OTTAWA—Canada’s credit card system is a ‘perverse’ place where shoppers who pay with cash or debit subsidize purchases made with credit cards, the Competition Bureau argued Tuesday in its opening salvo against Visa and MasterCard.

That’s because merchants pay high fees for accepting credit cards and those costs are passed on to all consumers, the bureau’s lead counsel Kent Thomson said in his opening statement to a tribunal hearing whether credit card companies are engaging in anti-competitive behaviour.

Presenting the case for the Competition Bureau, Thomson argued that the restrictive contracts put in place by Visa and MasterCard allow the two credit card companies — which represent 92 per cent of the market — to essentially dictate terms to merchants.

The much-awaited case before a tribunal headed by Justice Michael Phelan of the Federal Court of Canada involves high stakes.

As Thomson pointed out, Visa and MasterCard charged merchants about $5 billion in fees for the privilege of accepting payments by customers using the cards, charges that merchants recoup through higher consumer prices.

Those fees, which range from 1.5 to 3.0 per cent on purchases, are among the highest in the world, he said, about twice the rate credit card firms charge merchants in Australia, New Zealand and many parts of Europe.

“Most Canadians are unaware of the high cost of fees” that are part and parcel of credit card usage, he said. “And these are not borne by merchants alone, they are reflected in higher prices paid by customers.”

In laying out the Competition Bureau’s case, Thomson singled out rules credit card firms place on merchants. For example, merchants are denied the ability to tell customers the imbedded charge for using a particular credit card, or from levying a surcharge on premium cards.

This encourages consumers to use more premium cards in order to collect rewards, such as Air Miles, but merchants must pass on the higher costs to all customers, whether they use standard cards, debit or pay cash.

He noted the fees on the average credit card is about 50 times higher than those on debit cards — about 12 cents.

In a normal competitive market, the merchant would be permitted to charge customers different prices depending on their method of payment.

“But none of this is possible in this country because of merchant restrictions put in place by Visa and MasterCard,” he said. “These restrictions distort the normal competitive process.”

Visa and MasterCard were expected to issue their opening statements later Tuesday afternoon, but Visa issued a statement denying the charge, saying the policy against a surcharge ensures customers are not “unfairly penalized” for using whatever card they choose.

The tribunal has the power to force credit card companies to change their method of operations, but can not levy a monetary penalty in the case.

The issue was referred to the tribunal by the Competition Bureau after a group representing independent firms complained they suspected credit card companies engaged in price fixing.

The hearings, which operate much like a trial, are expected to run until the end of June.

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The bureau first brought its application to the quasi-judicial tribunal in December 2010 with a challenge under the price maintenance provisions of the Competition Act, which allows the Competition Tribunal to prohibit certain agreements or contracts that influence prices upwards or discourages the reduction of prices.

The bureau launched its investigation in 2009 in response to complaints by merchants.