Canada Credit Card Industry Makes Poorer Customers Pay For Wealthier Ones: Competition Bureau

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CREDIT CARD INDUSTRY COSTS CANADIANS BILLIONS
The Competition Bureau says Canada's credit card issuers have set up a perverse system that thwarts the normal rules of the marketplace and costs consumers billions of dollars annually. (The Canadian Press Images-Mario Beauregard) | CP

OTTAWA - Canada's credit card system is a "perverse" place where shoppers who pay with cash or debit subsidize purchases made with credit cards, the Competition Bureau argued Tuesday in its opening salvo against Visa and MasterCard.

That's because Canadian merchants pay among the highest fees in the world for accepting credit cards and pass on the costs consumers, the bureau's lead counsel said in his opening to a tribunal charged with ruling on credit card practices.

Presenting the case for the competition commissioner, Kent Thomson argued that restrictive contracts put in place by Visa and MasterCard allow the two credit card companies — which represent 92 per cent of the market — to essentially dictate terms to merchants.

"Most Canadians are unaware of the high cost of fees" that are part and parcel of credit card usage, he said. "And these are not borne by merchants alone, they are reflected in higher prices paid by customers."

The much-awaited case before a tribunal headed by Justice Michael Phelan of the Federal Court of Canada involves high stakes.

As Thomson asserted, Visa and MasterCard charged merchants about $5 billion in fees on about $320 billion in purchases in 2011, charges that merchants recoup through higher consumer prices.

The pay-off for Canadians — in theory at least — is lower consumer prices if the case succeeds.

The tribunal has the power to force credit card companies to change their method of operations, but it cannot levy a monetary penalty in the case.

But commissioner Melanie Aitken, who launched the quasi-judicial action in response to complaints from merchants, has a high bar to meet and faces a formidable united front from some of the richest interests in corporate Canada.

Lawyers representing Visa, MasterCard, the Canadian Bankers Association and TD Bank lined up to respond to the charges Tuesday, calling into question the entire basis of the proceedings.

The fees represent just another input cost for merchants who can choose to pass it on to customers or not, they responded. And merchants derive a value for those fees, including customers who may not be in a position to buy unless they could charge the purchase.

"The commissioner's theory fails as a matter of fact and economics," said Robert Kwinter, counsel for Visa, the country's biggest credit card company.

"If merchants do not want non-credit users to bear the costs of Visa card acceptance, they can give those customers a discount for using another form of payment, or they don't have to accept Visa cards at all."

The case against the credit card firms boils down to whether they are in contravention of the Competition Act in placing certain restrictions on merchants that accept their cards for payment.

Those fees — ranging from 1.5 to 3.0 per cent of the value of customer purchases — are about twice the rate credit card firms charge merchants in Australia, New Zealand and many parts of Europe, but slightly below the U.S. average.

Thomson noted the fees on the average credit card is about 50 times higher than that of debit cards, which is about 12 cents per purchase.

If credit card firms did not explicitly forbid merchants from discriminating between standard and higher cost premium cards, or to add a surcharge for using premium cards — fees would come down, he argued.

That's because otherwise more customers would opt for the less expensive payment option, he said.

He gave the example of a typical $200 barbecue. The merchant must pay about $5 in fees if the customer uses a credit card and only about 12 cents if a debit card is used.

The current system encourages consumers to use premium cards in order to collect rewards, such as Air Miles, without incurring the costs associated with those cards.

Perversely, he said, credit card companies are rewarded for charging more, and poorer shoppers are penalized by paying higher consumer prices for the benefit of premium card holders.

In a normal competitive market, the merchant would be permitted to charge customers different prices depending on their costs associated with the method of payment.

"But none of this is possible in this country because of merchant restrictions put in place by Visa and MasterCard," he said. "These restrictions distort the normal competitive process."

Lawyers for the credit companies said the evidence in the case, which is expected to run until late June, will show that the fees are competitive and that merchants accept credit cards not because they have no choice but because they are full value for the cost.

Bankers' counsel Mahmud Jamal told the tribunal the main reason for the complaint is that merchants simply want to create a "new profit centre" by charging more on certain credit cards.

Eliminating the no-surcharge rule, he said, "would be bad for the (card) issuing body, bad for customer choice and ultimately bad for consumers. It will, however, be good for merchants."

The tribunal has scheduled 21 days of hearings. The parties said they will call 31 witnesses, including merchants, economists and industry leaders.

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