Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 4 - Evidence, April 2, 2009
OTTAWA, Thursday, April 2, 2009
The Standing Senate Committee on Banking, Trade and Commerce met this day at 10:30 a.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 morning. I call the meeting to order. I remind witnesses and honourable senators to do their best to keep questions and answers short and editorial comments to a minimum. We are here to obtain information and we only have one hour with our witnesses. We will try our best to give everyone a chance to participate.
[Translation]
The Standing Senate Committee on Banking, Trade and Commerce meets today to study the credit and debit card systems in Canada and their relative rates and fees, in particular for businesses and consumers.
[English]
The committee was charged with undertaking this inquiry after the Senate adopted a motion put forward by our colleague, Senator Ringuette, to have us study the issue.
Our witnesses in the first hour of this meeting have a unique perspective on this issue because they act as a broker between merchants on the one hand and card issuers on the other hand.
I will introduce the senators present today. Starting on my far left, Senator Massicotte, from Quebec; Senator Ringuette, from New Brunswick; Senator Fox, from Quebec; Senator Greene, from Nova Scotia; and Senator Gerstein, from Ontario. I am Michael Meighen. I am a senator from Ontario and I have the honour to chair the committee.
In the first hour this morning, we will hear from Jim Baumgartner, President and Chief Executive Officer, Moneris Solutions; and Fern Glowinsky, Senior Vice-President, General Counsel and Corporate Secretary, Moneris Solutions; and from Jeff van Duynhoven, President, TD Merchant Services.
Jim Baumgartner, President and Chief Executive Officer, Moneris Solutions: Thank you for the invitation to speak to the committee regarding its study of the credit and debit card industry in Canada. We appreciate the opportunity to appear before you to share information in support of your study. I am Jim Baumgartner, President and Chief Executive Officer of Moneris Solutions, and with me today is Fern Glowinsky, Senior Vice-President, General Counsel and Corporate Secretary.
Moneris Solutions is a Canadian-based payment processer with operations in Canada and the U.S. Our head office is in Toronto and we have offices in Sackville, New Brunswick; Montreal, Quebec; Calgary, Alberta, Vancouver, British Columbia; and in the U.S. We have been providing credit, debit and gift card solutions to our merchants in Canada and the U.S. since December 2000. We process for more than 350,000 merchant locations in Canada and about 65,000 merchant locations in the U.S.
Moneris Solutions is a joint investment of the Royal Bank of Canada and the Bank of Montreal. We distribute our products and services to the market directly through various sales channels. We employ about 1,800 people, the vast majority of whom are located in Canada. As our offering tends to be the least understood component of the credit and debit card industry, I will briefly walk through what we do.
First, we enable acceptance of electronic payments at the point of sale by providing and supporting the cardholder facing solution, which may be a point of sale terminal or enablement of a cash register, gas pump, kiosk or website. Second, when a card is swiped or inserted if it is a chip card, we route authorization requests to the payment brands — Visa, MasterCard and Interac — to the card issuers who send back an authorization message that we deliver to the merchant at the point of sale. In that way, the merchant knows that the customer is authorized to make that payment. Once the transaction is authorized by the card issuer, the merchant will finalize the transaction with the card holder and send a settlement file to us, which prompts us to deliver the funds into the merchant's bank account.
An important component of our business model is underwriting risk, as we bear the risk for merchant transactions where the merchant does not deliver the goods or services that have been paid for in advance. For example, if a cardholder buys an airline ticket and the airline goes out of business prior to delivering the service, or in the case of fraud, noncompliance with the payment brand rules. We also provide reporting to enable the merchant to monitor their daily transaction activity. They use that for purposes of financial reconciliation as well as for fraud monitoring. Another important element of our service is exception item management, including tracing of individual cardholder questions and mediating on behalf of our merchants in case of a transaction being disputed by a cardholder.
As a whole, these components represent the payment processing value proposition. Payment processing is often the last interaction or final impression between a merchant and a customer and, therefore, has to be instant, always on and easy to operate. It is critical in enabling cash flow and, therefore, the merchant must receive the funds when and where they need them and have certainty of payment. The finality of payment feature in today's uncertain times removes an element of credit risk and eliminates the handling of large amounts of cash.
The payment processer also plays a leading role in the integrity and evolution of electronic payment networks. With the introduction of enhanced verification methodology, such as chip cards, or data security standards, such as PCI, or new card entry modes, such as contactless, the payment processor must upgrade infrastructure, which is no small task. Upgrades are capital intensive and complex undertakings. We have helped Canada maintain one of the most ubiquitous, secure and successful electronic payment networks in the world.
