Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 4 - Evidence, April 1, 2009
OTTAWA, Wednesday, April 1, 2009
The Standing Senate Committee on Banking, Trade and Commerce met this day at 4:07 p.m. to study on the credit and debit card systems in Canada and their relative rates and fees, in particular for businesses and consumers.
Senator Michael A. Meighen (Chair) in the chair.
[English]
The Chair: Good afternoon, ladies and gentlemen. I will introduce senators who are present.
[Translation]
To my right, Senator Francis Fox from Quebec.
[English]
Next, we have Senator Irving Gerstein, from Ontario; Senator Yoine Goldstein, from Quebec; Senator Pierrette Ringuette, from New Brunswick; Senator Wilfred Moore, from Nova Scotia; Senator Mac Harb, from Ontario; and Senator Paul Massicotte, from Quebec, via Manitoba.
[Translation]
The Standing Senate Committee on Banking, Trade and Commerce is examining Canada's credit and debit card payment systems, their associated fees and interest rates, with particular emphasis on businesses and consumers.
[English]
Our committee was charged with undertaking this inquiry after the Senate adopted a motion put forward by Senator Ringuette to have the committee study this issue. In recent months, a number of businesses have expressed concern about the cost of credit cards, especially in today's difficult economic climate.
To tell us more about this issue from the perspective of s mall- and medium-sized businesses, we are pleased to have with us in our first hour from the Canadian Federation of Independent Business, Corinne Pohlmann, Vice-President of National Affairs; and Catherine Swift, President and Chief Executive Officer.
I am Senator Michael Meighen, from Ontario. Our time is always too short so I ask honourable senators to keep their questions crisp and to the point, and to limit the preambles and editorial comment as much as they are able to do so. I know that the witnesses, who have appeared before the committee before, will give us succinct answers.
Ms. Swift, please proceed.
Catherine Swift, President and Chief Executive Officer, Canadian Federation of Independent Business: We greatly appreciate the opportunity to bend your ear today on what we believe to be an important issue. We are pleased that the committee decided to look into the issue, which is so important to small business and the economy at large.
I will go through the slide deck briefly that we put together, touch on some of the key issues that we see, and then we will be pleased to try and answer any questions.
As you may be aware, our organization is the largest small- and medium-sized business organization in the country. We have over 105,000 members across Canada in every sector and every region of the country. We are nonpartisan, not-for-profit, and we deal with issues at every level of government. We have a good perspective and are exclusively funded by our members.
We accumulate data. We will present some of that data to you today in public for the first time. Some data come from the fact that we have colleagues who visit cumulatively about 4,000 businesses per week in the country. We usually have a timely read on what this constituency is thinking. We never take a position on any issue before polling a significant number of our members. Again, we will present some of that data today.
The next slide indicates that small businesses in Canada dominate the number of firms in Canada, as well as the economy in general. We are roughly half of GDP and, in terms of net job creation, usually represent about three quarters at any given time. We found it interesting that during recessions such as the one we are experiencing now, small businesses were still creating jobs. We always hear the bad news, but there is good news out there.
Our most recent survey is on the next slide. We conduct a quarterly survey, called our "Business Barometer,'' in which we publish what our members are thinking. You will see there was an uptick in optimism. We released this data last Wednesday, so it is current. Having said that, if you compare it to the last year or so, not surprisingly, we have seen a significant decline in overall business confidence in this sector. Again, that decline is not shocking given the challenges we are seeing.
We feel it is timely to be looking at this issue because any incremental cost increases on business right now will be all the more painful — not that they would be happy in other times, but they will be more painful, given our current economic situation.
We have been active, as an organization, on this issue. We started on it last May or June. That was when the first significant jump in the fee paid by merchants and other businesses took place. Our members started calling us spontaneously to say, what is going on here; I am seeing 25-per-cent to 30-per-cent increases in one month.
That fee increase was before we saw the economic meltdown start. I know you tabled at this committee 12,000 of our action alerts from individual businesses. We continue to receive 1,000 or more per week. Those 12,000 alerts were only what we had at that particular time. We have been active, sending letters to members of Parliament, finance ministers, and so on. We also recently completed a survey. We have that data for you today.
Last Friday, we released information on a public opinion poll. I am aware that Senator Greene asked a while ago whether anyone had conducted public opinion polling. We were in the throes of conducting a poll at that time, as it so happened, and we released the data last week. We met with the heads of Visa and MasterCard and the large banks. We met with Chase Paymentech and some of the players in the industry to try to get a better handle on what was happening here.
The next slide shows some of the surveying we have conducted recently. This survey is still ongoing, by the way, and this is the first time we have released this data to anyone. This data is based on 3,500-and-change responses, but surveys are still coming in. This data is preliminary. Nevertheless, with a significant sample size of 3,500, we know the results will not change.
As you can see, credit cards are significantly important to all sectors. I know we focus on sectors like retail and hospitality, and rightly so, because over 90 per cent of these sectors accept credit cards. However, in some of the less logical sectors, even in things like agriculture and natural resources, over a quarter of these firms take credit cards. This issue is extremely pervasive for the entire economy, not simply for a couple of sectors.
Our members are representative of the general small business community out there. You will not see any bias. Results would be comparable for other kinds of poll of small businesses in Canada.
Visa and MasterCard obviously dominate. We knew that, but we now see the extent of their domination. I think discussions about not accepting either of these cards are put to rest by that result. We were surprised by the significant number of our members that accept American Express, because they tend to avoid that payment form because it is much more expensive. In some industries such as tourism and hospitality, that card is important. As a result, a higher number in those particular sectors accept it.
One of the breakouts that we show down the road — and we are happy to provide you with all of this information — is sectoral data. We will probably end up with about 10,000 responses to this survey; that response rate is typical. We will break out the results by sector. In any event, the clear conclusion that Visa and MasterCard dominate the industry is simply underscored by that data.
We also wanted to see which of the various processors were being used. We have a high number for Chase Paymentech simply because the Canadian Federation of Independent Business has negotiated an arrangement with Chase Paymentech to provide services to our members at a lower cost than members can negotiate for themselves. As a result, we have an inherent bias in our organization toward Chase Paymentech as the dealer of choice.
The next slide deals with an issue that we find important, which is how difficult is it to understand credit card fees, as a business? Two thirds of our businesses say that it is difficult, either very difficult or somewhat difficult. In our own efforts to understand what is happening in this industry, we have found ourselves often confused about exactly how these fees are arrived at. Hence, one of our objectives in having any kind of inquiry in this area is transparency. Let us understand exactly what is happening in this industry and its impact on the economy.
You may recall in the recent federal budget that the government included something proposing to improve the way banks and other financial institutions inform consumers on credit cards. We were interested in this proposal and again went to our members to ask them if they believed that this requirement should be expanded to include credit and debit card fees paid by merchants. You can see that from this pie chart that obviously, there was overwhelming support, 90 per cent.
The question on the next slide comes from the public opinion poll data. We released some of results last week; we will release more data in the next couple of weeks as we crunch the numbers more completely. We wanted to release these results right off the top because they emphasize how important the study by this committee is, in the view of the general public.
We asked if they would support or oppose tighter rules. We were careful about our wording. We did not want to say "regulations,'' because regulations mean something different than oversight or tighter rules. As you can see here, again, in the public eye there is overwhelming support; over 80 per cent. We broke the results down by region, but nationally, 82 per cent of the general public are supportive. That result was interesting. People see issues here.
Moving on to our recommendations, as I mentioned earlier, the whole notion of oversight, scrutiny and improvement of this industry is definitely warranted. We hope to see things like economic impact studies, a better understanding of how these fees are arrived at, and the impact on the economy. Other countries around the world have looked at this issue in the past. We looked at much of this research to try to understand what happened in these other economies. We know a portion of these fees flows into consumer prices, and so on. We need to conduct the same type of research here. We can draw from a lot of good international experience. Again, we feel conducting research in a form like this one is appropriate.
We would like to see an agency be made responsible. In some countries, as you may be aware, that agency is the central bank. The agency responsible does not necessarily have to be the central bank, but it would be a sensible choice. As an example, we have suggested the Bank of Canada.
I think regular monitoring is also helpful. We monitor so many areas of the financial sector but not this important and growing sector. An ongoing look at what is happening and tracking it is important. In a number of other areas of our financial universe, we have regular hearings by parliamentary committees and others to look at the impact as these markets change, and they will change significantly over the next little while. I am sure you have heard some of that testimony from other witnesses you have had before you.
We dug up a study that was conducted in the U.S. by the Federal Reserve Bank of Kansas City, it just so happened, and Canada was one of two countries out of the 20 that were studied that had absolutely no scrutiny whatsoever. The other one was Norway, for your information.
The notion put forward by some of the credit card companies is that no oversight is needed and the market will prevail. The vast majority of countries in this U.S. study obviously felt otherwise, and the credit card industry still seems to be doing okay there, so we think Canada needs to move on this issue.
The Chair: I apologize for interrupting. Is that study available to us?
Ms. Swift: Yes, we found it in our ongoing research. We would be happy to leave you a copy, and you can disseminate it.
The study is interesting. It is in English as well, so that is an issue, obviously.
On the whole transparency issue, these are only some examples, because we do not know what we do not know right now. We need to go into this issue to understand where we want to go in the future, but these are some examples.
