A cashless Canada is looking even more elusive now that a change in Canadian law allows merchants to add credit card processing fees to customer transactions. With the prospect of a 2 to 3 percent surcharge on credit card transactions, the fallout among consumers could be a spike in the use of cash and debit cards.
But what will the fallout be for merchants? On the one hand, the new ruling could be a boon to retail merchants. Facing additional credit card fees, customers will no longer shop with impunity, and fewer transactions mean less chargebacks. On the other hand, loyalty programs like credit card rewards could be severely kneecapped as consumers opt to use more cash and debit cards.
Here’s a look at the new ruling on interchange fees and its potential ramifications for merchants.
Credit Card Surcharge—Who Should Carry the Bag?
A recent Visa announcement suggested that a cashless Canada was imminent and digital transactions using mobile devices were poised to dominate the payments scene. But that was before a new ruling that could add 2 to 3 percent in processing fees to every credit card transaction made by consumers, digital or otherwise.
As part of a class action lawsuit settlement, Visa, MasterCard, and other card providers agreed to rebate merchants $188 million for interchange fees that merchants were charged in the past decade. Also, Visa and Mastercard are allowing merchants to decide whether to add on a fee for using a credit card at the point of sale.
The argument as to who should pay processing fees for credit card transactions is a longstanding one. So far, merchants have carried the bag paying rising interchange fees and chargebacks. Customers have largely been unaffected, at least directly, and the result has been burgeoning friendly fraud.
It might seem like a no-brainer for merchants to tack on a fee to credit card payments to cover their costs. After all, consumers should pay for the protections provided to them by card companies. But in today’s macroeconomic climate with skyrocketing inflation, the decision to add fees and raise prices is not so clear-cut.
The Canadian Federation of Independent Business found that only 19 percent of small businesses plan to add a charge for credit card processing, while 26 percent of respondents said they will do so only if their competitors or suppliers add the surcharge.
The Upside for B2B Merchants
Businesses that sell to other businesses are less affected by the new ruling. Chargeback fees are less of a concern to start with, and if a B2B merchant adds a surcharge for credit card usage they are less likely to lose business. In an established B2B relationship, adding an additional transaction fee is unlikely to cause too many ripples, and compromises exist elsewhere in business contracts. Consumers, however, are sensitive to added fees, and they have other options to turn to like cash or debit cards.
Merchants have the option, of course, to charge more for their products and services to cover their interchange costs rather than add on the fee, but what if their competitors don’t mark up their prices? A merchant could price themselves out of the market.
The Downside for B2C Merchants
Charging credit card processing fees could help the problem of rising chargebacks, but the situation is complex. While consumers are less likely to use their credit cards with impunity if they are held responsible for the resulting fees, charging consumers fees can backfire.
The customer experience is at the forefront of most retail strategies and detracting from that experience by adding credit card surcharges is counterproductive. Merchants who choose to add a surcharge to credit card payments must display signage explaining the surcharge and show the fee on receipts.
And then there’s the effect on credit card reward programs. These programs are cherished by consumers and are integral to customer loyalty—Spotify, the small business ecommerce platform, claims that 90% of companies have some form of customer loyalty program, and 84% of consumers say they’re more likely to stick with a brand that offers a loyalty program. Still, adding credit card fees could obliterate any value perceived from a rewards initiative.
Aware of the ripple effects of introducing a credit card surcharge, 40 percent of small businesses say they have not decided yet if they will add the surcharge, and 15 percent claim they do not intend to add an additional charge.
Kicking the Surcharge Can Down the Road
Consumers might be convinced to continue using their reward cards if the new fees actually reduced overall interchange charges, but they don’t, they merely kick the can down the road. The Bank of Canada has found that consumers still pay far more in fees embedded into retail prices than they receive in rewards.
According to the Retail Council of Canada, “on a $500 transaction, about $2 goes to the credit card companies and processors, while $8 goes to the banks, and only about $2 of that goes back to consumers as rewards.”
Many countries have attempted to reduce interchange fees. Both Australia and the European Union placed limits on interchange fees. Clearly, reported earnings of 13 billion euros a year were a strong incentive for EU banks to keep charging them.
Customers are already paying the cost of credit card use in the form of high retail prices, and now they could assume fees of up to 2.4%. With inflation continuing to rise, any merchant who dares to embrace this credit card surcharge may well be banging yet another nail into their coffin.
The Bottom Line
Credit cards are one of the most expensive means of payment for merchants, but they have also allowed merchants to improve the customer experience and boost loyalty through rewards like points, rebates, and other benefits. The fallout of this new ruling could leave customers frustrated and merchants struggling to appease their customer base. Both retailers and customers may decide to ditch credit cards and opt for cash. Faced with an additional two percent surcharge, using cash and cutting out the middleman is cheaper for all.
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