Your primer on credit card transaction fees
Canadians love the convenience and perks that come with using a credit card, but many are unaware of just how much it costs businesses to accept those transactions.
Credit card fees are a large and growing expense for retailers and other companies that accept credit card payments, especially with the surge in online shopping and the touchless transactions that the pandemic helped make more popular.
In fact, credit card fees for businesses are estimated to total about $5 billion a year, according to Corinne Pohlmann, Senior Vice President of National Affairs at the Canadian Federation of Independent Business (CFIB).
A class action settlement put a spotlight on what are known as interchange fees that are charged to merchants for the price of accepting credit card transactions.
As part of the settlement, merchants can now pass along those fees to customers as a surcharge on transactions. (The exception is for businesses in Quebec, where a consumer protection act prohibits this surcharge to customers.)
Here’s what you need to know about how the system works, how to apply the surcharge and how else you can reduce the amount your company pays in credit card fees.
What are credit card interchange fees?
Interchange fees are set by credit card companies and are collected on every transaction. The money flows from your payment processor (known in the industry as the acquirer) to the financial institution that issued the credit card to the customer.
Interchange fees are the largest of several charges bundled into what’s known as the merchant discount rate. The other charges are to compensate the payment processor and the credit card network (Visa or Mastercard, for example). There are a variety of other potential fees for accepting credit card transactions, including service charges, and those for terminal rentals and payment gateways for online companies.
Interchange fees represent 70% to 90% of the total fees paid by merchants. The financial institutions that issue credit cards, as well as the credit card networks, say the fees are used to compensate for the benefits cards provide to merchants and consumers in the form of convenient and secure electronic payments They also help financial institutions cover the costs and risks of issuing cards, including fraud.
However, Canadian interchange fees have drawn criticism over the years from governments, retailers and business associations for being too high.
What is the average interchange fee?
The actual interchange fee rate that a merchant is charged on a transaction depends on the card their customer uses. The rate varies by credit card brand, the type of card used and whether the transaction is in-person, online or by telephone.
Interchange fees are higher on premium cards that offer rewards, cash back and other perks for customers. For in-person or “card-present” transactions, the rate varies from 0.92% for a Mastercard that doesn’t offer rewards to 2.08% for a Visa premium card. (Visa and Mastercard typically adjust interchange fee rates twice a year in October and April.)
In Budget 2023, the Canadian government announced that it secured commitments from both Visa and Mastercard to reduce interchange fees by up to 27% from their current average rates for more than 90% of credit card-accepting businesses. This is expected to save businesses close to $1 billion over five years.
This follows a 2018 agreement negotiated by the federal government in which Visa and Mastercard committed to lowering interchange fees to an average of 1.4% from 1.5% for five years, starting in 2020. The networks also agreed to narrow the range of interchange rates charged to businesses.
Pohlmann noted that “the 1.4% average includes large companies that pay a lot less than small companies because they have higher transaction volumes, which can help them negotiate.”
How do interchange fees work with online sales?
Rates are also slightly higher for online and phone transactions. This is because they have a higher security risk than in-person transactions, where the merchant gets to actually see the customer using that card.
For “card-not-present” transactions, the rate varies from 1.45% for a Visa card without rewards to 2.54% for Mastercard premium cards. Separate rates include those for recurring payments, and for charity and non-profit payment processing.
How can a retailer lower their credit card fees?
Depending on your company’s volume of transactions, you can try to negotiate lower fees, but it’s challenging for small businesses, Pohlmann says. For many companies, a better alternative is to join with other businesses to leverage your negotiating powers.
“They can join trade associations, including ours, that negotiate lower fees on behalf of their businesses,” Pohlmann says. “Beyond that, you can always encourage your customers not to use credit cards. But, of course, COVID made that harder because credit cards became a more common way of doing transactions.”
Some merchants refuse credit cards or offer discounts for using cash or debit cards. Additionally, competition among payment processors has emerged, allowing merchants to shop around for lower fees. However, Pohlmann cautions business owners to carefully review contracts before signing, to ensure the discounts aren’t just temporary or that they’re not going to be hit with hidden charges.
“If it looks too good to be true, it might very well be,” she says. “But it’s not easy to compare contracts. And that’s one of the things we’ve been advocating for—having consistency in how information is displayed to merchants so they can compare.”
How do credit card surcharge fees work for Canadian businesses?
The other alternative, if you’re outside Quebec, is to levy a surcharge on each transaction.
As mentioned above, that’s now allowed under the terms of the settlement of the class-action suit involving Visa, Mastercard and other credit card networks. The credit card networks agreed to rebate $188 million of interchange fees to merchants and allow them to pass on interchange fees to customers for the first time.
Under the settlement, surcharges can’t be higher than 2.4% of the transaction amount and you must:
- give your credit card network 30 days notice of your intent to start charging a fee on transactions. You’ll also need to notify your credit card processor.
- not charge customers more than your actual interchange fee
- not apply the surcharge in addition to a service or convenience fee
- inform customers of the surcharge:
- at the point of sale, both in store and online
- at the entrance of bricks-and-mortar stores
- verbally over the telephone
- on every receipt
You can choose to apply a surcharge on specific credit card products or brands. However, if you decide to apply a surcharge at the credit card brand level, the surcharge must be the same for all credit cards for that specific payment card network.
Merchants should consult their acquirer about these and other rules.
Do debit cards have interchange fees?
Merchants are charged a flat rate for debit card transactions regardless of the value of the purchase. In a piece on payment fees by the Retail Council of Canada, the lobby group explains that it generally costs merchants under 10 cents to process a debit transaction, although the fee can be as high as 40 cents.
Merchants should contact their payment processor about debit card payment surcharges. Some networks do not permit merchants to add on a surcharge for debit card payments.
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