Merchants should be able to understand easily a fee on a credit card before accepting it for payment. Right now, a lot of confusion exists in the marketplace as different kinds of cards proliferate, with different fees attached to them. We need full transparency on interchange fees and what they should cover. Again, we have looked at other markets. In the U.S., for example, a significant amount of these fees goes to some of the cardholder benefits, marketing and so on. Should the merchants who process the cards pay for those benefits? These questions need to be asked.
Fees should not be subject to change within a contract period, which they are now. Usually, when someone signs a contract, they know what the rules are. Right now, credit card companies have the right to change the fees, and usually these contracts are for three years. If the merchant says they signed on for 1.7 per cent, or whatever, and they do not want to pay the increased rate, then often the merchant must pay an expensive exit fee, so there is a punitive element.
We believe a code of conduct would be appropriate as well for this industry. For example, the banking industry has one. A code of conduct does not have to be onerous, but it can lay out the types of things they should be doing, including fair warning of cost increases.
There should be choice. Again, some of these recommendations have come out of our examination of the U.S. We talked to many groups in the U.S. who have already experienced some of these changes, and they have made some of these recommendations. Merchants should be allowed to refuse certain cards. As you know, often merchants must take a whole array of cards and create limits on their use or offer discounts for other payment methods. Merchants are proscribed from doing that now in a number of contracts, such as giving a discount for cash, having a sign on their point of sale equipment or whatever.
Banks should not be permitted to send out cards with new fees and features that have not been requested by the consumer. We found a lot of consumer backlash when we looked into that area. The consumer does not even know what this new card is. They do not realize it has a higher fee for the merchant and they do not necessarily want the benefits. Some may want them, but others say, I did not ask for this kind of stuff. It is like the negative option billing approach, I guess.
Setting up a cost of acceptance calculator would be great. Industry Canada set this up for bank service charges some years ago, and it was a useful tool. Can a similar thing be applied here?
Finally, I have not really addressed the debit card area yet. We are still in the throes of understanding the changes that are likely to happen in the next little while. Right now, we have the one clearing system, Interac, that charges on a certain basis.
I think it is worth saying that, on the credit card side, we can understand why they charge a percentage of the transaction amount. It is a loan, and so the higher the amount, the more risk that is being taken. That charge makes sense. Debit fees, as you know, are charged currently on a flat-rate basis; so many cents no matter what the size of the transaction. A debit transaction is not a loan. As a merchant, you know right away whether the money is there or not. It is absolutely not the same kind of transaction. In other countries, they charge a percentage fee, depending on the size of the transaction, and I think that approach is planned for Canada, or at least, people are thinking about having it in Canada. It would be a massive money-maker. Half the plastic transactions in Canada are debit, and so we feel the potential is huge for a big cash grab on the debit side.
We have not gone there yet but Visa had a news release within the last day or so saying that they wanted to go into debit, and they were targeting the fall, I believe the release said. We think we should get a handle on this area as a country. Let us figure out the impacts of these various things before they happen so we are not trying to unscramble the omelette sometime down the road.
It was interesting to talk to business groups in the U.S. Their advice was, and I am surprised at how stark it was, do not let the credit card companies into the debit market. I did not anticipate they would be that stark: If you know what is good for you, do not go there.
I thought that advice was interesting and worth sharing with you. Another thing they said was, do not allow debit and credit features on the same card because it limits the extent of choice and competition.
I will close there, because I probably already blabbed longer than I should have. We would welcome any questions that you have for us today.
The Chair: Thank you, Ms. Swift. You blabbed succinctly and clearly, and we appreciate it very much. Will you make a statement, Ms. Pohlmann, or are you are there as a cleanup hitter?
Ms. Swift: She is here for the tough questions.
The Chair: I am sure they will all be tough. I will introduce two senators who have joined us since the initial presentation, Senator Nancy Greene Raine from British Columbia, and her namesake, Senator Stephen Greene from Nova Scotia. Let us move now to the questions.
Senator Harb: Thank you very much for your presentation. It was interesting to see that 40 per cent of the businesses accept Amex. Has your organization had a chance to meet with Visa and MasterCard; to sit with them and act as a facilitator? For example, have you met to say, what can we do, so the industry itself can figure out this issue rather than involving politicians in what, in essence, should be a business matter resolved within the business sector? If so, maybe you can tell us about that.
In the same light, maybe you can note whether your position is that the government, in fact, should introduce regulation. It does not matter how we slice it. When the government sees what you are promoting, they will understand that position to mean regulation. Is that your position?
On the Interac matter, we take the position normally that the more competition there is, the better it is for the consumers. In this particular case, it seems that we are getting wind of the fact that, no, maybe a monopoly is the answer. Perhaps you can tell us a little bit about that element.
Ms. Swift: On the question of MasterCard and Visa being able to take care of the issues themselves, I think they have already demonstrated that they cannot. They resisted this scrutiny that you and others will subject them to. Consider our meetings with them, as I mentioned, and this study that we will leave for you. It is interesting to look at the columns of credit cards, and they list all these regulations and so on that different countries have. Then the other side is debit.
On the credit card side, Canada is blank. We have zero regulation. If I were in the shoes of credit card companies, I would want zero regulation too. Even oversight — I do not want to use the "R'' word, as we do not necessarily think we are going there, but that might be where we are going. If they were going to take care of the issue, they would have done it already.
Our comments have not been welcomed by them, to put it mildly in one instance. We needed this kind of scrutiny to bring them to the table, and that is one reason we are delighted you are conducting this study. It sure was not happening without a process going on. No, I do not believe they can solve the problems themselves with the business community.
As I say, with 25-per-cent to 30-per-cent increases in fees, for a small business, often thousands of dollars more coming out of their pocket can tip the scales. Much of this problem existed even before the economy went south. Those increases can tip the balance between being in business and not being in business. That is the kind of issue we are concerned about. No, we were not getting that reaction; the attitude was, this is the way it is and so be it.
I alluded a little to your second question on regulation. We believe that once we understand exactly how this industry works, the impact on not simply the small business or large business side but the impact on the economy overall, then we will be able to see what the most sensible outcomes will be in terms of prescriptive actions. We do not have that information yet. We do not necessarily think the best action is regulation. In the early 1990s during the last recession, our organization recommended that the banks be called before the House of Commons Industry Committee on a regular basis to discuss what they were doing for small business. That scrutiny, alone, had major beneficial impacts. In an ideal world, we would not have to go to regulation. However, if we cannot resolve things in other ways, we certainly would not say "never.''
Regarding Interac, you are right. We prefer competition too. We would rather avoid regulation, not have regulation. We believe that markets take care of themselves well. However, you saw on the slide the dominance of Visa and MasterCard. That is not my definition of competition. That is a duopoly. Even permitting these large multinational players to come into the mix will be different.
I do not know that for-profit status is necessarily the way to go with Interac. The Competition Bureau is examining that issue right now. We need to know what is happening before making decisions such as whether they should be a for-profit entity. We might end up deciding to have competition, but it must be on a flat-fee basis or something like that. We can say, we believe competition is a better outcome, therefore let these players into the market, but there will be no charging a percentage of the transaction fee. There may be different ways to skin that cat.
I do not underestimate the advice we received from the U.S. who has experienced this situation already. They have lived it, and their advice was not to let Visa and MasterCard into our debit market. I thought that advice was quite stark.
Senator Massicotte: Thank you for meeting with us today. We need your enlightenment and experience.
Most of your recommendations suggest conducting further studies and establishing bodies. One specific recommendation is allowing merchant choice for credit cards. In your verbal presentation, you said merchants should be allowed to refuse certain cards, create limits on their users and offer discounts.
I was told that while contracts may be limiting in this respect, merchants have the choice to offer cash discounts. Are you saying that is definitely not the case?
Ms. Swift: They cannot advertise cash discounts. They cannot put up a sign saying, 5 per cent off for cash. In small establishments, you will see signs for no debit use or something like that for purchases less than five dollars, et cetera.
However, there are limitations. It is not allowed in all the contracts. There is no uniformity. We do not have sufficient information in this area. Someone has to do the leg work to look through the different contracts. We have seen some of the contracts because our members have shared them with us to permit us to understand them, but we need further information.
Senator Massicotte: We all are big believers in the value of competition when it is real competition. With credit card choice, there are many issuers of credit cards. Hundreds of institutions issue them, including all the credit unions. That information is publicly available and some websites provide comparative shopping for cards.
However, the user does not seem to be sensitive to that detail. We can argue that they do not know about that information or the interest rate level. The information is there, but the consumer seems to choose predominantly the card that gives them credit, irrespective of the conditions or terms of the credit. Have you any explanation for that choice?
Ms. Swift: I think it is simply because of the fine print. Who reads fine print? My son recently had a card. He hates it when I look into anything because it drives him mad, but I found out that he was paying 25-per-cent interest. I told him to cut the card up immediately. That is an example of what you are talking about.
That is one reason why we saw recommendations in the federal budget for consumers to be better educated on financial matters, and for more proactive dissemination of this kind of information. When consumers receive a long document with small print accompanying their credit card, I would argue not many people are looking out for their own interests. They end up paying a lot more money than they need to.
Senator Massicotte: We all agree with transparency. Do you think they do not understand? Is it because they do not care or that it is not sufficiently relevant to them?