Our industry is subject to the increasing liabilities associated with potential data compromises. A number of recent high profile breaches in the U.S. have highlighted the real threats posed to the digital infrastructures of the payments industry. The reality is that the cost of compliance in ensuring security within the payments system is continually increasing as the threat of breaches continues to evolve.
The Canadian processing market is highly competitive. Most of North America's top processers actively market in Canada. Significant established players regularly enter the market. U.S.-based merchant processers now control a significant percentage of the Canadian market. In addition, there is a robust reseller industry that offers even more choice to merchants. Our industry is forced to compete aggressively on price and innovation to maintain our market position. At this time in the evolution of the payment card industry, card acceptance growth is roughly equivalent to that found in the regular economy. It is essentially a zero sum game with each participant striving to be the most relevant to their merchant.
Fees are negotiated with each merchant. In terms of merchant acceptance of cards, merchants make choices and do so because of the significant value derived by them from electronic payments, including avoiding costs associated with handling cash; reporting and reconciliation; finality Moneris Solutions of payment; speed and throughput at the point of sale; and increasing customer satisfaction by offering the payment method of choice to their customers.
There has been much discussion about interchange. As you may know, it is a fee that payment processers pay to card issuers. In our pricing model, it is a component of our cost of goods sold. Payment processers do not set interchange rates; we are advised of them by the payment brands. Other components of our costed goods sold include assessment fees that are paid to the payment brands as well as our costs of operating infrastructure.
There has been much discussion about the introduction of competing debit products into the Canadian market. As payment enablers, we have to invest in the infrastructure to process the acceptance products from card issuers. We expect our customers will want to be able to accept the card that the consumer presents for payment. As a result, we must enable the technical capability, build business processes, commercialize and inform and train our customers. New products attract a greater compliance burden, greater wear and tear on our devices, as well as exception item management.
We hope our remarks have been somewhat helpful in providing insights and answers to your questions, and I appreciate the opportunity to appear before you.
The Chair: We will hear from Mr. van Duynhoven now and then we may ask questions of whomever we want.
Jeff van Duynhoven, President, TD Merchant Services: I am pleased to be here today to discuss the business that I run as the president of TD Merchant Services, as part of your study into the card payment systems in Canada.
TD is the only Canadian bank that currently operates a merchant acquiring business. The reason is quite simple: We believe it is a relationship business and we appreciate having a direct and comprehensive relationship with retailers and business owners.
Payment systems are obviously a complex topic, but I am happy to do what I can to help explain the process and explicitly the role that a merchant acquirer plays within that system. While there may be specific questions on other parts of the process, I believe that the committee may or will have the opportunity to ask these questions to specific players as they come before it.
As we all know, retailers accept debit and credit cards as a method of payment from customers today. They do it because it is a simple and effective way to execute the transaction, both for the retailer and for the customer. Non- traditional retailers such as many phone, cable and hydro companies also now accept credit card payments, despite the availability of efficient alternate payment methods such as electronic bill payments or preauthorized payments direct from a customer's chequing account. Clearly, in this case, they are accepting credit card payments because their customers want this convenience and they see value in offering that to their clients.
Of course, some retailers continue to operate as a cash-only business. Think of the quick-service restaurant businesses that accept only cash. Even this is changing today, as more and more of these businesses see value in accepting debit and credit payments, especially with the advent of contactless payment capabilities that offer the promise of a speedier checkout process.
In the most basic sense, merchant acquirers sell a service directly to Canadian retailers. We provide our customers with point-of-sale devices, the hardware that sits on the counter, and we process payments on behalf of that retailer. On the credit side, if we consider a simple example of a consumer paying for a purchase with a Visa credit card, the cashier or clerk would enter the payment amount and swipe the credit card through the payment device. The sale device then transmits that information over the Internet or a phone line to TD Merchant Services. We then validate certain parameters of the transaction and forward it on to the payment network, in this case Visa. Visa then routes that transaction to the issuing bank, regardless of where it is, to obtain authorization for that transaction.
The issuing bank either approves or declines that transaction and provides a response back to Visa. Visa then routes that response back to TD Merchant Services and the point-of-sale device will indicate to the merchant whether the transaction has been approved or declined. This entire process takes mere seconds to complete. TD Merchant Services would typically receive settlement for these transactions on the next business day and we, in turn, would then credit the merchant with the proceeds of that transaction. In our case, we typically charge the merchant the appropriate fees for processing these transactions at the end of the month. From this fee, we pay all of our expenses and pass on the appropriate interchange to Visa, which, in turn, passes it on to the issuing bank.
