Credit Cards in the Spotlight

By JoAnne Sommers

Credit card companies have been under fire lately, as both Canadian and U.S. legislators investigated controversial industry practices.

On May 21st Finance Minister Jim Flaherty said the government will introduce new disclosure and grace period requirements for credit cards, including a minimum 21-day interest-free period on new purchases when cardholders pay their balances in full.

The U.S. Senate went much farther, voting to curb sudden interest rate hikes and hidden fees on credit cards. The bill is expected to receive House of Representatives approval, after which President Barack Obama is expected to sign it into law.

The moves to regulate card-issuer practices come on the heels of an angry backlash by card holders and merchant groups following years of rate and fee hikes.

Catherine Swift, president of the Canadian Federation of Independent Business (CFIB), called Ottawa’s announcement, “a beginning,” but said much more needs to be done to rein in credit card companies.

“The announcement is a start but it’s nowhere near enough. Compared with the changes just announced in the U.S., these moves are very fluffy. Credit card companies are running amok and we need far greater oversight of their activities.”

Noting that the issue is still in play, Swift said she expected the government to take additional action in the future.

In early May, Canada’s Senate Banking Committee completed hearings on the fees that merchants must pay to accept credit cards. Its report is expected this summer. A joint House of Commons Finance/Industry Committee hearing on the same subject began in mid-May and Canada’s Competition Bureau is investigating the credit card companies for possible “abuse of dominance”.

Swift told the Senate hearing in April that the “duopoly” of Visa Canada and MasterCard means merchants are getting “whacked” by the higher fees charged for “premium” credit cards.

In recent months banks have aggressively marketed premium cards, whose usage has grown from two to about 25 percent of all Canadian credit card transactions, says Mark Beazley, director of communication with the Retail Council of Canada (RCC). Last year, the RCC launched the StopStickingItToUs Coalition, a group of Canadian associations that “is standing up to the big credit card companies to put a stop to skyrocketing fees.”

Premium cards carry more consumer benefits, such as no-charge travel insurance and increased air miles, noted Beazley. At the same time, credit card companies charge more to process transactions made using these cards. Retailers must either absorb the higher fees or pass them on through increased prices.

The fee system for credit cards is multi-layered, he added. “The merchant’s payment processor gets a cut, as does the consumer’s financial institution which issued the card. The latter is known as the interchange fee and it’s the largest part of the merchant’s cost. In the past 18 months, the credit card companies have raised it nine times and the interchange rate has jumped about 25 percent.”

The cost of processing a credit card transaction currently averages about two percent of the purchase price, says Beazley, although smaller retailers can pay as much as four percent.

“On a $100 purchase the merchant might receive only $96 and with razor-thin operating margins, that can have a serious impact on their ability to run a business and hire staff.”

Lorne Kashin, past-president of the OAC, owns the Eyeglass Factory in Thornhill, Ontario. He said there are many extra charges involving credit card transactions. “I had to pay extra for keying in card numbers rather than swiping cards because the machine wasn’t working. And transactions involving National Bank cards incur surcharges, because National Bank doesn’t play ball with the credit card companies.”

Kashin got a nasty surprise recently when he discovered that he was paying surcharges on premium credit card transactions. “The customer gets a bonus for using the card and the issuing company downloads the cost on to us,” he said. “It might not seem like much on an individual basis but we spend $10,000 to $20,000 a year on credit card transactions. How many pairs of glasses do you have to sell to recoup that?”

Merchants don’t expect a free ride when it comes to credit cards, said Beazley. “We recognize the convenience and security benefits they provide and we’re willing to pay for them but the cost should reflect the service rendered and right now, it’s completely out of whack.”

MasterCard Canada President Kevin Stanton said the proposals to regulate credit card companies, “threaten to break up a system that provides consumers and businesses access to credit that facilitates commerce at a critical time.”

Merchant fees, he added, are an operational cost and are not paid by the consumer but direct price controls would change that. “In fact, it would increase credit card costs for consumers through higher interest rates and higher annual fees. They would also significantly reduce the credit card reward programs Canadians enjoy.”

 (In the next issue, a look at the efforts of credit card companies to get into the debit card business.)