Ms. Swift: You are probably right. It is not sufficiently relevant to them or it has not been made clear. However, if they know they are paying an extra $10,000 per year to carry this particular card, they can probably avoid those costs somewhere else. Maybe we are not sufficiently poor yet.
Senator Massicotte: There is always the issue of interest rates, transparency and full information. I think we all agree on that issue.
Let me jump to the more problematic issue of merchants. You represent a lot of merchants because many of your clients are in the retail business. While there are comments about free choice, a significant issue is one whereby merchants are not sufficiently powerful to negotiate what the commission rate will be on a purchase, which may be 1.5 per cent or 2 per cent. Merchants are not at the table.
The consumer is not aware of that cost. It is not reflected in the purchase price. Therefore, consumers do not care what card they use. They may choose a card that give them gifts but that card usually has higher commission or interchange fees.
There are many parties in that transaction, but two of them are not at the table. The merchant is not the one negotiating. I am surprised that recommendation is not one of your specific recommendations on the interchange rates. It looks like the merchants are not complaining about the high interchange or commission rates. How do you deal with that issue?
Ms. Swift: They are complaining. That is why we are here.
Senator Massicotte: I do not see it there. The commission rates —
Ms. Swift: The interchange is what the merchant pays.
Senator Massicotte: The 2 per cent or whatever merchant pay; are they aware that it is 2 per cent?
Ms. Swift: Yes, they used to be. We received input from the survey because we ask open-ended questions and sought comments. We would be happy to share that data with you. We wanted to give you preliminary data today.
We have heard many times from merchants that when it was the plain old Visa or MasterCard, they knew the rate was 1.7 per cent, as an example. Now, with all the premium and infinity cards, I do not even know what I am paying. It is a surprise at the end of the month. No one can run a business effectively like that.
They knew they were paying 1.7 per cent previously. One of our complaints is the proliferation of all the new- fangled cards with the bells and whistles, which consumers may or may not want. The cards have higher fees because that is how the credit card companies can offer all the benefits. It is a transfer of money from the merchant to the consumer, but the consumer is not aware of it, or may not even want it.
However, the problem is not simply the higher rates of fees. I mentioned earlier that there were 25-per-cent to 30- per-cent increases in fees. That issue does not even address the different types of cards. It came up when we became inundated with phone calls from our members saying, what gives. We did not have the complaints prior to those increases.
Senator Massicotte: How do we make it fair? Should we give more flexibility to the merchants to accept cash discounts and publicize it?
Ms. Swift: There is not much of a choice except to bias purchases towards cash. I am not saying there is no value to the merchant to have these cards. They accept cash, but if you lose cash, it is gone forever, and you are at a greater risk of theft. Obviously, there are advantages with cash.
However, given the wide acceptance of credit cards and debit cards, I do not think merchants can say that they will not accept them any more. In the U.S., Wal-Mart became annoyed at MasterCard when they started increasing their rates and stopped accepting MasterCard for a while. Even Wal-Mart had to return to accepting MasterCard because it was damaging their business.
The reason the Canadian Foundation of Independent Business negotiates is to offer a better rate to our members than they can achieve on their own. One of our intermediaries is Chase Paymentech. Negotiation happens, but, realistically, the notion that a small business can negotiate with Visa; that is not a negotiation. A small merchant accepting a large number of different cards with different fees attached to them, realistically, is a real difficulty requiring the merchants to plan their cash flow carefully.
Corinne Pohlmann, Vice-President of National Affairs, Canadian Federation of Independent Business: I think the issue is not the rate; it is the growing sense of hidden fees being added incrementally all the time. It is about this incremental growth that I keep hearing about from small businesses over the last several months. Every month it feels like another incremental fee is being added. The issue for many people is understanding all the fees and charges. While people receive the letters two to four months ahead of the changes, they find it a shock when they see the total amount. Businesses can negotiate a standard fee but the extra fees become the troublesome factor.
Ms. Swift: As well, the merchant has no control over the fees. It is a fait acompli when there is nowhere else to go for the service. The difficulty is in planning a business when they do not know whether they will be whacked with a bill for an extra few thousand dollars at the end of the month.
Something we have not touched on yet are different kinds of transactions called qualified, non-qualified or partially qualified transactions. A qualified transaction occurs when the person swipes the card in front of you. There is a physical presence of the person and the card. Non-qualified transactions occur over the phone or on the Internet. There is no physical presence of the person or the card. Much more business is done with this method of payment. We heard recently about partially qualified transactions. Of course, different fees are attached. This is another area of massive confusion. We receive statements from our members that say, this is a semi-qualified transaction. What does that mean? Again, this confusion shows the need for research and data to understand what is happening. What ultimate cost can be expected and how can we better clarify so that businesses and consumers get a grip on what they pay and what will filter into our overall price level and inflation?
The Chair: Do you have any knowledge about whether the plain English requirement, which has filtered through the insurance industry, has been helpful in raising the level of understanding and comprehension?
Ms. Swift: Yes, it is helpful.
The Chair: Is that something you would recommend?
Ms. Swift: Yes, that would be one thing.
The Chair: I should say, plain English or plain French.
Ms. Swift: You can say, plain language.
[Translation]
Senator Fox: I find the situation you are describing to be hellish; it is beyond all understanding, and comes to us as a surprise today. What you are describing is abuse of dominance, single-industry dominance, and decisions being made unilaterally.
Nonetheless, you represent 105,000 members responsible for very significant sales figures. From what I am gathering, it is impossible for you to meet with them and discuss things. You could perhaps clarify who it is you wish to discuss things with. Is it the banks who are acting this way, making changes without any notice? Or are the credit card companies the ones responsible? I would like you to answer those two questions.
[English]
Ms. Swift: The notice must be 30 days, which is not long.
[Translation]
Senator Fox: You have 105,000 members, and represent an intimidating sales figure, I presume. And yet you have no leverage that would allow you to sit at the table with them to talk about these things?
[English]
Ms. Swift: We have discussed it with them. For example, I met with the heads of both MasterCard and Visa, who were annoyed at us for even looking into this issue. They consider us price takers, but that is indicative of how this industry has always operated in Canada. The companies are American-owned, and Canada will never be their priority. That is why we need as much moral suasion as we can bring to bear.
[Translation]
Senator Fox: You have no market power that would allow you to sit down, discuss things, and ask for changes. Your criticism is being leveled at credit card companies like Visa, MasterCard and American Express, rather than Canadian banks. Is that right?
[English]
Ms. Swift: They are directed more toward the credit card companies but we have also met with the banks, who issue the cards. There is no question but that banks are the culprits, if you will, because they encourage this proliferation of different kinds of cards. Absolutely, the banks have role in this situation.
The main targets are Visa and MasterCard. Our data show that 94 per cent to 96 per cent of our members use these cards. That situation is not competition. Businesses are price takers and so these companies are our primary target. We would like to see better understanding and scrutiny. I mentioned the example of the banks in the early 1990s. There was no change in the regulations; it was simply that the scrutiny meant they started to change their behaviour.
[Translation]
Senator Fox: I have two last questions. The witness is answering quickly enough for everyone, so I think I will take my time.
The Chair: You can take all the time you want, but we must adjourn this meeting at 5 p.m.
Senator Fox: I will talk about a very concrete example. In Montreal, there are big-box stores that advertise expensive household appliances that require zero down payment to purchase, with installments over 36 months, or using a credit card. But if a consumer wants to pay up front, as they say in the business, your members, the merchants, do not take into account the fact that a consumer has paid in advance. Did I understand you properly when you stated that credit card companies build in these types of requirements into the contracts?
[English]
Ms. Swift: We do not have full information but we have seen contracts that include restrictions on the extent to which a business can apply different conditions if someone pays cash. I find some of the restrictions on these contracts surprising.
[Translation]
Senator Fox: Are you surprised that despite drops in interest rates, and reductions in the cost of credit, rates remain at 19 per cent whereas the cost of money has been significantly reduced? Deposits are a major deciding factor. Today, I met with one of my colleagues who showed me that he was getting 0.5 per cent on a rather substantial account in a Canadian bank. How do you explain the fact that most Canadian credit card holders are asking the same question?
[English]
Ms. Swift: The question is a difficult one to answer. I do not understand it. Ultimately, perhaps Canadians are a little complacent. We should be angrier about these issues. I do not understand the motivation. Ultimately, consumers could do something about some of those trends but we choose not to do anything.
In my view, not lowering those rates is unacceptable behaviour.
Senator Goldstein: I am concerned. Some of us around the table or elsewhere might want to say that the marketplace should deal with these issues rather than dealing with them through regulation.
I find it difficult to understand that an organization of your magnitude with your number of members and activities would not be able to sit down with the large issuers and tell them that we need to change the way in which these things are done. I cannot understand why you do not do that. What would it take to help you to do that?
Ms. Swift: We have a large membership but we have a relatively small number of players, not simply in the credit card industry but also in the banking industry in general in Canada. Those industries are powerful players.
I do say nice things about banks occasionally — at least they are Canadian, and I view that as positive. There is a bottom line: They should realize that the best interests of Canada will also benefit them. I cannot take that same view with respect to the credit card companies because they are not Canadian.
