When you pay at a store using a credit card, you’re not the only one being charged fees. While consumers may pay annual fees for certain credit cards or interest on credit card purchases, businesses are also charged fees by banks and credit card companies, like Visa or Mastercard, every time a shopper pays by credit card – hence the name “swipe fees.”
Also known as interchange fees, they usually cost the merchant between 1.5% to 2.5% of the purchase, which can add up for a small business. But as a result of a recent class action lawsuit settlement, businesses in Canada are now allowed to pass that cost on to customers.
How Did The New Credit Card Surcharges Come About?
Credit cards are a popular form of payment for consumers, but can be costly for merchants. With every swipe or tap of a customer’s credit card, merchants are charged an interchange fee to cover all the costs around processing credit card transactions.
High credit card interchange fees are a persistent pain point for businesses in Canada. Originally, agreements between credit card companies and merchants explicitly stated that businesses could not pass on the cost of processing fees to customers.
But as part of a recent class-action lawsuit settlement between Canadian businesses and Visa and Mastercard, that’s changing. As of Oct. 6, 2022, businesses in Canada can choose to add a surcharge at the point of sale if a customer wants to pay using a Visa or Mastercard credit card.
The rule applies to all provinces except Quebec, where the province’s Consumer Protection Act does not allow Quebec-based merchants to pass on credit card surcharges to customers.
How Will These Credit Card Surcharges Affect Businesses?
Businesses across Canada (except Quebec) now have the option of passing swipe fees along to their customers by adding a surcharge to Visa and Mastercard transactions in person, online, or over the phone. But there are a few rules around how they can go about it.
Must Notify All Parties Involved
First, businesses are responsible for checking whether they need to notify their credit card network (ie. Visa, Mastercard) and acquirer of their intent to start surcharging, and may need to give 30 days’ notice before they start charging. They also have to follow disclosure rules on how they communicate the surcharge to customers.
Must Only Charge The Cost of Processing A Payment
It’s up to individual businesses to decide how much they want to surcharge, but there’s a limit – they cannot charge customers more than it costs to process the payment. The surcharge must be the lesser of 2.4% or the amount it costs the merchant to accept those credit cards.
Must Clearly Disclose Surcharge At Point Of Sale
Businesses will have to provide clear signage disclosing the surcharge at the point of sale (both in-store and online, or verbally over the phone) and show the surcharge amount on receipts.
Can Choose What Types Of Transactions Will Get Surcharges
Businesses also have the power to decide if they want to charge for all types of credit card transactions – in person, online and over the phone – or if they only want to add a surcharge in some environments (for example, online credit card transactions only).
Can Decide Whether Or Not To Pass On Cost To Customers
Ultimately, it’s up to business owners to run the numbers and decide whether to pass on the cost of accepting credit cards to the customer. Having the option to add a credit card surcharge is a double-edged sword – it helps businesses to recoup some money at a time when the cost of doing business is high, but some customers may not be willing to pay the extra surcharge and shop elsewhere.
This also may affect small businesses that choose to implement the surcharge compared to larger eCommerce stores that might swallow the cost to retain customers. For this reason, the Canadian Federation of Independent Businesses (CFIB) created free printable posters and resources for businesses to help explain to the change customers.
How Will These Credit Card Surcharges Affect Businesses?
If you want to buy something from a business that has a credit card surcharge, you’ll have to pay a fee on top of the price you pay for goods, including the sales tax charged in your province or territory.
Because businesses have to be transparent about adding a credit card surcharge and how much it costs, it’s up to you to decide whether you want to eat the cost or use another method of payment.
For example, let’s say you’re shopping in Ontario and make a $100 purchase. With 13% harmonized sales tax, the total is $113. If you want to pay by credit card and the merchant charges a 2% processing fee, you would pay a fee of $2.26 on top of your purchase for a total of $115.26.
The new rule also allows companies to add credit card surcharges to bills and subscriptions, like your monthly cell phone bill or streaming service subscription.
How To Avoid These New Credit Card Surcharges
Rather than giving up shopping at your favourite stores because they have a new surcharge in place, you can switch up your payment method. The change does not affect debit cards or prepaid cards, and there’s always cold hard cash – unless you’re shopping online or at a cashless establishment.
There are many benefits to prepaid cards, like KOHO’s prepaid Mastercard, which gives you cash back on every purchase and allows you to earn interest on your entire balance, from spendings to savings. The prepaid card runs on the Mastercard network but draws from your own money, so you have the spending power of a credit card without any fees or interest charges.
Because the change is so recent, it’s too early to say how many businesses will opt to add a surcharge to credit card payments. But depending on where you shop and how much your credit card is costing you already (annual fees, interest, etc.), surcharges could become another added expense for many Canadians. Consider whether the rewards you earn on your credit card are worth it relative to the fees you pay, or whether you need to switch to an alternative payment method when needed.