Canadian consumers may feel an extra pinch starting October 6, when merchants gain the ability to add surcharges of up to 2.4% for purchases made with credit cards.

The ability of merchants to surcharge consumers was an outcome of a class action suit brought against Visa, MasterCard and Canada’s largest banks.

The suit alleged that banks conspired with Visa and MasterCard to set higher interchange fees and restricted merchants’ ability to surcharge or refuse higher-cost credit cards. Interchange fees are paid by merchants, and have increased with the growth of premium credit cards that generate higher levels of rewards for credit card use.

The settlements reached in December 2021 included fines that were paid out to merchants, and an agreement from Visa and Mastercard to modify their rules to allow merchants to surcharge, up to a limit of either 2.4% or the merchants’ actual costs to accept credit card transactions, whichever is lower. The surcharge ability will remain in place for up to five years, and begins October 6.

The new rules do not apply to Quebec, because of that province’s Consumer Protection Act.

Merchants may also add a surcharge to Interac debit card transactions, but merchant costs to accept those transactions are much lower.

Although merchants will have gained a contractual right to surcharge, they may not elect to use it. A 2015 research report by the Consumers Council of Canada studied the relationship between credit card processing fees and loyalty programs. In that study, focus group participants reacted extremely negatively to potential surcharges on credit card purchases. However, most conceded their payment choices would not change if funding were reduced to loyalty programs, and merchant costs similarly reduced.

Published materials from credit card networks and organizations such as the Canadian Federation for Independent Business describe how these new charges should be presented to consumers. Signage is required, both in store, and online. Surcharge amounts should be clearly listed on the receipt. Merchants cannot surcharge only on selected products, but can surcharge only on selected credit cards. The disclosure must include a statement that the surcharge is not greater than its actual costs of accepting the credit card transactions. The surcharge should be credited back to the cardholder on purchases that are “charged back” because of non-delivery or other problems.

Fear of consumer backlash has led some to believe that most retail merchants will not choose to implement surcharges. However, Telus provided notice to its customers that bill payments made through a credit card will be charged an additional 1.5% credit card processing fee.

Merchants have long argued that because the higher transaction costs associated with more premium cards could not be charged to those specific cardholders, it had to be spread among all consumers. A 2021 Bank of Canada paper confirmed that “credit card transactions are cross-subsidized by cheaper debit and cash payments” and thus higher interchange fees result in a transfer of wealth from those who pay with cash and debit (typically lower income consumers) to those who use premium cards (typically higher income consumers.