It is intriguing that, in this recession, we have seen that when things get tough — and we are seeing this is all over the world, and it is perfectly logical — people gravitate to their home country. In credit markets in Canada, for example, we have lost a lot of U.S. players. They exited from Canada and made our credit crunch worse. That is why I cannot view this situation as analogous with the credit card companies.
I have sat down with them, as you say. They need more of a smack to the head to pay attention to this issue. You are administering one because we, in and of our organization, can put scrutiny on the issue and we can have some impact. We can go to the media and attract public attention but, ultimately, the threat of regulation changes people's behaviour, even if the reality is not ultimately regulation.
In this case, we can definitely have some impact, but we are having impact because of the support from those that can inflict pain, if necessary. That is not our objective here, but that gets their attention more than someone like us giving them a blast in the media.
Senator Goldstein: I am particularly concerned about the conversion of Interac to a for-profit organization.
I am specifically concerned about that conversion with respect to retail food. The margin in the retail food industry is so minimal that a percentage of transactions, rather than a flat fee for a transaction, would be either ruinous to that industry or would cause an immediate increase in the cost of living for all Canadians. That impact concerns all of us, with great respect.
Have you made any active representations to the Competition Bureau and, if you have not done so, why not?
Ms. Swift: We have.
Senator Goldstein: May we see a copy of those representations?
Ms. Swift: There is a letter on our website; we will provide it to you. Last fall, in September, we asked them to look into the provision that relates to the abuse of dominant position. I understand that they are doing that now. They were not planning to do so at the time, though. We received an announcement last week from them indicating that they are now looking at that request. Yes, we absolutely did make a representation.
Senator Goldstein: Have you put yourself on record with Interac to state that you would oppose a percentage?
Ms. Swift: Yes, I have met with Interac several times.
Senator Goldstein: Have you written to them?
Ms. Swift: No, we have not written to them, but we have met with them.
Senator Goldstein: Do you think it would be appropriate to write to them?
Ms. Swift: Yes, I could write to them.
Senator Goldstein: Would it be appropriate to send us a copy?
Ms. Swift: I can do that. At least with a credit transaction, they are making a loan; it makes sense. There is logic to it. There is no logic with a debit.
Senator Greene: I agree with your position about fees versus percentages on transactions for debit cards, but I think I heard you say that a percentage basis for charging transaction fees on credit cards was all right with you because the transaction is a loan.
Is the cost of providing the fee not the same, regardless of whether the amount is small or large?
Ms. Swift: If the loan goes south — if it is not paid back — they have already lent the money.
Senator Greene: That is the role of interest, is it not?
Ms. Swift: Not necessarily; in part it is the role, and absolutely, interest charges are attached to it as well. The larger transaction involves a larger loss, and we can debate what that rate should be.
Senator Raine: Have you conducted research on countries like Australia, New Zealand or the U.K., and the fees or the regulation of their fees? Has that regulation impacted the businesses in any way?
Ms. Swift: Do you mean the business community or the business of the credit card companies?
Senator Raine: People are using credit cards and business is still functioning?
Ms. Swift: Yes, it is functioning. We collected the research done on those countries. Australia has an interesting model. The credit card companies argue — and you have probably heard this — that regulation has limited the extent to which they can have certain innovations in the industry, and so on. I certainly have not observed, in our work, that it has been of terrible detriment. It may be true for consumers. If companies are not able to offer all these bells and whistles cards — and, we know those higher fees are part of financing those bells and whistles — has that been a horrible hardship; not that we found.
One thing we ran across in the U.S. research, indicated in that pie chart, is interesting. We have been searching the Internet, where things crop up sometimes, quickly. This research was in the U.S. It showed that 44 per cent of the interchange fee revenue was used for consumer perks, rewards, and so on. We must ask: Is this what the market is demanding? I do not know the answer but almost half the revenue is a big chunk.
Senator Raine: The benefits of these bells and whistles are going to the people who are the high-income earners — they can have the fancy cards — but the costs are paid by everyone.
Ms. Swift: That is true.
Senator Raine: The proliferation of these cards is scary. I know of people who have always had the same credit card, for example, they acquired it from the Bank of Montreal in Edmonton years ago and they have had the same card the whole time. However, the last one that arrived in the mail had some other name on it but it still had Mastercard in the corner. They did not ask for the card, but it was sent to them. They now find out that the card costs the merchant more money. It has the same number that this consumer has always had. How can that be?
Ms. Swift: There is nothing that says it cannot be; that is why. They should have rules or at least an understanding. I do not think we have either. These cards are being paid for by the merchants — and the cost will filter into the general price system — to benefit a certain component.
Part of the reason MasterCard and Visa are going into this area is that they want to compete with American Express. American Express has a smaller market share, but they have targeted that higher-end market forever, and also a certain portion of the business community, because they provide statements and more information-capture and things like that. Part of the reason MasterCard and Visa are getting into this area, is to give more competition to this segment that Amex has usually served.
Part of the reason MasterCard and Visa are looking for more money is because they are now publicly traded companies. That was not the case a couple of years ago. Whenever companies are on a stock change, and so on, they are looking to provide more shareholder value.
Senator Raine: The sad thing about the business of personal credit and credit card use is that the person who pays their bill promptly uses the service for little cost and the person who does not — oftentimes, these people are less educated and less financially aware — pay an exorbitant price. That is a sad commentary on our system.
Ms. Swift: That is the way the system works. It is force feeding, if you will. The information is out there, but some people do not make the effort to find out exactly what they are paying.
Senator Gerstein: Thank you for a comprehensive presentation.
Credit cards, of course, have inherent in them the granting of credit, and the granting of credit has inherent in it, risk creation. The merchant receives cash up front and bears no risk for the transaction for a pre-screened consumer. In these tough economic times, how do you factor in the whole area of increased delinquency that banks are faced with, in terms of collections?
Ms. Swift: On credit cards, it is a problem. It is not unique to this recession. Things become tighter and people do not pay back their loans of whatever kind. It is a problem.
It is always said that we pay relatively high interest rates. Senator Fox alluded to the high rates that we pay, even when the prime is declining. Part of the high rate goes to fraud. We all pay. That is like the insurance system. That is like a lot of systems. That is the way the world is. We want to determine the amount that should be paid.
I am sure my dog could probably get a credit card if he wanted one badly enough. We see what loose credit has done to the U.S. economy. We have had some loose credit here as well, but thankfully nowhere as much.
I think too the definition of credit worthiness should be looked at. I am not sure if I am answering your question, but I think credit was offered willy-nilly, and it is not exclusively the responsibility of the consumer if some consumers are abusing that credit. The issuers and so on should perhaps undertake a little more due diligence before throwing a ton of money at people. The credit card situation is like the sub-prime mortgage situation in the U.S. Those people, unfortunately, should not have been enabled to buy those houses, because they could not afford them, and that goes for credit cards too. We all pay through the system with higher interest rates than we probably otherwise would have to pay, and some fraud is just fraud. We will always have fraudsters, but the people now, maybe through their own silliness, took on more credit than they should have.
Senator Raine: Are you suggesting the increased delinquencies the banks face today are primarily due to fraud?
Ms. Swift: No, I am saying some of the cost is fraud.
Senator Raine: That is a small part of it? Most of it is the recession that is taking place?
Ms. Swift: A good chunk currently of delinquencies is because people's means have diminished.
Senator Moore: Thank you for coming here. In your analysis of these situations, have you put together a schedule that you can share with us of the charges assessed, whether by the leading cards or by Interac?
Ms. Swift: We have not put together a schedule. We can access this information from the credit card companies, so it is not as if they are not telling anybody. It is confusing, though, and then how does the information actually apply in practice. I mentioned earlier the merchant that takes five different credit cards, and the cards all have different fees attached to them. Trying to understand what the merchant will pay later is a problem.
It is not unlike the consumer information we were talking about earlier. Why do the people who are paying a high rate on their card not do something about that situation? The information is often complex and time consuming. It may not be their priority, and then after the fact, they find they have paid thousands of dollars of interest they did not need to pay.
The information is out there, and maybe I am wrong, but I do not believe it is an accident that the information is confusing. One of the Visa schedules for fees for different kinds of transactions, non-qualified, qualified and so on, was over 100 pages. That schedule of all the fees and all the eventualities was 104 pages, I believe.
Senator Moore: I thought that had you hauled all that information together, along with the information that Senator Fox asked about, you would have ammunition to sit down with these people and bargain on behalf of your members.
Ms. Pohlmann: More information will come from the survey whose preliminary findings we started to show you today. One of the questions we asked, and which we did not include, was if we could go back to our membership for more of that type of information. Our plan is to go back to our membership in the next several weeks for more information to detail what they are paying, because it is different for different companies, and that is what we are trying to figure out ourselves.
Ms. Swift: I also do not think it is really our responsibility to have to do that. Visa and MasterCard should provide you with a comprehensive schedule of what they charge. That is part of the transparency we are talking about. They are the ones charging those rates.
Senator Moore: We will ask them, but I wondered if you had something on behalf of your membership.
Ms. Swift: We will have more info, but those companies are setting the fees.
Senator Ringuette: Thank you for coming, and thank you also for sponsoring the consumer polling. Most organizations tend to work in silos, and we have all been witness to that, but you have looked not only at your members' situation but at how the consumers that are buying products from your membership felt, and 82 per cent of them want legislation on this issue.
