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Ottawa's competition watchdog is taking on two giants of the credit card business, alleging they are engaged in anti-competitive practices that hurt merchants and consumers and drive up prices at the cash register.

The Competition Bureau launched a legal action against Visa Canada Corp. and MasterCard International Inc. for imposing "restrictive" rules on credit cards that cost retailers about $5-billion a year in fees, some of which is passed on to their customers, regardless of how they pay, in the form of higher prices on their merchandise.

The two companies, which control more than 90 per cent of the credit-card market in Canada, set the base fees that help determine how much stores must pay to accept plastic. Those fees, which typically range from $1.50 to $3 for every $100 transaction, are nearly twice as high as the charges retailers pay in Europe, Australia and New Zealand, the bureau said.

Central to the bureau's case are the rules that retail outlets must follow, which have long been an irritant to store owners. Retailers are not permitted to add a surcharge to purchases made on "premium" cards, which carry higher merchant fees, and are prevented from trying to persuade consumers to use lower-cost payment options, including cash or debit cards. Stores that take Visa or MasterCard are also forced to accept the companies' entire suite of credit cards regardless of fees.

The bureau, which began investigating the case in 2009, determined Visa's and MasterCard's rules are impeding merchant choice and destroying competition between the two companies. "Visa and MasterCard's anti-competitive behaviour hurts businesses and consumers alike," Competition Commissioner Melanie Aitken said in a release.

Her challenge, announced Wednesday, highlights shortcomings in Ottawa's voluntary code of conduct for the industry.

The code, which took effect just four months ago, was intended to give retailers more clout to negotiate fees. But critics say the voluntary measures lack teeth. While the bureau does not directly call the code ineffective, it emphasizes its limitations.

The move also highlights the bureau's new aggressiveness in pursuing complaints of anti-competitive activity. Ms. Aitken, a lawyer, became commissioner last year and has already challenged controversial practices in the wireless and real-estate industries, and recently forced the Canadian Real Estate Association to allow greater competition from companies that offer lower-cost services.

The bureau argues that permitting retailers to charge consumers extra for using higher-cost cards would be the "most effective" way to foster competition with respect to fees. Some consumers prefer those cards because they come with more lucrative incentives, such as travel points.

Catherine Swift, chief executive of The Canadian Federation of Independent Business, now plans to ask Finance Minister Jim Flaherty to include surcharging in the code as a prudent measure.

The Retail Council of Canada does not support surcharging, but wants the payment system regulated. "This is another piece of the puzzle, and it provides the minister with further evidence of the need for a more robust regulatory framework," president Diane Brisebois said in an e-mail.

Mr. Flaherty told reporters the code is working and called the bureau's application a "parallel" effort. "We want to have as much competition as possible."

David Russell, co-owner of Sporting Life, which runs four sporting goods and fashion stores in Ontario, said Visa charges it 12.5 per cent more for transactions made with its premium cards compared with its regular cards, while MasterCard charges 25 per cent more for purchases on its high-end plastic.

"We can't afford those kinds of increases," said Mr. Russell, who is also chairman of the Retail Council of Canada.

The bureau was forced to take legal action, which comes in the form of an application to the Competition Tribunal, because Visa and MasterCard refused to change their business practices voluntarily, a spokesman for the competition bureau said. A final decision could take more than a year.

Visa and MasterCard criticized the legal action, arguing it would pad retailers' profits at the expense of consumers. Both said the case lacks merit.

"Visa is disappointed that the Canadian Competition Bureau has taken an anti-consumer position by filing a lawsuit against Visa to overturn policies that protect consumers from being punished by large retailers who seek to impose surcharges and take away consumer choice at the checkout counter," the company said in a statement.

MasterCard, meanwhile, said retailers should pay their "fair share" of credit card costs and should be prohibited from passing them on to consumers.

"If these changes were implemented by the Competition Bureau, the result would be to enrich merchants at the expense of consumers," added Betty DeVita, president of MasterCard Canada.

Last month, Ms. Aitken asked an Ontario court to levy a $10-million penalty against Rogers Communications Inc. for "misleading advertising" that disparaged upstart competitors Wind Mobile, Mobilicity and Public Mobile.

With a report from Marina Strauss

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