Credit Card Processing Fee amounts to a Private Tax

Jim Flaherty's release of a proposed Code of Conduct for credit/debit card issuers has put the behaviour of the credit card industry under a much needed spotlight. Prominent in the list of issues is, of course, credit card interest rates.

While there are many complaints about credit card interest rates, people at least have a choice as to whether they retain a credit card balance, and so can avoid paying those high rates of interest by simply choosing not to carry a credit card balance.

In contrast, no one seems particularly concerned about that estimated 4.5 billion$ in processing fees Canadians pay each year. (FYI I have no connection to the Retail Council of Canada). It's the credit card issuers that set those fees. The public, by and large, doesn't see them, but ultimately pays them whether they use a regular credit card, premium card or no card at all. Unlike interest rates, the only way to avoid paying these fees is to avoid shopping at stores that accept credit cards. These days, even grocery stores accept credit cards, so it's nearly impossible.

Allowing the credit industry to levy a hidden processing fee effectively permits a private tax on just about everything we buy these days. (At least if you use a premium card you'll get some of the fees kicked back to you at the end of the year). The consequence of that, though, is that more people will be putting purchases on those premium cards, and so the overall processing fees we pay will continue to rise. That's basic economics; people will do what's in their best interest, and if they can get 1% or 2% back, quite a few people will use the credit card instead of cash or debit.

This is going to get worse when the credit card companies enter the debit card market. After all, what will their drawing card be to the public except to offer the same kind of cash-back deals that they are with credit cards? Processing fees are going to keep going up, and we'll be paying more money than ever to the credit card companies. These fees are also structured so as to further increase the gap between rich and poor. The proposed code of conduct in fact constrains issuers of premium cards to provide them only to customers meeting "spending and income thresholds", so the consumers with the high incomes will gain the benefits of these premium cards, at the cost of all of us. That's not fair.

Up until now, debit cards worked on a fee-recovery basis. The cost to the merchant (and so what is passed on to the consumer) is a fixed per-transaction fee. That's about to change when Visa and Master Card enter the market. Their initial fees are not terribly onerous - $0.25 + %0.15 - but there are no legislated limits on what can be charged, so I'm expecting to see the same kind of self-funded bribery (read "cash-back" and "Affinity programs) as occurs in the credit card industry these days. The rates are bound to increase to pay for these programs. These programs seem like free money to the recipients, but it is funded by everyone who patronizes merchants wo accept credit or debit cards (which is just about all of them).

If Mr. Flaherty were really interested in helping consumers, he'd regulate those fees. Plastic is here to stay, but the best deal for consumers would be to have all fees established on a cost-recovery basis as it currently is for Interac.