With credit cards, there are no free plane trips
Last week, the B.C. Supreme Court certified a class-action lawsuit against Canada’s banks and credit card companies, seeking billions in claims to repay what is called a civil conspiracy on transaction fees charged to merchants.
Similar suits in Alberta, Saskatchewan, Ontario and Quebec are being held in abeyance, pending the outcome of the action in B.C., which will probably take years to settle.
The B.C. suit was launched in 2011 — a year when credit card companies reported a profit of $18.5 billion, on credit card sales of $267 billion, with about $2 billion rolled over in monthly unpaid balances at usurious interest rates.
The part that’s involved in the lawsuit is about $5 billion a year, which is charged to merchants in transaction fees. The lawsuit alleges a conspiracy to keep fees unreasonably high.
When a merchant agrees to accept any credit card, the credit card system says they must agree to accept them all. The banks and the credit card companies mostly charge 1.5 to three per cent of the final value of the sale, to handle the transaction. Some — the ones with generous reward program points — can charge as much as six per cent.
Merchants are not allowed to build the cost of fees into the sale price. This is not protection for consumers. Just the opposite. If they were, you could ask for a discount at the cashier for paying cash. Banks and card companies don’t want that option to be allowed. They don’t want you to know the true cost of your card.
A similar suit against banks and credit card companies in the U.S. was settled last year for $7 billion. It was the largest class action settlement in U.S. history.
In the meantime, the value of retail sales in Canada transacted through credit cards is rising. For last January, StatsCan says the total of all sales was $40.67 billion.
It’s getting to the point where the cost of buying things is affected more by credit card fees and related charges than the GST everyone loves to complain about.
If you’re low income, at least the GST refund provides you with a small cheque every 90 days.
If you’re middle-income, the winter vacations you take with your credit card reward plan might actually cost you less if you never used a card and just bought the plane tickets yourself.
However, (no surprise) there is actually a benefit to high credit card spenders with lavish rewards programs (business cards, mostly), who pay their total balances every month. Their rewards are (no surprise) subsidized by everyone else — other credit card holders, merchants and even people who have no card at all.
Bottom line: there are no free rewards programs, there are no free seats on airplanes.
And if the various Canadian lawsuits prove to have traction, consumers could come to a much clearer understanding of the true cost of holding a pocketful of plastic.
A study done by the Federal Reserve Bank in Chicago tried to explain that cost to consumers. One of the costs looked at (beyond exorbitant interest charges, high transaction fees and unreasonable annual fees), was the cost of their so-called loyalty programs.
Even a straight one per cent cash back on purchases ended up costing consumers more. That’s because holders of such cards ended up spending an average of $68 a month more, resulting for most in an average of $115 higher unpaid balance after three months. Triggering outrageous interest charges.
The popular travel plans likewise resulted in increased credit card spending (and an avoidance of competitors’ cards), and increased costly debt.
But have you tried just paying for everything in cash? It’s getting harder to live that way — and bank fees mitigate against it.
If you don’t like the thought of carrying large cash sums on your person, you will need a debit card. It’s the cheapest form of plastic for both you and the merchants (the transaction fees are much lower), but it requires you to be mindful of your current account balance.
If your bank’s ATM machine isn’t handy, the fees for using other institutions’ cash machines will wipe out any savings you could expect from not holding a credit card.
The same studies that show increased use of credit cards via loyalty programs also show people generally spend less when using cash or debit. Today, people will sell you a credit card swipe attachment you can plug into your smartphone. For a fee, on top of fees, on top of interest on your unpaid balance.
The gullibility of consumers has never been in question. At least now, merchants have begun to fight back.
Greg Neiman is a retired Advocate editor. Follow his blog at readersadvocate.blogspot.ca or email firstname.lastname@example.org.