Banks hold the key

When you shop for anything and pay by cash, cheque or debit, you may be ripped off. When you pay by credit card, both you and the merchant are sharing the cost of some of the highest consumer transaction fees in the world.

When you shop for anything and pay by cash, cheque or debit, you may be ripped off. When you pay by credit card, both you and the merchant are sharing the cost of some of the highest consumer transaction fees in the world.

When you pay by credit card, and do not pay the full balance owing each month, you’re a sucker, pure and simple.

None of this is illegal, but the federal government is so concerned about the usury over credit card fees that Finance Minister Jim Flaherty is going to speak to a committee. Hoo boy!

Canadians buy a lot of stuff. Annual retail sales, posted by Statistics Canada for 2011, showed more than $472 billion in gross revenue. Gross margin for all stores was 26.9 per cent. Both those figures are rising well this year.

Inside all that is the cost we pay for our love of plastic. On a $400 purchase, for instance, the merchant can typically lose $12, if the customer pays with a regular-type credit card. If the customer is collecting air miles bonuses, the cost will be even more.

The total cost of credit card transactions carried by merchants is proprietary information. But it is estimated at between $4 billion and $5 billion a year.

Considering that margins are just shy of 27 per cent, you can reasonably assume that some of those costs are hidden in the price of stuff you buy. Therefore, if you do not pay by credit card, you are sharing the costs for customers who do.

That means the system is skewed to reward consumers who use credit cards, forcing both merchants and other consumers to share the costs.

If the customer pays by debit, the cost is a flat 12 cents. Pay by cash and there is no deduction for the merchant, other than the cost of counting and managing the cash.

Guess which method of payment the merchant would like you to use? Guess which one the banks behind Visa and MasterCard would like you to use?

One in four Canadians with a credit card (that’s most of us) also carries a monthly balance. One in four Canadians who carry a balance say they carry that balance for more than a year — at interest rates hovering at 20 per cent per year.

For those who make only the minimum payment each month, that $400 purchase will cost about $240 in interest. The definition of stupid.

One in 20 Canadians who carry a balance say they fear they will never pay their credit card debt. For them, the cost of the purchase is infinite, and they are indeed suckers — the legitimate prey of credit card companies.

This week, Canada’s major retailers got the results of a Competition Bureau ruling on their complaint that the rules around accepting credit cards — including some of the world’s highest fees — are unfair.

No dice, said the bureau. The complaint was rejected on a technicality — it was based on a section of law that did not apply, they said. At any rate, relief would have to come through legislation, not through anti-competition complaints. Over to you, Flaherty.

Thus the finance minister’s promise to convene his committee. Stay tuned.

Actually, without any need to change any laws, relief is already in the hands of every bank and credit union in Canada.

Instead of rewarding credit card purchases by making everyone carry the cost hidden in the price of everything, we can reward debit card users by reducing the cost of overdraft protection.

It’s already cheaper to carry an overdraft than credit card debt, and for anyone who gets a regular paycheque, the interest compounding would be vastly less.

Any consumer who has a balance on their credit card should talk to their banker about transferring as much of that debt as possible to an overdraft chequing account, into which their paycheques are also deposited.

Minimum payment amounts will automatically be exceeded, and consumers will be able to gauge their progress at getting out of debt — with a hugely lowered interest rate burden.

The real cash incentive to use debit/overdraft is much larger than any credit card loyalty program could ever be. So consumers will eventually switch payment preferences at the stores where they shop.

The ripoff costs of credit cards will slowly reduce, giving credit card companies a real incentive to lower their fees to regain their share of the action.

Merchants, consumers — and even local bank branches — win.

You’re welcome.

Greg Neiman is a retired Advocate editor. Follow his blog at readersadvocate.blogspot.ca or email greg.neiman.blog@gmail.com.