On the back of a recent issue of Bon Appétit magazine, a group of attractive, smiling young people is gathered around a white-cloth covered table, sipping wine and laughing.
The tag line is "Guess who’s paying for dinner? Your points."
It’s an ad for a credit card and the implication is clear: Use your card often enough and you’ll get something in return.
Canadians are crazy for rewards programs. Collectively, there are 114 million active members of rewards programs in Canada, according to Colloquy, the market research arm of LoyaltyOne, the group that owns the Air Miles program.
That’s more than four rewards programs for every man, woman and child in the country.
"When you can take a whole family on a trip and not pay anything, I think that’s fantastic. That’s worth thousands of dollars. Why wouldn’t you do it?" says Lynda Fishman, a 52-year-old children’s camp director in North York.
Fishman has at least three credit cards with rewards programs on them, and an Air Miles card she can use on its own to collect points. None comes with annual fees and they’ve produced enough points to send her family of five to Florida for a week.
She also earns a $150 bottle of Chanel perfume every few months with her Shoppers Drug Mart loyalty card. "I shop there whenever they have the 20 times bonus points on everything in the store."
In the minds of most consumers, these rewards are "free." But, of course, they’re not.
They come out of the pockets of retailers like Jim Stonley and Zafar Khokhar, co-owners of the Esso station at Front St. E. and Sherbourne St. in Toronto.
The pair say they pay nearly $11,000 a month on average in credit card fees and see little benefit, even from Esso-brand loyalty cards.
Indeed, they say they pay twice when a customer swipes their Esso points card – once to process the transaction and again when the customer redeems them because the points do not cover the full cost of the product or service.
Stonley and Khokhar say they feel they have to accept any credit card the consumer presents or risk losing their business to competitors. But the costs are starting to add up.
Profit margins on gas average 5 cents a litre. Credit card processing fees are on average 2 per cent. So, when the price of gas goes up, the credit card processing fee also increases and eats into the margins.
"It’s quite a lot of money for a small business person," Stonley said.
Many loyalty programs are part of a retailer’s marketing program. Retailers pay to join Air Miles because it helps drive cardholders to their stores. Shoppers Drug Mart uses its Optimum card to attract customers and push selected merchandise by doubling or tripling the points on those items.
These kinds of loyalty programs make up about 80 per cent of the rewards program market in Canada.
Consumers don’t seem to mind that the costs may be hidden in the prices of things they buy. Indeed, the Consumers Association of Canada opposes anything that would reduce the value of rewards programs, such as caps on credit card interest rates and fees.
Nearly half of Canadians use a credit card simply because it offers rewards, citing first points, then flights and finally cash as their preferred rewards, according to Chicago-based research firm Mintel International Inc.
Retailers say there is a fundamental problem in the way credit card programs are funded. They foot the entire bill but they do not derive all the benefits and say they have no ability to negotiate the rates.
That’s because merchant "swipe" fees are based largely on something called the "interchange rate."
"I can tell you, without a doubt, that all of the credit cards that come with rewards programs are fully paid for by the merchants," says Diane Brisebois, president of the Retail Council of Canada. The council estimates such fees now cost merchants $4.5 billion a year, or roughly 2 per cent of the value of every purchase Faxless payday loans. That amounts to nearly $400 per household, assuming these costs are passed on to consumers in the form of higher prices.
The Bank of Canada concluded credit cards have become the most expensive form of payment for merchants. The average debit card transaction costs 12 cents, but a credit card transaction costs 2 to 4 per cent of the value of the sale, according to the central bank.
Credit card companies say interchange keeps the system running smoothly. In a two-way network, where both sides have to agree to participate, it ensures banks have an incentive to issue cards to consumers, and merchants have an incentive to accept them, they say.
The fee is collected by the merchant’s bank and paid to the cardholder’s bank to compensate the card issuer for the cost of bringing cardholders into the system, the credit card companies say.
"Interchange is determined by MasterCard and makes up part of the fee paid by the merchant," Kevin Stanton, president of MasterCard Canada, told a Senate committee hearing earlier this year.
Merchants and small business owners say the system encourages a weird form of reverse competition in which credit card companies compete for the banks’ business by raising the interchange rate at the merchants’ expense.
This wasn’t a problem as long as merchants felt the rates were reasonable and negotiable, Brisebois says. That’s no longer the case.
Ever since most of Canada’s banks outsourced their merchant-acquiring business to third parties, it’s been a lot tougher for merchants to strike deals on credit card processing fees.
"The merchant used to deal directly with the branch manager of their bank. The merchant could negotiate with the manager, who wanted to keep the merchant’s banking business," Brisebois explains.
The situation took a turn for the worse after the credit card companies fiddled with their interchange rate structure and introduced a new class of "premium" cards. After years of relatively steady, predictable fees, both Visa and MasterCard expanded the number and kind of rates retailers pay from two or three rates to between 19 and 21.
The new premium cards, such as Visa’s Infinite card, come with more perks for consumers but cost merchants more to accept.
Retailers say these cards now represent 25 per cent of the value of all transactions and have a huge and unpredictable impact on the fees they face at the end of the month.
The bankers’ association says premium cards represent just 9 per cent of their credit card accounts and benefit the merchant by bringing in higher net worth customers.
Industry experts, such as Andrew Davidson of Mintel International Inc., say premium cards were created to offset banks’ rising loan losses during the economic downturn.
Add in other interchange changes and these new premium cards helped boost processing fees more than 10 per cent for Visa and nearly 20 per cent for MasterCard in the 12-month period ending last February, retailers say.
The credit card companies dispute the retailers’ figures, saying they have raised rates for some types of transactions and lowered them for others so the overall impact is neutral. The retail council says the new rates are designed to boost credit card use in grocery stores, gas stations and coffee shops where consumers prefer to use cash or debit.
Initially, credit cards were cheaper than cash or cheques and had the added benefit of reducing the risk of theft, says Andrew Ching, a marketing professor at the University of Toronto’s Rotman School of Management. Now, with the market saturated, banks began to use their reward programs to compete for market share, and to penetrate under-represented markets, such as grocery and gas.
Fishman, the points-collecting camp director, shrugs off retailer complaints. She accepts credit card payments from clients. "It’s just another cost of doing business."
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