December 6, 2023

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When will we have to pay credit-card surcharges?

Canadians may not see extra charges popping up on their bill just yet

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Whether you are an entrepreneur or aspiring to be one, the Financial Post would like to help by answering your questions on small business in this uncertain economy. Today, we answer a question from Robert Sweep about credit-card surcharges.

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Most businesses in Canada now have the ability to add a surcharge on transactions paid for by credit card, the result of a recent class-action settlement with Visa Canada Corp. and Mastercard International Inc.

Previously, the credit-card giants had refused to allow merchants to pass along fees — which range from about 1.4 to 2.4 per cent of every sale — to consumers, who only see the final price paid and may not even be aware of the hidden cost to stores.

While the new rule came into effect on Oct. 6, Canadians may not see extra charges popping up on their bill just yet.

Merchants who intend to start surcharging need to go through a specific process outlined by the credit-card companies, both of which require at least one-month’s notice.

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Luciana Brasil, a partner at Branch MacMaster LLP and one of the attorneys handling the class action, said in an interview that those looking to apply surcharges on Oct. 6 would have had to apply in September.

In order to add a surcharge on Mastercard payments, merchants are required to notify both Mastercard and their “acquirer,” which is the bank or financial institution that processes the credit-card payments, at least 30 days before first implementing it. They can do this by accessing an online disclosure form, which Mastercard launched on Sept. 6, and also notifying the acquirer separately. For Visa credit cards, merchants must provide a written notice to their acquirers at least 30 days prior. Quebec-based merchants do not have the option to surcharge due to provincial consumer protection laws.

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Businesses are required to clearly disclose the surcharge to customers and that it is being applied by the merchant, not the credit-card companies.

Visa and Mastercard have also placed a 2.4 per cent cap on the fee, preventing businesses from surcharging more than the processing cost.

While some merchants have already filed their notices to surcharge, Brasil said she expects most will not do so right away, and instead will watch and see how the public reacts before deciding to add the charge or not.

“They do have to jump (over) a number of hurdles,” she said, noting that smaller merchants and merchants that operate on a small margin may find it worth their while because the process only needs to be done once. “It’s short-term pain for hopefully long-term relief from those higher (credit card) costs.”

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The lawsuit, which alleged Visa and Mastercard conspired with certain banks and processors to set the amount of interchange fees, was settled with the credit-card companies in 2017 and with the banks in 2020. The suit also alleged they conspired to impose rules restricting merchants’ ability to surcharge or refuse higher-cost credit cards. The settlement included $188 million in payouts from banks and credit cards over the credit card processing fees, known as interchange fees, charged to retailers.

While a merchant might pay 1.96 per cent on a typical standard card, premium credit cards that charge the highest interchange fees, such as the World Elite or Muse Mastercard, can require as much as 2.54 per cent of the bill, according to Mastercard Canada.

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The credit-card companies, Brasil said, have wanted to have it both ways: They want their card accepted as widely as possible but they don’t want merchants to surcharge, which makes it noticeably more expensive for consumers to use their cards.

“The ability of all merchants to ultimately surcharge is something that we hope is going to keep any future increases in those costs in check,” Brasil said, referring to the interchange rates set by the credit-card providers.

The Canadian Federation of Independent Business said in a recent report that nearly 20 per cent of small businesses are considering a surcharge to offset processing fees, while 26 per cent of respondents said they will add a surcharge if their competitors or suppliers do.

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Corinne Pohlmann, the group’s senior vice-president of national affairs, said some merchants may consider this option to help address costs that have substantially increased over past years, even as many still struggle with COVID-related debt.

“So here’s one area that potentially they could recoup some of their costs to help address some of the challenges they’re facing,” Pohlmann said.

She noted, however, that getting consumers to accept paying a surcharge may be a challenge, given that no one has ever had to do pay in Canada before.

“Many are worried about what reaction their customers would have to them applying a surcharge, so there are definitely some pros and cons that many folks have to think about to determine what the best solution might be for their business,” she said.

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Telus Corp., one of the first Canadian companies to announce a surcharge on credit-card payments, said the fixed 1.5 per cent fee it plans to charge would lead to an extra fee of $1.58 (plus $0.08 GST on that fee) on $100 worth of services. A bill that previously came to $105 including tax would thus rise to $106.66.

Credit-card surcharges are not new. In the United States, charging a credit card processing fee is legal in all but a few states. Pohlmann said while it’s been in place in most of the U.S. economy for years, only a very small proportion of businesses actually do it — and Canada might not be much different.

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