We were presented by federal bureaucrats with this chart representing interchange fees, Example of a Credit Card Transaction
Ms. Swift: Oh, yes.
Senator Ringuette: Here in the middle, credit card network, which is Visa and MasterCard, they set the fees, and the fees are remitted to the banks. Then, the authorization requests to the processor, acquirer, have a processing fee on a percentage base too. Did you know that these two entities, the bank issuing and the company processing, for example, Moneris, are owned by our banking community?
Ms. Swift: Yes, there is a lot of inter-ownership among those companies. Chase Paymentech used to be Paymentech. It was owned by the Bank of Nova Scotia. That ownership changed, and it is now Chase. It is a U.S. entity. Yes, we were aware of that ownership.
Senator Ringuette: Royal Bank and Bank of Montreal created Moneris, which is a major player in the Canadian market in regard to processing.
Ms. Swift: They were all attached to a bank, and of course the TD one is still attached to a bank.
Senator Ringuette: The arm in the middle is setting the fees, and the bank is receiving most of the fees from one side, and the rest of the fees from the other side, the processing side. Have you been able to sit down with the Canadian banks, the big players who charging fees? They are the contractors with your members in regards to that little machine there.
Ms. Swift: Yes.
Senator Ringuette: Have you ever sat down with the banking community to say: Look at this situation; this is enough; you are being paid by both ends; we are being squeezed here?
Have you been able to do that?
Ms. Swift: We have not met with them all yet, but we have met with some of them.
Senator Ringuette: What is their response to this situation?
Ms. Swift: We know they receive the lion's share of the fees. Again, we are trying to find out what is logical, and if there is a reason for it. I am not saying, go to town with these fees because they are logical, but the banks are taking on the risk. If a credit card transaction goes bad for whatever reason, currently they are taking on that risk.
I should mention a related issue. When chip technology comes in down the road a piece, the risk will be borne by the merchant, and I think that happens in a couple of years, if I am not mistaken. Of course, the whole notion of introducing a chip on a card is to limit fraud. You might want to look at that related issue down the road. We are trying to get to the bottom of that issue right now to understand exactly what merchants will need to do, because right now at least, the merchant is protected from that risk. If a credit card transaction goes bad for whatever reason, the bank is on the hook.
That being said, I do not believe anybody has ever looked at how the intertwining of all these players ends up. What does that mean to their bottom lines, respectively? I certainly have not looked at that issue. I think it would be pretty complicated.
Senator Goldstein: May I ask for a single point of clarification? Are you sure that what you said is accurate? My understanding is that the credit card issuers are permitted, under many circumstances, to charge back bad debts.
Ms. Swift: That is only if the merchant is culpable; if they should have known the card was bad or whatever.
Senator Goldstein: How on earth is a merchant supposed to know?
Ms. Swift: That is a good question. Do you remember the old days when they looked through these big honking piles of paper to see if the card holder was on the bad card list? It is not that way anymore because we have technology, happily, which makes the process a little less Neanderthal, but there are cases where the merchant has been notified not to accept this card, that card or whatever, and they still do it.
Senator Goldstein: There are circumstances where the merchant is not notified, and the credit card issuers say the merchant is culpable.
Ms. Swift: You are right. There are some.
Senator Goldstein: Do you have any statistics on that?
Ms. Swift: I do not, no.
The Chair: It is almost ten past five, colleagues. Senator Ringuette, perhaps you can have one concluding question.
Senator Ringuette: I need two.
The Chair: I am sure they will be short.
Senator Ringuette: I have pulled this document from the website of the Canadian Bankers Association. It is dated January 2009. This document clearly says that the delinquent accounts are only 1 per cent on Visa and MasterCard credit cards, so the spin they have given you is not the same spin they give on their website.
Ms. Swift: I do not know what the percentage is.
Senator Ringuette: That clears up that issue. The debit card situation is definitely a major issue and, hopefully, we will have some answers.
There have been changes in the interchange fees from both MasterCard and Visa in about the last six months. How have they justified preferential rates for certain retailers like gas station operations?
Ms. Swift: The companies have to gain acceptance of their cards in different industries. I think the rate is what they perceive the market will bear. Different sectors have different rates and they tend to vary. The situation is confusing because it tends to be based on things like average transaction size, et cetera.
In the case of gas stations, it would be justified on the basis of average transaction size.
The Chair: Thank you, Senator Ringuette. I appreciate your cooperation.
Ms. Swift, you have emphasized that Visa and MasterCard are non-Canadian companies. We have a different banking system in Canada than in the United States. Can you give me a short answer as to whether you think that difference has a positive or negative impact, whether it is helpful in resolving the difficulties your members have or whether it has no bearing at all?
Ms. Swift: It is a good question. I do not think it is simple to answer, but I will try to be short.
I have always said that banking is like the Wild West in the U.S. There are many players. In good times, it can be more advantageous. Community banks often can deal better with a small business simply because those banks relate to that community. We have credit unions in Canada.
The Chair: I am speaking in terms of credit cards and debit cards.
Ms. Swift: As a result of our much more concentrated oversight in Canada, we probably have better oversight and it has prevented us from getting into the soup that the U.S. players find themselves in. The Canadian situation is probably preferable.
The Chair: What about fees?
Ms. Swift: Regarding fees, there is not much difference. For example, the fees in the U.S. are largely comparable to Canada.
The Chair: Thank you. I appreciate your cooperation in answering as you did and for your presentation.
[Translation]
The Chair: The second half of tonight's meeting on the credit and debit card systems in Canada will focus on the perspective of credit card issuers.
[English]
According to the Bank for International Settlements, 64.5 million credit cards were in circulation in Canada in 2007. A Bank of Canada study found that in 2006, Canadians used their credit cards to make some $214.7 billion in purchases.
In our second hour, to tell us more about credit card issues from the perspective of an organization that represents some of Canada's biggest credit card issuers, we are pleased to have before us representatives of the Canadian Bankers Association. This is not the first time they have appeared before us and we welcome them back. We have Nancy Hughes Anthony, President and Chief Executive Officer; Terry Campbell, Vice-President, Policy; and Darren Hannah, Director, Banking Operations.
Without further ado, I welcome you. Thank you for your attendance and I ask you to proceed.
[Translation]
Nancy Hughes Anthony, President and Chief Executive Officer, Canadian Bankers Association: Mr. Chair, thank you for your invitation. We have brought along an information package that we hope you all have before you.
[English]
In the interests of time, I will try to be brief. I will not go into every detail of the presentation that I put before you. I will try to summarize. When we were here a few weeks ago, we shared information about our banks and their role in the economic turmoil. Some of those points are in the presentation we have left with you today. In the interests of time, I will proceed more quickly.
It is important to note that the turmoil in the global financial markets has had an impact on our banks. Particularly, when we look at the cost of credit, banks are definitely facing challenges.
There is a new reality in the credit marketplace in Canada and internationally. Certain types of credit, like commercial paper and the securitization bond markets are no longer functioning properly around the world. This reality results in relatively higher cost than in the past. That higher cost has affected the banks' overall cost of borrowing, and therefore, has had an effect on the consumer, particularly for medium- and longer-term borrowing.
Another factor affecting the rates that banks set for their loans is risk. We are in a recession, which has had an impact on the credit worthiness of customers, both retail and business. As prudent lenders, banks need to adjust their pricing to reflect the risk reality.
Those factors determine the cost of credit. Many people think that the Bank of Canada rate determines the cost of credit, which is not the case. The Bank of Canada rate affects less than one per cent of the funds of Canada's banks. That rate is a short-term overnight rate.
The impact of the global financial turmoil has also meant that our banks have increased their provisions for credit losses. In the first quarter reports of Canada's big six banks reported in February and March, we saw that provisions for loan losses were close to $2.5 billion. That amount is an increase of 124 per cent from the previous year. The bottom line is that Canada's banking system is not immune to what is happening in the global financial market.
Regarding the payment card market, consumers and business, I believe, benefit from the tremendous competition and choice of these payment cards in the marketplace. While we are focused on credit cards today, we should remember that they are not the only type of payment available to consumers. Payment cards are one form of payment that consumers can choose when deciding how to make a purchase. These cards compete with cash, cheques, debit cards and also unregulated, electronic payment services like PayPal. The decision about which one to use is up to the consumer and the decision about which one to accept is, obviously, important to business owners.
Credit cards are primarily a convenient and secure payment tool. As a payment tool, there are many benefits to the consumer. There is an interest-free period from the time of purchase to payment, depending on the card, as long as the balance is paid in full when owing.
Regarding the benefits of choice, hundreds of institutions, including banks, retailers and credit unions, offer major credit cards. Some institutions offer multiple kinds of cards. Some credit cards have reward programs, some have loyalty programs and some are low-rate, plain vanilla credit cards. Obviously, a benefit that we take advantage of to a certain extent is the global use of credit cards. They are accepted at over 30 million locations around the world.
When it comes to interest rates on credit cards, there is a great deal of confusion about what Canadians pay. The vast majority of Canadians pay no interest. They pay zero interest because 70 per cent of Canadian households regularly pay off their credit card balances in full every month. That information is from a recent study by the Boston Consulting Group, which we can make available to the committee.
