Capping credit card fees puts cap on benefits to Canadians

Credit cards are owned by nearly 90 per cent of Canadians and are used in approximately 65 per cent of point-of-sale payments. However, large merchants want government to impose price caps on the transaction fees that enable card issuers to incent credit card use. Such price- fixing would likely harm consumers.

Since 2008, the value of retail transactions involving credit cards has risen by over 50 per cent due to their convenience, security, insurance, warranties on purchases and, arguably the biggest driver, the rewards that cards offer. Owners of reward cards — about 80 per cent of Canadians with credit cards have at least one — cite rewards as the primary motivator.

Credit card benefits are paid through a combination of annual fees charged to cardholders and transaction fees charged to merchants. Although cards with more benefits attract higher annual fees, consumers recognize the bargain. A new Macdonald Laurier Institute study found that those earning $ 40,000 might expect annual rewards valued at $450 while paying just $75 in fees. Those earning $90,000 would benefit by about $1,350 while paying $225.

Contrary to claims that rewards have induced spending that increased credit card debt, a Bank of Canada study shows increased card use over the past decade has come mainly from “convenience users” who pay off their cards monthly and represent a majority of card holders.

Some merchants object to the higher fees needed to cover the cost of higher rewards, claiming declining profitability, and want the government to impose price caps. Yet Stats Can data show that their profitability did not decline as a result, and that the number of merchants who accept credit cards has increased in the past decade.

In Australia, the country with the longest- running experiment with price caps, we found that, as with other price controls, price caps tend to reduce the supply of the price- capped good and cause other prices to rise. Australia’s price caps lowered the fees paid by merchants by 43 per cent on average but raised the annual fees on credit cards by an average of 40 per cent. The effect? Reward earnings from comparable cards fell by an average of one third.

If that experiment was run in Canada, we estimate that Canadians would be worse off, with middle- class households bearing much of the pain. For an individual or household earning $40,000, the net loss would be $66 to $ 187. For an individual or household earning $90,000, the net loss would be $199 to $562.

We also estimate that merchants would experience an aggregate net loss of between $ 1.6 billion and $ 2.8 billion ( taking into account merchant savings from lower fees). And we estimate that reduced spending and saving could cause GDP to fall by between 0.12 per cent and 0.19 per cent per year, while federal government revenue could fall by between 0.14 per cent and 0.40 per cent.

Middle- class Canadians benefit enormously from credit cards and associated rewards. Were caps to be imposed, the harm would be felt across the economy.