Rules Around Merchant Credit Card Surcharges to Change in Canada This October

In accordance with settling the Canadian credit card class action, Visa Mastercard, agreed to modify business practices and standards allowing Canadian merchants to apply an additional surcharge at checkout to cardholders who use credit cards.‍

Starting October 6th, 2022, merchants in Canada will be allowed to apply a surcharge to customers who pay by credit card.“Canadian merchants will be allowed to surcharge Mastercard credit card transactions, providing them with the flexibility to operate their businesses based on what best suits their needs,” Will O’Connor, a senior vice president of communications at Mastercard, said in an email Sept. 9.‍

So what exactly is a surcharge? Surcharges are additional fees that a merchant may add onto transactions when a consumer uses a credit card for payment.As long as Canadian merchants comply with certain limitations in the standards for charges to cardholders, merchants are permitted to apply surcharges at either a product-level or brand-level. In order to apply surcharges, Mastercard requires the following:

• Advance Notice to both Mastercard and the merchant’s acquiring bank of no less than 30 days prior to surcharge implementation.

• Disclosure of surcharge practice to cardholders at the point of sale and on the cardholder’s receipt

• Apply the surcharge within the rate standards

Merchants may apply surcharges if the fees do not exceed the merchant discount rate for the applicable credit card. For Mastercard, the maximum amount a merchant can charge is no more than 2.4%. In addition, merchants cannot surcharge Mastercard credit cards more than another competing credit card.Brand-level surcharge caps are calculated by an average of the merchant’s discount rate of their credit card transactions over the past one or twelve months. The cap is then chosen by the merchant, the absolute cap or whichever average is lower.‍

Visa also requires disclosure to the cardholder of surcharges and the maximum credit card surcharge must be 1% plus Visa’s average annual effective rate of Interchange for credit card transactions in Canada.Surcharges are allowed in both card present and card not present transactions as long as the surcharge is visible at checkout and on the receipt.Debit cards and prepaid cards are not applicable in the new surcharges allowed starting October 6th.‍

Are surcharges the same as convenience fees?No, a “convenience fee” is considered a fee levied by a merchant for offering customers the option of paying with an alternative non-standard form of payment method. Surcharges differ in that they are regulated fees that can be added to transactions where a credit card is used to make a purchase.Mastercard prohibits both the use of a convenience fee and a surcharge on the same transaction.Overall the new surcharge rules that are coming into effect this week will benefit merchants as they will be able to cover some of their operating costs.

Research conducted by PYMNTS suggests that 2 in 3 people will take the fee “in stride without drawing a negative inference on the merchant”.It helps being transparent with customers as they generally will be accepting of the new surcharges while giving merchants a bottom-line boost.