What you need to know about the new additional credit card fees

We have answered some of your questions about the new additional fee you might notice when using your credit card. The idea for this story came from members of the audience, like you, who reached out to us. Send us all your questions about the new credit card additional fee.

We are listening: ask@cbc.ca. As of last week, you may pay an extra fee if you choose to pay with your credit card.

That’s because Canadian retailers can now charge customers who use credit cards to pay, following a long-standing lawsuit with Visa and Mastercard settled earlier this year. Canadian companies launched a class action lawsuit against the two companies in 2011, and the settlement earlier this year returned hundreds of millions of dollars in fees – known as interchange fees – that they pay any time a customer pays with credit.

The settlement also gave them permission to pass these fees directly to customers, which was not allowed before. Previously, companies absorbed the cost of the so-called interchange fees, but now many are looking to recoup lost revenue by charging their customers a fee. But what does that mean for you? We received many questions from our audience and answered some below.

Why are credit card fees so high at 2.4 percent? Couldn’t the cap be 1 percent? In fact, credit card interchange fees are sometimes higher than 2.4 percent, but the additional cost to customers was capped at that number due to the settlement. However, the amount of the additional cost you may be charged when paying depends on the credit card you use.

Luciana Brazil, a partner at MacMaster LLP law firm in Vancouver, who worked on the class action that led to the settlement, said: “The higher the card premium, the higher the interchange fees.” Paying with a credit card? Expect to see a fee when shopping under new rules starting now. This means the more points and rewards you get from using your credit card, the more you can expect the additional cost to be.

Retailers can also choose to add the additional cost based on the company brand, i.e., Visa or Mastercard, or they can add it to product types, meaning Visa types, or Mastercard types, Brazil added.

The average additional fee in Canada is 1.4 percent, but depending on the card, it can reach 2 percent or more. Regardless of the maximum, retailers cannot charge an additional fee higher than the actual cost of what is purchased or paid for. Brazil said: “These are not fees to make money. They are cost recovery fees.”

Why do we pay [interchange fees] more than Europeans and others? In many parts of the world, including the European Union, Israel, the United Kingdom, China, and Australia, interchange fees are capped at less than one percent. On the other hand, Canada has some of the highest interchange fees in the world, averaging 1.4 percent.

Why this is so remains unclear. However, credit card companies set these rates. Brazil said, “It’s a question for the networks.” She says she and her team were previously told these fees have to be higher in Canada to maintain all the different levels of services provided regarding extending credit to people.

However, Australia, one of the countries with legal restrictions on interchange fees, can provide a similar level of services for much less. Brazil says understanding why there is such a large difference was a question they raised in litigation, but they never received an answer because the case was settled.

There has been talk about introducing legislation to control fees, especially for small and medium-sized businesses, but so far, no news from Ottawa. Can an additional fee be applied if I use my Visa debit card? No, additional fees cannot be applied if you use your Visa debit card or Mastercard debit card.

Brazil says it applies only to credit cards. Interac debit cards are typically used, even if classified as Visa Debit or Debit Visa Card.

Canadian retailers may see discounts after settling fees with the Visa and Mastercard deal. This also applies to pre-authorized debit transactions, such as bill payments – they cannot have additional fees because those bills use debit. In fact, some of your bills cannot even be paid with credit cards, like your property tax bill, because they are expensive,

as said by Robina Ahmed Haq, a personal finance expert in Toronto. How will added credit card fees affect my shopping habits? Whether it’s more self-checkout stations in your grocery store or your local cafe becoming cashless, many companies have recently opted for frequent card transactions – debit and credit. With the rise of cashless options and the introduction of additional credit card fees, more Canadians are likely to lean towards paying with Interac over tap options.

Brazil said, “I think the only thing it will do is make people more accustomed to using debit, but you can use debit tap in all those cashless environments.”

“I don’t think it will affect the ability to pay in a cashless environment.” Why do small businesses say they need help from Ottawa to get some relief from credit card fees? She added that debit is much cheaper for the retailer.

However, adding an extra fee on credit card fees could change customer behavior, whether it changes your shopping habits or your payment method, experts say. It is also not certain that all businesses, or even many of them, will apply the extra fees.

Ahmed Haq said: “My impression is that most businesses won’t apply these additional fees because they don’t want to scare off customers.” When it comes to bringing customers to your doorstep, not your competitors', choosing not to add the additional cost might be the solution.

She said: “If you have a local cafe you go to or eat at a restaurant, can you imagine if they said we’re now adding an extra fee, how will that affect people's behavior?”

“It’s really easy to go to the place next door.” Instead, grocery stores are expected to be the first to apply fees because feeding their families is unavoidable.

Editing: Yusra Bamatraf