‘Free’ loyalty rewards may cost you up to $520 a year – Consult with a Vancouver Mortgage Broker

The average premium credit card generates more than $400 a year in indirect merchant swipe fees – all so you can collect so-called “free” rewards.

That’s on top of the $120 a year annual fee you may pay directly to your bank for the privilege of earning free rewards on purchases made with cards like the Visa Infinite or World MasterCard.

The cost to merchants – and ultimately consumers—of handling credit card payments was back in the news this week when the federal Competition Tribunal dismissed a complaint against Visa and MasterCard.

The complaint, laid by the federal Competition Bureau, alleged that certain Visa and MasterCard rules limited competition, leading Canadians to pay among the highest credit card swipe fees in the world.

The tribunal’s closely-watched decision effectively squelched efforts by merchant groups to start surcharging customers who use credit cards, especially rewards-rich premium cards.

For Canada’s banks, the decision was a big relief. Banks earn up to 10 per cent of their pre-tax operating profit from credit card interchange rates, analyst Peter Routledge, at National Bank Financial, estimated in a report to clients this week.

“Surcharges have the potential to really disrupt the whole payments system,” said Lynda Lovett, of MarketSense Inc., a research firm that tracks the financial services industry, including consumers’ attitudes toward credit.

But the issue is far from dead.

Related: A credit card fee primer

The tribunal said the bureau failed to make its case, but it opened the door to regulation by Ottawa.

Federal Finance Minister Jim Flaherty has called for a special meeting of a payments industry advisory committee to consider the government’s options. Other countries allow merchants to surcharge customers who pay with credit cards, a controversial solution that’s produced mixed results.

So far, Flaherty has given little indication which outcome he favours, except to hint that he would prefer it to be voluntary.

At stake is nearly $5 billion in hidden credit card fees paid by merchants to banks to cover the cost of accepting plastic as a form of payment.

Visa and MasterCard say the system provides a safe and secure payment network that benefits consumers and merchants. Consumer groups warn that allowing merchants to surcharge could lead to gouging at the checkout. The merchants say they’re middlemen in a game that rewards the banks and some cardholders—at everyone’s expense.

Related: Merchants vow to fight credit card fees

Every time you use a credit card, the merchant pays a fee of between 1.5 to 3 per cent of the value of the purchase.

The fee is largely based on something called the interchange rate, which is set by Visa and MasterCard, who together control 92 per cent of Canada’s credit card market.

Though the rate is set by the credit card companies, they don’t derive any revenue from it. Rather, it was created by the card companies to encourage banks to issue and accept credit cards and comes out of the fee the merchants pay the banks.

Critics say this is a perverse system where banks have incentives to issue increasingly costly, reward-rich credit cards at the expense of merchants and consumers.

“The banks want people to use the cards so they get the interchange revenue. To do that they give out cards with increasing benefits,” says Luciana Brasil, a lawyer with Branch MacMaster in Vancouver, one of the firms that has launched a lawsuit against Visa, MasterCard and the banks on behalf of Canadian merchants.

Proponents of interchange say the system works just like any other two-sided market. Much like shopping malls, credit card networks are platforms that brings together consumers and retailers , a research paper by the C.D. Howe Institute notes.

Retailers pay a price to participate in the market and some of that cost is passed on to consumers, according to the study, called The Way We Should Pay.

Interchange rates can vary with type of card and purchase and even type of retailer. But for premium cardholders, the rate on a typical transaction is around 1.75 per cent.

That translates into at least $400 a year in fees per cardholder based on research by MarketSense, which shows the average premium credit card holder spends $24,000 on their credit cards.

The situation is not unique to Canada.

In the U.S., Visa, Mastercard and some major banks signed a tentative settlement with merchants a year ago that includes $6 billion U.S. in compensation for swipe fees and permission to surcharge customers who pay with credit cards.

In Europe, the Europe Commission is considering a cap on merchant fees and a ban on surcharging.

MarketSense research shows that permitting merchants to surcharge could have a dramatic impact on credit card use in Canada.

If merchants were allowed to add even 1 per cent of the purchase price in surcharges at the checkout, 42 per cent of credit card users said they would reduce the credit card use and 30 per cent would cancel their cards altogether.