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Card sharks: users seeing red; Consumers, merchants take aim at high rates and fees

IDNUMBER 200902280033
PUBLICATION: The Hamilton Spectator
DATE: 2009.02.28
SECTION: Business
ILLUSTRATION: Photo: Ron Albertson, the Hamilton Spectator / Jay Higginsof Hamilton-based Beau Monde Productions, which produces consumer trade shows, has found he can't avoid using credit cards in the hundreds of companies he deals with. And each time his company completes a credit-card transaction, it must pay the card company 3 per cent of the transaction. Those fees add to the cost of doing business -- and merchants must pass that cost on to consumers. ; Photo: Credit card interest rates and the hidden cost of merchant fees cost consumers. ; Photo: Cathie Coward, the Hamilton Spectator / Restaurateurs Leanne Ciancone and her father Ron Ciancone of Ancaster Old Mill and Spencer's in Burlington, say transaction fees take as much as $170,000 a year. (Credit card information altered to protect privacy.) ;
BYLINE: Steve Arnold
SOURCE: The Hamilton Spectator
COPYRIGHT: © 2009 Torstar Corporation

Card sharks: users seeing red; Consumers, merchants take aim at high rates and fees

Credit cards can be little plastic passports to the good life -- or one-way tickets to financial hell.

Canadians have always had a love-hate relationship with their credit cards, but in recent months there has been a lot more hate than love as consumers and businesses bristle at the way they feel abused by credit card issuers.

At the top of that list are sudden and drastic increases in interest rates and service charges, especially "hidden fees" paid by merchants who accept cards -- fees that end up being figured into the cost of a restaurant meal, CD or new suit.

Reaction to those moves has sparked an Internet campaign led by the Retail Council of Canada called and a motion in the Senate calling for government action to cap credit card interest rates and fees. Even the usually business-fawning Harper government has been forced to announce measures in its most recent budget to control the worst abuses.

Consumer anger about high interest rates -- up to 28.8 per cent in some cases -- and fees for everything from cash advances to foreign currency transactions has been well publicized. Less known are the "back office" fees that drain billions from hard-pressed merchants.

Peter Woolford, vice-president for policy development and research at the Retail Council, says that's allowed to go on because two massive companies dominate the market and use that bulk to gouge their customers.

"Credit cards remain an effective and efficient way of paying for goods, but there are problems," he said. "In Canada we have a duopoly in place that's taking advantage of its dominance to gouge us.

"We've been hit with a whole series of measures that have quite substantially increased the fees merchants have to pay," he added. "They very clearly are not listening to us."

The credit card market in Canada is utterly dominated by Visa and MasterCard. Between them they control 80 per cent of the business -- 68.2 million credit cards used to purchase $267 billion of goods and services in 2008. In 2007 there were 64.1 million cards in use.

It's a profitable business. Very profitable. For 2008, Visa International reported global earnings of $1.7 billion US from processing payments of $2.7 trillion. In its earnings news release, the company stated its profit growth was "driven by strong contributions from service fees, data processing fees, and international transaction fees."

In the fourth quarter alone those fees amounted to $788 million, up 8 per cent over the prior year. Data processing fees rose 18 per cent, to $548 million, and international transaction fees were up 45 per cent.

For 2008, MasterCard International reported a net profit of almost $1.1 billion on revenue of $4.06 billion.

Those fees are the focus of the Retail Council's campaign demonizing "big credit card companies" that bled $4.5 billion from consumers in 2007 to cover "lavish incentive programs and corporate credit card benefits, even if you don't have one."

In industry jargon it's called the interchange fee, a levy of up to 3 per cent of the sale that's supposed to cover the cost of processing the transaction. Trouble is, according to the StopStickingItToUs campaign, only 13 per cent of what's collected actually goes to cover processing costs. More than 40 per cent goes to the cost of credit card reward programs such as Air Miles.

According to Visa Canada's website, the system works like this: When a credit card is used to pay, the retailer's bank pays the retailer and then collects from the cardholder's bank, which in turn collects from the purchaser. The banks collect what they call the merchant discount rate for that transaction. It's supposed to be negotiated between the retailer and the retailer's bank -- and if the retailer doesn't like the deal with one bank the retailer is free to shop around for a better deal.

Woolford explains it's not the fees themselves merchants object to -- they're business people and understand everyone has to make a buck -- it's the size, and the fact the same fee is charged whether the bill is $10 or $100.

By comparison, the interchange fee is less than 1 per cent in the United Kingdom and Sweden, and less than 2 per cent in the United States and Belgium.

"It may be only $3 on a $100 purchase, but multiply that out over hundreds of billions of dollars in purchases, and it's a lot of money," Woolford said. "When retail margins are so tight -- it's only 1 per cent on groceries, for example -- merchants are really being squeezed by these fees."

For business operators, credit cards are sometimes an ugly necessity.

Jay Higgins, of Hamilton-based Beau Monde Productions, a trade-show producer, didn't take credit cards in his business for years but eventually found he couldn't function without them.

