Surcharging in Canada – Your Questions Answered
If you follow any sort of news site you will notice that there has been a lot of chatter and supposition regarding Surcharging in Canada following a successful class action suit filed by the Canadian Federation of Independent Businesses (originally filed in 2011). The conclusion of that class action suit, which focused on the high charge of credit card fees charged to businesses (called Interchange) did not result in the Card Brands and banks lowering those fees, but instead resulted in a rebate that businesses can claim (more below on this) and an agreement by Visa and Mastercard (as well as other card brands such American Express) to allow surcharging in Canada. As of October 6, 2022, surcharging is allowed by these Card brands.
What does this mean for you as 1) a business that accepts credit cards and 2) as a consumer who uses credit cards?
First, lets discuss what is surcharging and what the rules are that the card brands are requiring.
Surcharging is a fee added onto a purchase made when using a credit card. This is usually a percentage of the sale. The reason that surcharging was part of the settlement under the CFIB lawsuit was it allowed a way for businesses to recoup the Interchange (percentage charged by the Card Brands) that businesses pay.
Credit card charges work like this:
Banks issue a credit card to a consumer under the label of either VISA or Mastercard. The banks entice consumers to get credit cards by offering cards that provide everything from basic credit to reward programs such as cash back and airline miles.
VISA or Mastercard set an Interchange fee (percentage) of every sale, which varies depending on the type of cards offered. Cards with no reward programs are a lower percentage which cards with rewards have a higher interchange fee or percentage.
The Banks earn as much as 75 – 85% of that fee, while VISA and Mastercard keep the rest. 
Who pays the Interchange fee? You, as the merchant accepting credit cards do. That means that when a consumer walks in with an Airmiles card, you are going to pay more for that sale than if they used a debit or basic Visa card with no reward program.
If you have travelled to the states in recent years, you may have come across surcharging when visiting a store or restaurant. At the time of purchase, the payment machine that the business was using may present a separate line item adding on a convenience fee/surcharge/non-cash adjustment. When using your credit card to make a purchase, your total might look like this:
In the US, the States that allow surcharging are allowed to add up to 4% onto their bills to cover the cost of Credit Card processing.
However, in Canada, the rules state that surcharging will not be allowed to exceed 2.4%.
Surcharging is a way for you to recoup those costs by passing them on to the consumer. However, there are a number of issues with this program.
First, by adding a surcharge onto your sales you are going to be changing how consumers will perceive shopping with you, knowing that there is an added fee (rules surrounding what you have to do to notify consumers of this change below).
Second, you have to consider what your competitors are doing.
Third, with surcharging maxed at 2.4%, you may not actually cover all of your credit card fees, just a portion. The actual percentage that the card brands will allow your business to charge will also depend on your typical interchange rate you are charged on average.
In addition to interchange fees, there are also assessment fees, transaction fees, sometimes cross border fees and then there are the fees to your service provider (some of which are legitimate and some of which are bogus fees meant to pad your bill). In some cases, SME’s are paying as much as 3 to 4% for credit card processing (not including the cost of equipment).
The fourth issue (at least right now) with surcharging is that even though VISA/Mastercard are allowing surcharging as of October 6, 2022, your service providers are NOT ready. Every single platform in Canada (the service providers) are working on updating their hardware and software to allow for surcharging (according to the rules) but don’t expect to be ready until 2nd quarter of 2023 or possibly later.
You see these are the rules if you are going to present surcharging:
· Will require merchant registration with Visa and Mastercard with 30 days’ written notice to your service provider
· Will be allowed on all credit products (debit and prepaid excluded)
· Will be allowed for all merchant category codes (MCCs)
· Will be allowed in all acceptance channels (card-present & card-not-present)
· Will not be allowed if a convenience fee or service fee is also applied
· Must not be charged by third party agents on behalf of the merchant
· Amount must be the lesser of the Effective Merchant Discount Rate or maximum of 2.4%
· The total amount of the transaction submitted must be inclusive of the surcharge amount
· Will not be allowed in jurisdictions where surcharging is legally prohibited
· Must be appropriately disclosed at point-of-entry, point-of-interaction and on the cardholder receipt
· The surcharge amount must be included in the corresponding sub-data field in the transaction
Those last two points are what are holding you up from being able to legally surcharge – because your hardware and software are not ready to provide the necessary disclosures to consumers.
