The Justification for Credit Card Surcharges: A Deep Dive

The recent court decision in Canada that now permits merchants to impose credit card surcharges has sparked heated debates in online communities like r/Canada, r/PersonalFinanceCanada, and r/Ontario. Many of these discussions have targeted merchants, with the assumption that surcharges are simply a way for them to double dip since credit card fees are likely already incorporated into their pricing models.

This post, however, takes a different angle. It aims to elucidate the path that led to this situation, highlighting how prohibiting surcharges contributed to the tangled web of exorbitant fees that customers face today.

A Brief History of Credit Card Fees

The two titans of the credit card industry, Visa and Mastercard, along with various governments, have historically prevented or restricted merchants from passing on credit card fees to customers.

Here's why the absence of surcharges can be problematic:

  1. Consumers are practically pushed into using credit cards because of the incentives they offer, even when it might not be in their best interest.
  2. With everyone bearing the brunt of credit card fees, the charges are inevitably higher than they would be in a competitive market.
  3. This pricing model means that some segments of the population, particularly those who don't or can't use credit cards, end up subsidizing the fees of those who do.

Unraveling the Credit Card Industry

When a purchase is made using a credit card, the merchant has to compensate both the credit card network (e.g., Visa or Mastercard) and the bank that issued the card. Though these fees can vary, in Canada, they usually fall between 1-3% of the transaction amount.

Two crucial points need to be understood:

  1. The fees differ depending on the card type. Premium cards attract higher fees, which in turn fund their more extravagant perks.
  2. Credit card networks set the rules. In places where it's allowed, these networks often prohibit merchants from adding a surcharge, leading to a universal price hike.

The Prisoner's Dilemma & Market Failures


When customers use credit cards without direct surcharges, everyone indirectly pays for it through inflated prices. This model hits the economically vulnerable harder, as they often lack access to these cards yet still bear the cost.

Externalities in economics can lead to suboptimal outcomes. In the case of credit cards, users do not pay the full price, causing skewed consumer behavior.

The Prisoner’s Dilemma

Imagine an apple costing $1. If using a credit card gives you a 5% cashback, but the merchant raises the price by 15% to cover credit card fees, you still end up benefiting. This scenario encourages all consumers to use credit cards, making it the rational choice, even if it isn't optimal for the market as a whole.

Market Failure

What this leads to is a system where the consumer doesn't really have a choice. They are compelled to use a credit card regardless of their personal preferences or the inherent value of the "perks" they receive. This monopolistic structure of the market allows credit card companies to maintain high fees, knowing that consumers have limited alternatives.

A Case for Mandatory Surcharges

Consumers have the most to lose from exorbitant credit card fees. If surcharges are not only allowed but mandated, consumers can then exert pressure on credit card companies to reduce their fees. They can choose to switch to cash payments, pushing these companies to reconsider their fee structures.

The Way Forward

While the recent ruling in Canada allowing surcharges is a step in the right direction, more needs to be done. To genuinely protect and benefit consumers, credit card surcharges should be made mandatory, and the savings should be passed on to those who opt for cash payments.

In conclusion, while the initial impulse may be to blame merchants for imposing these surcharges, a deeper understanding of the credit card industry reveals that these charges might be the key to dismantling a monopolistic system that's rigged against the consumer.

Be careful out there and get with the right partner with the experience to know what small businesses need. Reach out to me directly at the number below or schedule a zoom if you need help or just need a free consultation.

Scott Lorts

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