Senator Fox: That situation applies except in the case of cash advances. Consumers pay interest at the full rate on cash advances, as of the date of the transaction.
Ms. Hughes Anthony: Yes, and that is their choice.
Senator Fox: It is not correct to say they are not paying any interest.
Ms. Hughes Anthony: I am talking about retail purchases.
Senator Fox: If consumers pay before the due date, they do not pay interest, but that situation applies only to retail purchases. Is that right?
Ms. Hughes Anthony: Yes, that is correct — only on retail purchases.
It is interesting to note that income is not a factor as to who pays off their credit cards. Statistics Canada found that the percentage of low-, middle- and high-income families paying off their credit cards every month is roughly the same. That point is important.
For those customers who do not pay off their balance in full, there are over 60 low-rate cards. There are prime plus cards on the market. Banks have been leaders in developing those low-rate cards. If customers are having difficulty with their credit card payments, they are encouraged to talk to their bank because there are options such as lines of credit and other products for longer-term borrowing. The goal is to help people to manage their finances better to maintain a good credit rating and continue access to credit. Many Canadians know they have choices when it comes to borrowing and managing credit. They are making smart credit decisions, such as increasingly using lower-cost credit products in situations where that credit is appropriate.
There are as many reasons for possessing a credit card as there are types and varieties of cards. With so much choice in the marketplace, Canadians have a great resource available to them. I believe, chair, you had the Commissioner of the Financial Consumer Agency of Canada before the committee. The CFCAC has a fantastic website that shows an extensive list of cards and features, and the respective interest rates. This information is a great tool that we promote through our website.
It is important to note that many more institutions and organizations other than banks issue and distribute credit cards. I mentioned department stores, credit unions, gas companies and caisse populaires. Non-banks represent a significant proportion of all credit card issuers in Canada. I encourage the committee to consider the full credit card marketplace during this study.
A number of factors go into fees and rates. Customers have access to unsecured credit, whereby no collateral is needed. Credit is not pledged against a car or house. Obviously, such a card is higher risk for the credit card issuer. There are significant costs to operating the credit card system, including processing a large volume of transactions, technology that needs to be updated constantly to support transactions, the preparation and mailing of statements, collecting payments and the costs for providing rewards programs.
A significant cost relates to fraud and reimbursement. Banks must focus on, and invest in, financial fraud prevention, detection and investigation systems to protect their customers. When fraud occurs, customers have zero liability. In 2008, financial institutions reimbursed their Canadian credit and debit card customers more than half a billion dollars, which represents the losses suffered by those customers as a result of criminal activities.
Mr. Chair, I will make a brief reference to debit cards. We are pleased that the committee is taking a holistic look at debit cards and the payment system. Customers are best served by an open and competitive marketplace. The current debit card system serves Canadians well. It needs to grow and evolve to meet the needs of a more integrated global economy. We would be proponents of choice for consumers in that marketplace because choice is an important international trend as well, and Canadians cannot be left behind.
I will skip over the rest of my commentary in the interests of time, chair.
[Translation]
I want to go back to where I started — Canada's banks are strong, secure and Canadians remain confident in their banking system.
[English]
Part of that stable banking system is our vibrant credit card marketplace with tremendous choice and competition, which benefit both consumers and businesses.
I will turn now to your questions.
The Chair: Ms. Hughes Anthony, that was helpful and we appreciate the clarity of your statement.
Senator Massicotte: I will ask about interest costs first. The argument can be made that if the environment is competitive, the consumer receives value for money because the consumer makes that choice. Let me be more fundamental. I am trying to understand what the average interest rate is on delinquent accounts. It must be 12 per cent to 13 per cent. Some cards are at 18 per cent and some at 8 per cent. What is the cost to the provider to issue a credit card? We all know that there is a 1-per-cent delinquency over 90 days but that delinquency does not mean there is a 1- per-cent default rate.
Ms. Hughes Anthony: We have an update for the senator on that point.
Senator Massicotte: The data show that 70 per cent of people pay their account on time, so the 1-per-cent cost must be shared by the 30 per cent who do not pay on time. With 70 per cent of people paying their account on time, there is an interest savings, and there is a cost to the provider of credit cards for the free credit offered. When I use that percentage, it costs me about 1.5 per cent. The delinquency costs borne by 30 per cent are about 2 per cent to 3 per cent. You mentioned $500 million in fraud last year that was refunded, divided by $217 billion in transactions. That cost equals approximately 0.25 per cent.
When I add those costs, the result is that between 3 per cent and 4.5 per cent is the cost to the provider for providing the credit card. I presume the 2 per cent the providers receive equals the cost of their transaction. I presume that fee must equal their transaction cost. I have a 4-per-cent cost for the things I know about and the banks pay about 4 per cent to 5 per cent for funds, convertible debentures that are issued, so how do I arrive at 16 per cent or 19 per cent — the current interest rate on cards. How do I arrive at a fair interest rate? I must be missing something.
Ms. Hughes Anthony: There are a few points. I will ask my colleague, Mr. Campbell, to look at that situation. It is extremely difficult to generalize unless we pick one credit card only. There are many credit cards in the industry, some offered by banks or by a monoline company such as American Express.
Senator Massicotte: What is the average interest rate of your banking members?
Ms. Hughes Anthony: We would have to look at several hundred cards to factor an average.
Senator Massicotte: Use the five banks.
Terry Campbell, Vice-President, Policy, Canadian Bankers Association: We have the delinquency figure on our website but it dates back to the nd of October. It was accurate at the time but we have not updated it. At the end of January, the Dominion Bond Rating Service, DBRS, the credit rating agency, was quoting 4.5 per cent on the 90-day delinquency. We are seeing the effects of the recession. The challenge is to determine the average because we would have to weight the various uses and consider the low-rate cards.
Standard rate cards are about 18 per cent. We would have to look at the card usage so that we could weight them, and that is an extraordinarily difficult thing to do.
In terms of what you are talking about, perhaps my colleague Mr. Hannah would have some comment as well. An array of things needs to be borne in mind. As was cited earlier, customers can choose to activate this unsecured credit wherever they want, 24/7, anywhere in the world. There is no interest on that credit for a period of time, and there could be no interest on that credit forever.
The other aspect is that credit card companies have an enormous fraud prevention infrastructure, and those numbers are increasing as well. This number is not static, as Ms. Hughes Anthony mentioned a moment ago.
The main thing is that we need to turn it on the head. Consumers go to the marketplace and say they want a credit card with these features but not those features. I have a low-rate card in my pocket because I carry a balance. My wife has a card and she pays off those purchases every cycle. The card is what we wish to have in terms of the features. If one card does not work for consumers, they have the choice of another.
Ms. Hughes Anthony: It is also difficult to make the kind of calculations you made, senator. The costs involved in the system are, obviously, that card providers have to pay the rewards that they promise for a particular type of card. They have to maintain a certain type of system. This fact may not be in that handy chart that was handed out earlier, but they pay transaction fees to a card company like Visa and MasterCard.
Senator Massicotte: You think that transaction costs are not covered when they charge the fees of 1.5 per cent or 2 per cent?
Ms. Hughes Anthony: A plethora of fees goes back and forth in this system.
Senator Massicotte: That is part of the problem.
Ms. Hughes Anthony: You will have with you tomorrow, I believe, Mr. chair, the acquirers that are the first stop for a merchant who wants to figure out what to do to set up a dry cleaner on the corner. The first question is, should the merchant accept credit cards? Then they need to go to a processor, a merchant acquirer. The committee will hear from that group tomorrow exactly how funds flow between merchants and acquirers, and the Visa and MasterCard companies, if they are Visa and MasterCard.
I would love to be able to do a calculation.
Senator Massicotte: Can you send a prototype of the expenses of cards and the broad categories of their costs?
Ms. Hughes Anthony: We would not have that information.
Mr. Campbell: Not only would we not have it, but that would be seen as sensitive proprietary information.
Senator Massicotte: Can you provide us with the generic averages among the five major banks?
Ms. Hughes Anthony: I do not think we would be able to access the banks' accounting systems and figure that out. I would provide it if I had the information.
Senator Massicotte: The previous panel commented that there is a big problem with merchants not being at the negotiating table when card companies negotiate the 2 per cent. Merchants pay for it, but consumers are not aware of that cost. Even the Organisation for Economic Co-operation and Development issued a substantial report in 2006 saying that situation is a major world problem and we have to fix it. The OECD even recommended that the competition board allow merchants to group themselves to negotiate a better deal.
Is it your knowledge, based upon your members, that the merchants have a choice? Can merchants accept cash? Can they advertise cash payable with 2 per cent discount?
Ms. Hughes Anthony: I was surprised by that information, because I believe they can offer a discount for cash. I am not privy to the kind of contracts that Ms. Swift was talking about. I do not know what is in those contracts. We have believed that merchants can offer discounts for cash. I stand to be corrected, but that is what we understand.
Senator Massicotte: Your written summary says that the merchants have a choice of cash.
Mr. Campbell: That is our understanding.
The Chair: Are you saying merchants always have choice, or they have choice depending upon the contract, and some contracts permit them to discount cash?
Ms. Hughes Anthony: We are not privy to the kind of contracts that Ms. Swift had in her possession. Mr. Hannah, can you clarify what we know?
