Merchant Payment Steering: Evidence From the 2009 Bank of Canada Methods of Payment Survey

Many retailers in Canada have noted the increasing burden of transaction costs, in particular the interchange fees due for every credit card transaction that they process. After the Competition Tribunal rejected in 2012 an application that might have granted retailers the right to surcharge credit cards, retailers may look for other solutions to avoid these fees. Discounting cash or debit card transactions has often been suggested as one solution since discounts are currently allowed in Canada. The results suggest that discounts cost more than the retailer saves by encouraging consumers to switch to lower-cost payment methods. This finding may explain why discounts are not frequently observed among Canadian retailers. I discuss non-pecuniary steering as an alternative to discounts. Non-pecuniary steering could be used by merchants to exercise third degree discrimination based on payment choice, while discounts only allow second degree discrimination.