"We had no choice. Too many people we dealt with wanted to put the fees on their cards," he said. "About half of our business is done on credit cards now. It's the convenience of it. It has become a vital tool that way.

"We're stuck," he added. "They've built an in infrastructure around credit cards, and we can't get out of it."

Beau Monde produces shows such as the Food & Drink Fest and several local bridal shows. In staging those events, it deals with as many as 500 companies.

When his bank hiked the fees he pays to take cards from 2.25 to 3 per cent, that represented thousands of dollars in lost revenue. On $750,000 worth of business, a 2.25 per cent rate means $16,875 a year. Up the fee to 3 per cent and it's another $5,600 off the company's bottom line. That really hurts in the current climate.

It's enough money that one of his many suppliers offers a 3 per cent discount if he's paid in cash rather than with plastic.

Restaurateurs Ron and Leanne Ciancone, of the Ancaster Old Mill and Spencer's in Burlington, figure 90 per cent of the business in their dining rooms is paid with credit cards. The fees for these transactions take as much as $170,000 a year off their profit statements.

"The credit card companies can do that to you. It's all about how much power they have," he said. "Nobody seems too interested in doing anything about it."

Leanne Ciancone has a special dislike for the American Express credit card, which charges merchants who take it as much as 4.5 per cent. In a business where the average profit margin is 6 per cent, that's a real blow.

"In some of these cases the credit card company is making more on a purchase than the merchant, and for no added value other than a way to pay," she said.

Aside from the Retail Council's Internet campaign, one of the few voices raised against credit card operators has been that of Senator Pierrette Ringuette, a Liberal from New Brunswick. Just before Parliament was suspended to save the Harper government from defeat, she tabled a motion in the Senate asking the Standing Senate Committee on Banking, Trade and Commerce to probe Canada's credit card and debit card systems. In addition to caps on interest rates, she's also asking for an examination of behind-the-scenes charges including interchange and merchant discount rates.

That motion died when Parliament was suspended. Ringuette revived it late in January and it's currently being stalled by Conservative senators.

In an interview, she said action is desperately needed to ease the credit pinch on small-business owners. "For a lot of them it has become a do-or-die situation," she said. "Canada's business community is being squeezed by these fees for no good reason."

That's especially bad, she added, in an era where the federal government has agreed to spend $125 billion to buy distressed mortgages from the country's chartered banks -- without requiring them to put any portion of that money back into circulation.

"The Government of Canada is acting like an ATM machine for the banking community and we're not getting anything out of the transaction," she said. "The only way we're going to get fairness here is through some kind of regulation.

"If we had regulation of credit card interest rates and fees, then we could protect Canadian consumers from these greedy bankers, so they would have more money to play with," she added.

"Unless I can get major help from Canadians, we're never going to get fairness on these fees," she said. "People need to contact their MPs to demand protection. We don't need to be squeezed by the banking community that we pulled out of the fire they got themselves into."

While spokespeople for Visa, MasterCard and Canadian Bankers Association refused to comment for this story, previously released material lays out the banks' argument they need higher interest rates on account balances and higher user fees to compensate them for the risk they're taking in borrowing money to lend to cardholders. They also point to evidence the credit card system is in deepening trouble as the economy tanks.

In December, for example, credit card balances shot up more than 5 per cent to $53.4 billion, a 10 per cent increase from a year earlier. Since 2004, credit card balances have risen 40 per cent.

A study carried out last year by the consulting firm Deloitte found Canadians spending ever more on their credit cards -- we now have $1.30 in debt for every $1 of disposable income. Since October, delinquent accounts have been rising as much as 10 per cent. That's leading to debt writeoffs which, at the upper end of the range, could cost card issuers as much as $800 million.

That's an early warning sign of more problems, the consultants concluded, warning credit card losses are "the canary in the coal mine" because Canadian consumers are more likely to default on credit cards before mortgages and car payments.

Banks and other card issuers have responded to those numbers by hiking interest rates for customers in trouble -- earlier this month Amex Bank of Canada hiked its rates to as much as 21.99 per cent; Canadian Tire Corp. will hike rates to 19.5 per cent and warns that cardholders who don't pay off their full balance by the due date will be charged interest not only on the unpaid balance but also on subsequent items purchased after that date. In December, Toronto-Dominion Bank hiked the interest rate charged to customers who miss two consecutive payments to 24.75 per cent, a five-percentage-point jump.

So far, the Harper government's only concession to this issue has been a clause buried in the Jan. 27 budget promising to push for increased disclosure of interest rates on credit card applications. "The Government will take a more principles-based approach in improving the disclosure of information to consumers. Improvements will be sought in areas such as the provision of clear and simple summary information on credit card application forms and contracts, and clear and timely advance notice of changes in rates and fees," according to budget documents.

The government also promised "to further enhance consumer protection by limiting business practises that are not beneficial to consumers." This could include requiring a minimum grace period on new purchases made with a credit card, and improving debt collection practices of federally regulated financial institutions.

The Retail Council called those initiatives "a positive first step," but wants more action on fees.