Darren Hannah, Director, Banking Operations, Canadian Bankers Association: Our understanding is that Visa and MasterCard do not, in their rules, prohibit cash discounting. I cannot speak to whatever may be in the rules or the agreements set bilaterally between merchants and their acquirers.
Senator Massicotte: Can they advertise? I know they can accept cash, but can they put up a sign saying that if customers pay cash, they will give them a 2-percent discount?
Mr. Hannah: Based on what I understand Ms. Swift to have said, I believe she was talking about conditions set in the agreement between the merchant and the acquirer. Those agreements are bilateral agreements negotiated individually. The short answer is that I do not have a good answer.
Ms. Hughes Anthony: The companies that will appear before the committee tomorrow as witnesses can perhaps clarify that information.
Senator Massicotte: Her answer was that the issuer of the credit card, the most significant negotiator, receives a large percentage of the fees.
Ms. Hughes Anthony: The banks do not have anything to do with that type of negotiation.
Senator Massicotte: The fees would not be imposed by banks?
Ms. Hughes Anthony: Two acquiring companies will appear before you this week, and they have bank ownership. There are at least five large acquiring companies. Others are U.S.-based companies, such as Chase Paymentech and Global Tech. They are substantial.
Senator Ringuette: Ms. Hughes Anthony, you are right that Visa and MasterCard do not sign the contract with the merchant. The acquirer, which is Canadian-bank-owned for the most part, sets the fees and has the contract. The contract does say that the merchant is prohibited from making any kind of announcement, or prohibited from not accepting a credit card or a debit card. I wanted to clarify that you were right in your statement. Thank you.
Senator Moore: Thank you for coming again today. So that the Canadian public understands, what is an acquirer?
Ms. Hughes Anthony: The chain in the credit card business is complex.
As I said, if someone sets up a business and wants to accept credit cards, their first stop is to choose an acquirer, and that is literally the company that provides the technical box for them to process credit cards or debit cards. They can choose among a wide variety of acquirers. If they choose global Paymentech, those people come to the merchant and say, We have a MasterCard offering, a Visa offering, and maybe an Amex offering; what would you like?
That discussion takes place between the acquirers and the merchants. The committee will hear tomorrow from two of those acquirers.
Senator Massicotte: On page 3 of the handout you gave us, under competition and choice — for consumers and business, the third paragraph indicates, "Just as consumers can, and do, choose the form of payment they want to offer, businesses can choose the form of payment they are willing to accept.'' That payment could be "cash, cheque, credit cards or debit cards,'' or "some brands of credit cards but not others.'' Is that information accurate?
Ms. Hughes Anthony: I think there was a little confusion in the previous witnesses. We do not know anything other than what we have clarified to you about this posting-for-cash situation.
Senator Massicotte: You also said merchants can offer discounts for cash payments.
Ms. Hughes Anthony: That is correct, yes.
Senator Massicotte: To the best of your knowledge, is that the case for sure? Can you confirm to us that this is the case?
Ms. Hughes Anthony: We can certainly confirm our understanding through our members with Visa and MasterCard. We cannot go to every single acquirer and figure out what they might negotiate with their merchants.
Mr. Campbell: If your question is, can a merchant choose not to accept MasterCard but to accept Visa, not to choose credit cards at all or to choose debit cards but not credit cards, they can make those choices. A consumer can go into any store and perhaps be able to use only debit. Merchants can say they do not take credit cards, or vice versa.
Senator Massicotte: Can they accept some Visa cards and not other Visa cards?
Mr. Campbell: That rule is a different one, and that is where the Visa and MasterCard companies would have to respond.
Senator Massicotte: The discount is also important.
Ms. Hughes Anthony: The Visa and MasterCard representatives will appear. We understand their rule on what they call honour all cards is that if the merchant is a Visa merchant, the merchant must take all Visa cards, but that merchant can decline to take Mastercard or Amex.
Senator Moore: What percentage of the credit cards in circulation is issued by the banks?
Mr. Hannah: It is approximately 92 per cent.
Senator Moore: You did not mention that information in your brief. I thought it was an important number. Does your organization represent the five banks?
Ms. Hughes Anthony: No, to clarify, we represent 50 banks. In the 90-something per cent, we would include other banks that are members. These banks would include Amex Bank of Canada, the large banks you refer to, Canadian Western Bank, Laurentian Bank, et cetera.
Senator Moore: Of the 92 per cent, what percentage of that number is issued by the five big banks?
Mr. Hannah: Of the total market — not the 92 per cent — 56 per cent is accounted for by the six major banks including National Bank.
Senator Moore: I find it interesting that you do not have a schedule. Fifty-six per cent by the six banks is over half. Why do you not have a schedule of the card features of each of those banks?
Ms. Hughes Anthony: That information is available on the FCAC website. There are hundreds of cards.
Senator Moore: You are the Canadian Bankers Association, but you do not have that information. I find that interesting that you do not have your own information.
Ms. Hughes Anthony: No, the credit card market is obviously extremely competitive.
Senator Moore: However, you are the Canadian Bankers Association. That is who you represent.
Ms. Hughes Anthony: It is on the FCAC website, which serves consumers well.
Senator Moore: If there was no FCAC, would you have the information?
Ms. Hughes Anthony: Probably.
Senator Moore: Senator Massicotte touched on the breakdown of fees. What percentage of the fees is made up of the value-added rewards programs?
I do not think the consumer understands all these features.
Ms. Hughes Anthony: I do not think we know that information. I would ask which fee, because we are talking about a system —
Senator Moore: You said there are "significant costs.'' I think those costs break down to a fee.
Ms. Hughes Anthony: We are unable to put a number on that cost, senator. We do not have access to every one of our member's books in order that at we can dive in to those books and figure it out. The percentage would vary from bank to bank, card to card and month to month. I was interested in the statistic that Ms. Swift raised earlier, but that is the first time I heard the figure.
Senator Moore: I think that information is an important item here.
I am surprised. This industry has been building up over the years. I thought someone would be keeping track and would have numbers available.
[Translation]
Senator Fox: Thank you, Mr. Chair. I have only one single question in the same vein as the questions asked by Senator Massicotte. You stated that 70 per cent of credit card holders pay off their credit card balances in full within 30 days, or approximately within the 30 days allowed. No interest is charged if it is paid in cash. Everybody knows that there were cash advances for those people, and associated fees; but they did not have to pay them. There is a financing cost that is not paid for by them. Thirty per cent of people do not pay off their credit card balances in full, and it is this 30 per cent that finances the costs associated with their own purchases, and those of the 70 per cent who paid off their balance within 30 days. That 30 per cent pays for the costs of the system, and they fund the profits turned by the system. Does this not come down to a matter of fairness? Take the first 30 per cent, and you will realize that they are the ones bearing the cost, unless I have miscalculated something.
Ms. Hughes Anthony: Not necessarily. I believe that there are certain business credit cards that charge annual fees. People agree to pay them because they receive certain advantages.
Senator Fox: There are advantages.
Ms. Hughes Anthony: These people who choose to pay an annual fee for using their credit card generate income for the banks.
Senator Fox: Let us assume that the annual fees are used to pay for insurance, air miles, aeroplan points, and all kinds of bonuses. If the fees cover those types of things, and banks are able to turn a certain profit on them — which they are entitled to do — the fact remains that 30 per cent of the clients are funding the whole scheme. This would explain the exorbitant interest rates that are not falling. You say that the Bank of Canada's interest rate has no effect on the cost of credit, but bank deposits do have an effect on funds available in the banks. Right now, bank deposits are very high, as we have learned since the posting of Canadian bank revenues, as are money market fund investments. And yet, the cost of using credit cards remains extremely high, and has not been reduced.
I suspect that the 30 per cent of people who have a hard time paying off their credit card balance are in the main paying for the 70 per cent who have no problem paying off their credit card in full.
[English]
Mr. Campbell: For the people who pay it off, there is a cost for the infrastructure, as you say, and this cost is driven by the consumer. Consumers can choose the card they want. If they choose a card and say they will pay it off and not pay interest, that decision is theirs. However, if they choose a card and roll over the debt, they are using it as a form of loan and not as a payment product.
In that case, maybe they are using the wrong card and there are other options they should explore. A range of tools is available. For example, there is the FCAC site. The banks are telling people that if they are having a challenge, please talk to their banks because there is a better product for them. We can put them on a lower cost credit card or a different credit product.
Consumers have the options. The whole system works with revenue going back and forth. However, the 30 per cent of consumers that do not pay off their balances have a variety of options they can use to lower their costs.
Senator Fox: With respect, your answer is peripheral to the question and it begs the question.
Senator Goldstein: Thank you to our presenters. You are always informative with rare exceptions. We are pleased to have you here.
I am concerned about debit cards. The reason for my concern is that I understand they are used predominantly in retail grocery stores or for gas.
Those debit cards worked well for the consumer when the debit cards did not bear any charge, but Interac, which de facto administers all the debit cards, now seeks to change its status, as you are aware.
I will put my question more directly; I will be less diplomatic. Is it true to say that the sole reason for Interac seeking to change its status is so that this operation can become profitable rather than neutral? I have a supplementary question: If it becomes profitable rather than neutral, will the consumer be the person to pay the profit?
