A consumer watchdog group in Canada is speaking out in support of the major card brands in response to an argument brought by the country's Competition Bureau on behalf of retailers.

The consumer group says an expected government decision could allow merchants to add surcharges to credit card transactions. The decision would address a two-year debate between the bureau and Visa Canada and MasterCard.

"It's actually rare that consumers would side with card companies, but in this case it just so happens we have the same goals," says Bruce Cran of Vancouver, president of the Consumers' Association of Canada.

The association's goals are to protect consumers from surcharges if Canada's Competition Tribunal lifts card brand rules prohibiting retailers from passing interchange costs directly to consumers.

"The public doesn't understand what can happen here, and consumers could wake up paying up to a 10% surcharge on transactions," says Cran. "It's absolutely ludicrous."

Canadian retail organizations and government agencies have long claimed to want to help consumers, but "there is nothing in this argument but grief for consumers," Cran says.

However, the Competition Bureau casts the fee situation as a "transparency issue," says Bryan Parker, spokesman for the bureau.

"We feel that the rules were eliminating competition between Visa and MasterCard on fee structure, and the consumers are not aware of the fees at all," Parker says.

The bureau contends that, due to lack of competition, Canadian merchants pay among the highest card acceptance fees in the world at between 1.5% to more than 3% per transaction.

As such, the bureau argues card brands should drop their rule that forbids merchants to pass transaction fees directly onto consumers. The bureau also wants the card brands to drop a rule prohibiting merchants from refusing to accept premium cards that carry higher transaction fees.

The Competition Bureau's stance is reminiscent of the situation in Australia, Cran says. The consumer group fears a repeat in Canada of the surcharging spree that unfolded in Australia when that country's merchants began applying extra fees in 2003, he adds.

In June 2012, the Reserve Bank of Australia adjusted its standards to allow card scheme rules, as of March 2013, to limit surcharges "to the reasonable cost of card acceptance." The bank's payment systems board took up the surcharging matter in Australia because some merchants were charging "well in excess of acceptance costs," with a taxicab company adding a 10% surcharge.

The Competition Tribunal has listened to arguments from the Competition Bureau and card brands for the past year, but has not set a date for its ruling. The tribunal carries authority similar to that of any court, Parker says.

"We took our argument in front of the tribunal almost a year ago now, and we are still anxiously awaiting a ruling," Parker says. "I believe the consumer group was probably expecting it was time to hear something."

Published reports indicate the tribunal is in the "draft stage" of its decision, meaning it is printing it in English and French, may have triggered a belief that a ruling was imminent, Parker says.

Cran says the consumer association doesn't know what to expect as far as timing on a decision, and feels the tribunal has already waited too long.

"The market … has moved on, with some retailers offering attractive credit card discounts at the registers," Cran says. "Plus, millions of us in Canada just go across the border to the U.S. to get better prices and better service."

In a response to the Competition Tribunal, MasterCard emphasized that a "no surcharge rule is clearly protective of consumer interests."

It is not a rule which "results from or leads to anti-competitive conduct, but rather is driven by efficiency considerations," MasterCard says.

Visa stated that acquirers are free to set the prices for the services they provide to merchants and that card brand rules do not restrict that process.

"Interchange is a tool that is used to balance demand on both sides of the two-sided market," and a fee reduction could result in fewer benefits for cardholders or an increase in annual fees, Visa said.

No matter which country is debating card fees, the basic premise of the debate does not change, says Gil Luria, analyst with Los Angeles-based Wedbush Securities.

"This is just the Canadian front of the battle retailers have with the networks," Luria says.

The consumer group in Canada is concerned because surcharging is a way for retailers to "hold the consumer hostage" in leveraging for lower rates from Visa and MasterCard, he adds.

Meanwhile, the Competition Bureau is attempting to give merchants an opportunity to obtain lower fees or be granted the ability to cover costs directly through surcharging, Luria says.

U.S. consumers were alerted to a potential surcharging earlier this year, a result of the $7.25 billion card-fee settlement stemming from a district court ruling in an eight-year antitrust case against the major card brands. Part of that settlement calls for an end to the brands' rule stating merchants could not pass along the cost of transaction fees to consumers. 

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