Since the financial collapse laid bare the dangers of the world’s over-dependence on credit, consumers have had plenty of cause for pause when pulling out the plastic. As household debt in Canada eclipsed that of the U.S. last year, with the income-to-debt ratio reaching an unprecedented 148.1%, policy-makers and government officials of all stripes have loudly decried the buy now, pay later mentality. Now, Canadians are being implored yet again to cut back on credit card use. Only this time, for an entirely different reason — and from a somewhat surprising source. In March, the Canadian Federation of Independent Business (CFIB), went on the offensive against credit cards and the high merchant fees they carry. The message to consumers: where possible, consider choosing another way to pay.
According to Dan Kelly, senior vice-president of legislative affairs for the CFIB, the campaign was born out of general misconceptions about the cost of credit card transactions. “Most consumers think that the fee for processing credit card transactions comes from the interest rates that they may pay, or from the annual fee,” he told Canadian Business. “They aren’t aware of the fact that it is actually the merchant that pays a giant cost every time a credit card is swiped.” This cost, sometimes referred to as the “interchange fee,” generally ranges from about 1.5% to 3% of the total sale, and goes to the credit card network, the company that processes the payment and the bank.
Not surprisingly, credit card merchant fees have long been a source of frustration among retailers. In 2008, a Bank of Canada study found that while 92% of Canadian retailers accepted credit cards, only 5% viewed credit cards as the preferred form of payment. (Interac cards, which carry much lower merchant fees, snagged top spot.) Still, Kelly says that until recently, “merchants generally accepted [credit card fees] as a cost of doing business.” That changed, however, with the recent proliferation of premium cards, which offer consumers extras like air miles and car insurance, but put merchants on the hook for even more. Says Kelly: “Those costs became unreasonable and rose for no good reason in the middle of a worldwide recession.”
But according to Brian Weiner, head of strategy and interchange for Visa, the interchange differential between his company’s premium cards and ordinary cards is only 0.2% — proof that even in recent years, rates have remained “relatively flat.” Though there is a cost associated with accepting credit card payments, Weiner says the CFIB campaign neglects to mention the benefits associated with doing so. In addition to increased efficiency, he says, “credit cards allow small businesses to extend immediate, unsecured credit to their customers to increase sales without bearing any of the credit risk.” Though he concedes that merchants have the right to steer consumers away from credit cards, he says the fact that the number of businesses that accept Visa continues to rise is “a signal to us that merchants believe in the value they receive.”
For his part, Kelly insists the CFIB isn’t trying to get consumers to give up their credit cards completely. Instead, he says the intention is to target consumers who are whipping out their credit cards “out of convenience” — which, according to the latest Moody’s Investors Services quarterly Canadian Credit Card Index, is exactly what most Canadians tend to do. “When you’re at your local dry cleaner, you see the guy that’s working 70 hours a week, why don’t you just pull out your debit card and give him a break?” says Kelly. “That’s the kind of consumer action that we think may be possible.”