Ms. Hughes Anthony: I think Mark O'Connell has been called also as a witness here. He will be able to speak for the business plans of Interac. One thing that Interac has under its current consent order — it is a kind of association; about 65 entities rely on Interac for the system — is their ability to innovate and to provide the types of services that people want, for example, the ability for Canadians to take their debit card and travel internationally with them, to be able to do certain things over the Internet, and so on. They have cited those kinds of things that they need to be able to do.
This change is more about trying to commercialize the operation. That is my understanding. I should not speak for Mr. O'Connell; he will come before you and talk for himself. This system serves Canadians well, but it does have its limit in terms of its technical applications, and the ability of Canadians to travel with those debit cards and use them internationally.
Senator Goldstein: With greatest of respect, Ms. Hughes Anthony, you have not answered my question. My question is this: Who will pay?
Ms. Hughes Anthony: In terms of what the fees or the rates will be, I was listening to Ms. Swift, for whom I have great respect. There is a lot of speculation as to what the rates will be. I cannot comment on that subject. Interac will have to comment on their pricing structures and how they will do their business. That information is up to them to provide.
Senator Goldstein: Let me take another try. Whatever the rates may be — 1 per cent or 90 per cent — from whose pocket will that quantum of rate come?
Ms. Hughes Anthony: The debit card is a different type of transaction. You described it absolutely. The transaction is one where consumers take money out of their bank accounts, so that is who will pay at the end of the day. There is no doubt about that. We need to ensure that there is a good competitive marketplace here.
It is interesting. Senator, you say people use debit cards for food. I use a debit card for food, but in Loblaws, I see people using credit cards for food because they want the points, or whatever, on their card. That experience demonstrates that different cards are being used and they are competing. My understanding from Interac is that they want to ensure they can compete. It is up to them to tell you what their eventual pricing will be.
Senator Goldstein: Let me move to another subject. The transaction in virtue of which I buy something and use a credit card is characterized as a de facto interest-free loan until I pay my credit card bill. Theoretically, that payment could be made 52 days after I make the transaction, if it is on the first day of the cycle. I am cautious of the fact that payment is outstanding for 52 days and, if I pay it by day 52 and the company receives it by day 52, then there is no interest on it.
Conversely, however, what is the average time cycle for the merchant to be paid, if I buy on day one of my cycle? The merchant is not paid the following morning. How long does it take for the merchant to be paid?
Mr. Hannah: That payment would be a function of the merchant's relationship with the acquirer. I would put that question to them when they come here tomorrow.
Senator Raine: We have been told that Visa and MasterCard wish to go into the debit card business. I cannot figure out what they could add because to me, the debit card is a transaction between the person who has their money in the bank and wants to access it directly, and the bank. Why on earth would they want to go through a third party?
Ms. Hughes Anthony: You will have to ask Visa and MasterCard that question.
Senator Raine: The banks do not have a position on Visa and MasterCard coming into their territory?
Ms. Hughes Anthony: No.
Senator Raine: I am astonished.
Senator Ringuette: I guess we will talk about choices again.
Will a consumer who qualifies for a credit card with an annual interest rate of 19 per cent, or up to 24.75 per cent, automatically qualify for a different credit card, for example at 9 per cent?
Ms. Hughes Anthony: That qualification is something that is determined on a case-by-case basis.
Senator Ringuette: You said that consumers have choices. I want to know if they have a choice.
Mr. Campbell: I think they do.
Senator Ringuette: Can you answer the question, then? Will the consumer who qualifies for a credit card at 19 per cent or at 24.75 per cent automatically qualify for a credit card at 9 per cent; yes or no?
Ms. Hughes Anthony: Yes.
Mr. Campbell: On a case-by-case basis, they qualify.
Senator Ringuette: They would qualify. Do they have the choice or not?
Mr. Campbell: They absolutely have the choice.
Senator Ringuette: You represent 50 banks. With regard to an unsecured line of credit, a person who has an unsecured line of credit to its bank would pay anything between 6 per cent or 7 per cent — at the highest currently it would be 8 per cent.
As you stated in your presentation, credit cards are an unsecured line of credit that consumers access when needed, like the personal line of credit at a bank. How can you justify that one is, on average, at 6 per cent and the other one is, on average, at 19 per cent?
Ms. Hughes Anthony: They are two different things, senator.
Senator Ringuette: No they are not.
Ms. Hughes Anthony: They are. If consumers want short-term credit, they would choose the lowest cost product. They would choose that line of credit. If they want the convenience of a payment card that in their pocket because they need it, then they would choose a credit card.
Senator Ringuette: With a line of credit, they can have their cheques with them, and the convenience in that they can write a cheque, and so on. The convenience is that one is paper and the other one is plastic. That is the only difference between credit cards and a personal line of credit. How can you justify such a difference with regard to the interest rate that you charge?
Mr. Campbell: Senator, they are different products. With a credit card, they have an interest-free period. They do not have that with a line of credit.
Senator Ringuette: No, we used to have 30 days, and now it is in the vicinity of 14 days.
Mr. Campbell: They are different products. Consumers can use credit cards online. They can use them anywhere in the world, any time they want, 7-24. They cannot do that with a line of credit.
Senator Ringuette: On the other hand, you keep forgetting that there are interchange fees on a percentage basis of what consumers buy. There is that fee, that money, that the merchant community pays. Do not tell me that when I buy today, and when I pay within 21 days, that all that credit is free. It is not true, because you receive a percentage of what I buy from the merchant. It is called the interchange fees.
I have a third question.
The Chair: I do not think the witness has finished her answer. I may be mistaken.
Senator Ringuette: I want to ask a few other questions and I want answers to those questions as well.
The Chair: Have we finished with this subject, from the witness's point of view?
Ms. Hughes Anthony: For a credit card, like any business, there will be a revenue stream and a cost stream, obviously. The business is highly competitive. There is a huge amount of choice for individuals who may want a line of credit for something but they also need a credit card. A line of credit and a credit card are different things. Obviously, if the individual in this example wants credit only on a short-term basis and that individual wants to use a chequing account every time, then that is fine. That is what the individual takes.
However, a credit card is a different thing. Consumers can obtain a low-rate or prime-plus credit card to fill that need.
Senator Ringuette: I was told that every dollar the banking community invests in the credit card market, there is a 20-per-cent return. I do not expect you to answer this question right now. Can you check with your 50 members and send an answer saying, yes, it is true; no, it is not true; or clarifying the issue?
The Chair: Are you able to obtain that information?
Ms. Hughes Anthony: No, we are not able to obtain that information, senator.
Senator Ringuette: My last question might be a comment. You started your presentation with the cost of credit, how it was difficult for your 50 members to have credit in the marketplace and so forth, and that you were experiencing losses because of the current financial situation.
We have information that for the six federally chartered banks, the major ones, the first quarter net income for 2008 was $2.104 billion, in comparison with the first quarter net earnings for 2009 of $3.048 billion. Those earnings are an increase of 30 per cent, quarter for quarter.
Ms. Hughes Anthony: I need to correct that figure, chair. It is not correct.
Senator Ringuette: It is not?
Ms. Hughes Anthony: No; to which bank are you referring, senator?
Senator Ringuette: This figure was supplied to us by the Department of Finance. If a correction needs to be made, maybe you should give them a call. We received this information from the Department of Finance.
Mr. Campbell: Senator, you are looking at one quarter in a year and another quarter in a year. If you look only in terms of profit for the Big Six, in 2008, relative to the profit in 2007, it actually declined 37 per cent. In terms of actual trends, the first quarter profit for the Big Six this year compared to, say, the previous quarter, which is the trend line, it went down a further 13 per cent.
One quarter out of a year relative to another quarter of a year does not tell the whole story. If you look at the whole year, you will see a decline.
Senator Ringuette: It seems you have enough money for the Prime Minister of Canada to tell you that you should invest abroad, buy abroad, help businesses and consumers abroad instead of helping Canadian businesses and Canadian consumers. You must have a lot of liquidity to be able to do those things.
The Chair: I am afraid we have to call an end to the hearing.
Ms. Hughes Anthony: I would love to respond to that last comment. I do not think it is fair, chair, for the senator to infer that the Prime Minister said what the Prime Minister said.
The banks, to my knowledge, are not on a shopping spree, Senator Ringuette. We have seen serious erosion in the banks' profit and in their market cap, which is not something Canadians should be cheering. That erosion shows the recession is starting to bite Canada's banks. They are not immune to it. I want to make sure that comment is on the record.
The Chair: Senator Moore, you had a comment?
Senator Moore: You can respond in writing to this question. In the early 1980s when we went through tough times, the prime rate was up around 16 per cent or 17 per cent, and the Visa card rate was around 21 per cent. This year, today, the prime rate is half of 1 per cent and credit card rates are still at 19 per cent. I want to know why, because the banks set the interest card rates, we learned.
Second, you mentioned in your brief that the banks' source of borrowing from the central Bank of Canada is 1 per cent. What are the other sources of borrowing, and the percentages?
The Chair: Do you have that information?
Ms. Hughes Anthony: It will vary from bank to bank, senators. We will attempt to give you some kind of overall numbers, and to give you the best answer we can.
The Chair: That will be satisfactory. Thank you very much.
Ms. Hughes Anthony: Thank you.
The Chair: The session has been a spirited one. I am sorry we cannot continue longer.
(The committee adjourned.)