Lately, a lot of the news networks have been writing articles that seem to amount to nothing more than scare tactics, telling consumers that they are suddenly going to be charged more for their purchases
everywhere they go. The fact is, no one is ready to even offer surcharging at this point (some few exceptions are internal point of sale systems built by companies themselves – such as Telus/Shaw).
Just so you know, surcharging your customers is optional. While it will become available sometime in 2023 by most of the service providers (Fiserv, Moneris, Global, Elavon, Chase and others), you don’t have to offer it if you don’t want to.
What can you do?
The good news is that there are options available to you to lower your credit card processing fees, right now.
1) You can apply for a rebate that is being provided to businesses in Canada that did credit card processing between March 23, 2001, and September 2, 2021.
Due to the successful class action suit by the CFIB, small businesses can claim either $30/yr (Small businesses – Settlement Class Members who collect less than $5 million in average yearly revenue over the Class Period ) and Medium sized businesses can claim $250/yr (Medium businesses – Settlement Class Members who collect $5 million to $20 million in average yearly revenue over the Class Period).
For example, if you qualify as a Small businesses and you have been doing credit card processing since 2001 until 2021, you can claim 20 years x $30 = $600. This won’t even scratch the surface of what your actual fees were doing those years, but it’s better than nothing. If you are a Medium sized business, then it would be 20 years x $250 = $5,000.
You can apply for this rebate even if you are no longer in business, or sold your business, but operated during those time periods. To apply for the rebate, click here: https://www.cfib-fcei.ca/credit-cards
2) Get a competitive quote
If you are a business who is paying more than 2.4% and you are thinking about surcharging in 2023, you might want to get someone to give you a competitive quote on your current processing.
Contact one of the service companies out there, or their brokers, to get them to take a look at your current statements and give you a quote on lowering your fees. There are a lot of times that I have found merchants are being charged extra fees that are not necessary or simply getting gouged with high service fees (added on top of interchange fees). There are a lot of nuances to credit card processing fees, so talk to someone who understands and can explain the charges you are paying to ensure that you are not being overcharged. Then if you decide to adopt surcharging in the future, you will have a good chance of covering most of your fees.
3) Offer Cash Discount program
You can offer a program that has been available in Canada for more than 2 years that covers 100% of your credit card fees and provides a better message to consumers. It’s called the Cash Discount program.
The Cash Discount program is a combination of hardware and software that increases the price of your inventory by a percentage. Then, at the time of purchase, the software can provide a discount to the
consumer if they use a debit card or pay by cash. In this case, the messaging is flipped so that the consumer is not presented with an extra fee if they pay by credit card, but instead, with a discount if they pay be debit card/cash. If you were a consumer, which message would appeal to you more?
This is how it works – let’s say that you are a food truck offering tacos. You normally charge $5.00 for a taco. However, with the cash discount program, you would increase your inventory price (done automatically by the software) by 4%, making the new price $5.20. This would now be your new advertised price. However, at the till, the consumer would have the option to get a discount (equal to the $0.20) if they use a debit card or cash, bringing the price to $5.00. If consumer decided to use their credit card (because they get cash back or airline miles), then they would simply pay the new regular price of $5.20.
This is the good part – that extra $0.20 that you collect from credit card sales, covers ALL of your credit fees including Interchange, service fees, assessment fees and transaction fees. Essentially giving you credit card processing for free; and your customers get a better feeling knowing that you offer an option to get a discount.
The cash discount program is available now. It is NOT surcharging and as a result, does not fall under all the rules and regulations that are part of the surcharging program.
At this point, don’t believe all the hype and misinformation out there about surcharging. If you have questions about surcharging, contact your service provider or someone who understands the credit card processing industry to get the facts and advice on how to help your business.
Author: Rob Larsen, CEO of Metroplexx
Metroplexx is a broker and fintech consulting company specializing in helping Small and Medium Sized businesses get the best advice and deals on credit card payments, card issuing programs, payment systems (AR/AP), Point of Sale software, loyalty/gift cards and crypto currency acceptance.