Today, the Canadian Competition Bureau has just rejected a complaint from retailers about changing the way they pay fees to Visa and Mastercard. I found it interesting to read, as I know that in the States it is illegal in several states for retailers to charge “swipe fees.” It’s almost given that this would never happen in the USA. For now, it seems like points-earning in Canada is still pretty stable.
There are a few things that I thought might be worth mentioning. First of all, every time you use a credit card, the retailer pays an “interchange” fee, which is a percentage of the purchase for credit card acceptance. These range anywhere between 1 to 3 percent. What’s important to note is that premium cards carry much higher interchange fees. So with Visa Infinite (Signature) and World Mastercards, the fee is much higher, arguably because the rewards the cards come with are a higher cost.
The purpose of the complaint in Canada was to limited interchange fees and give retailers the ability to “reject” premium cards. For the miles/points world, this definitely negatively affects our ability to collect points. So I am happy that the complaint got rejected. For now, it continues to mean that competition for the premium card sector will hold steady if not increase, which means increased benefits and rewards for consumers like us.
There are definitely arguments over the prices and how a retailer’s profit margins will be affected, both in a positive and negative way – just look at the legislation that’s present in Australia and New Zealand which limit interchange fees and permits retailers to levy credit card surcharges. That’s right – in Australia and New Zealand you have to pay for the right to use a credit card.
This all lead back to the idea that points are not free – the banks have to pay for them (especially with transferrable currencies), which leads to the bank raising the capital to buy those points from somebody. With premium cards, it’s the retailer that is footing the cost for the points. It’s just very easy sometimes to get absorbed into the “game” that we play and sometimes we have to just take a look back and see that this phenomenon of “travel hacking/points arbitrage” is very fragile, even though there’s a lot to give before the entire system will go kaput.
Definitely, there’s been a lot of change in the credit card market, especially in Canada. There have been a flurry of excellent signup bonuses and some targeted offers with waived fees and it’s always interesting for me to watch the progression of this hobby to see what has happened, and what will happen.
You can read the article here which talks about today’s ruling here.
Keep in mind – merchants receive benefits from credit card products as well. The interchange costs merchants pay reflect the risk transference of debt to banks and transfer of collection costs from the merchant to the bank. (Cards offer finality of payments for merchants – vs. holding the transaction ‘on account’ for future payment).
Interchange also provides improved cash flow to the merchant – vs. holding the receivable – on account.
Think of it this way – if you ran a pizza shop – would you offer an unknown customer an account – to let them buy dinner and pay you back in 30 days? If so – what do you think your credit losses would be – over time? How much would you spend in collections? How much would it cost you as the merchant in interest costs to float the ’30 day invoice’ on your business’ own credit – while you wait for your unknown customer to come in 30 days to pay you back.
Avoidance of these costs is why there is interchange – it is for the absorbing of these costs that banks (not the networks) receive interchange.
Now folks can say – buyers can just pay cash – which is true…but often you’ll sell less pizza if you only take cash. Additionally – there are handling costs associated with taking cash – from obtaining change to to counting to ‘leakage’, etc.
All and all – interchange plays a positive role in enhancing our economic commerce experience – and our economy grows on a net basis as a result.
hey Jeff,
On April 29th, you said you’d post about a mini-rtw? i cant seem to find that post, did you ever end up doing it? thanks
I said I would… but then I got lazy. I’m still working on it, apologies!
@Mike. Your analysis is correct in that it’s clearly advantageous for most retailers to accept credit cards. As a small (one branch) retailer, I am well aware of that. However, my fees vary from nearly nothing on debit cards, to about 1.5% on some credit cards to over 2.5% on some other credit cards. The blended %age I pay over all payment types, including cash, is about 1.4%, up from about 1.3% a couple of years ago.
I need to achieve an overall margin of xx%. If the interchange fee I pay goes up, then my prices must go up, all other things being equal, and they will go up. So it’s idle to think that consumers don’t pay for it – they absolutely do and, the more people use “premium” credit cards, the more all consumers will pay.
You could take the view that this is great for the savvy, who are benefiting from their “premium” cards, or you could take the view that it is unfair on others who don’t get the benefit. You could also take the view that it would be fairer to be able to pass on a surcharge to be paid by those who are milking the system. I guess it depends on whether your social conscience trumps your love of unfettered capitalism.
As a retailer, I’m entirely agnostic on the issue – I do what the market will accept and, if that means inflating costs to certain customers, that’s what I have to do.
Most discussions of retailer credit card fees omit the benefits to the merchants and indeed many merchants overlook (or pretend to overlook) these benefits. Thanks to Mike for mentioning just a few. I could add quite a few to the list, but I will just mention one. Armed robbery. The cost of doing too much business in cash is becoming a target for armed robbers. The cost of having a clerk get shot is almost never mentioned but it is the largest cost of all.