Interchange fees vary across the retail market and are dependent upon several variables, including the industry of the merchant, the size of the merchant, the way the transaction is processed, and the type of card that is presented for payment. It is important to stress that interchange rates are set solely by the credit card companies — that is, Visa and MasterCard — based on certain market variables which they can better explain when they appear before this committee. I will not take you through the step-by-step process for the debit card payment system, but it is similar, other than that the authorization is received directly from a financial institution as opposed to through Visa.
I presented the committee in advance with a short deck that I hope will help to visualize the payment process. I would be happy to speak to that in more detail.
Going forward, I am certain we will see continued innovation in the payment space, with mobile payments and contactless payments being two examples As well, new entrants into the debit market will likely further alter how payments are conducted in Canada. However, as these changes are introduced, history would suggest that, to be viable, any innovation needs to create value for all stakeholders in the payment value chain, whether they be issuers, consumers, merchants or acquirers. Without the acceptance of all parties involved, these innovations will likely fail.
Thank you for inviting me here today. I would be pleased to take any questions that you may have.
The Chair: Thank you, Mr. van Duynhoven. Ms. Glowinsky, do you have anything to add or are you being held in reserve for the tough questions?
Fern Glowinsky, Senior Vice-President, General Counsel and Corporate Secretary, Moneris Solutions: I will hold in reserve for now.
The Chair: Before we start with questions, I will introduce the senators who have arrived since you began your evidence: Senator Mac Harb, from Ontario, on my left; Senator Wilfred Moore, from Nova Scotia; Senator Céline Hervieux-Payette, from Quebec; and Senator Yoine Goldstein, our deputy chair, from Quebec. We have a good number of senators here on this matter of great interest.
Senator Harb: Thank you for your presentation. I am interested in knowing about the evolution of this market. It started with how many players? How many do we have now? Do you see room for more players? Based on your answer about whether or not you are calling on this committee to call on the government to set up a CRTC-type mechanism, where anyone can get into the market as long as everyone understands the rules of the game, do you think that deregulation or regulation is the way to go with a common denominator that everyone will need to follow?
Yesterday, Senator Fox and myself, as well as other colleagues, asked why people in the industries have come to a bunch of politicians like us to have us try to facilitate what seems to be an issue in the industry. Why can the industry not get together itself — that is, the issuers, the merchants and consumer associations representing the constituents — to set up some sort of format? Why must you run to the government?
If you were not able to do that, is it your call on the government to set up some sort of mechanism like the CRTC and say, "There are the rules as we understand them. We will set up a consultation with you and then go back and complete a report.'' That report would state, for example, that we want to set up a CRTC-type minimum standard. I would be interested — and I am sure colleagues would be interested — in your comments on the general terms.
Mr. Baumgartner: I will take a crack at that and then Mr. van Duynhoven can chip in.
To start out with, the first part of your question dealt with what the market was like, what has changed over the years and whether it has gotten less competitive, et cetera. You are spot on; the market has changed a lot over the years. When we started this company, there were, for the most part, basically Canadian-based merchant processers, in terms of providing merchant services. Back in the early 2000s, a few of the larger banks sold their businesses to U.S.- based merchant processing companies. A few other banks, including the parents of my company as well as Mr. van Duynhoven's, decided to hang on to the business because they viewed it as strategic.
As a result, over the last several years, the number of competitors in this country has grown. The share of the U.S.- based acquirers has grown. It is a very much scale business for us to compete. Our cost of transaction and getting a lot of transactions through the systems allows us to compete with some of the largest players in the world, most of which are now doing business here.
There has been a new entrant into the Canadian market pretty much every year since we started the company. From a merchant processing perspective — from my perspective — it has never been more competitive than it is right now.
In terms of how someone enters or how difficult it is to enter the market, the business itself is not overly capital intensive and there are ways to get in and offer services through other providers. Some of the U.S.-based acquirers, particularly, will allow smaller companies to sell and resell their services on their behalf. As a result of that, the merchants themselves have never been contacted more frequently in terms of alternative providers.
Mr. van Duynhoven: As Mr. Baumgartner mentioned, those other entrants, whom we call ISOs, independent sales organizations, are affiliated with some of my competition and do go out there and sell with some of our competitors, and have our competitors process their information on their behalf.
There are four or five major acquirers here in Canada. We have two of them here today. Global Payments. and Chase Paymentech are two significant players. Desjardins, who was before this committee previously, is also acquiring in Canada. There are also other U.S.-based players who come into the market.
I will echo what Mr. Baumgartner said: This is a very competitive business and we compete on value that we deliver to our customers. TD looks at this as a relationship that we have with our customers. We are proud of the fact that over 85 per cent of the customers that deal with TD Merchant Services are also TD business banking customers.
For us, if we were not providing value to those merchants, they would, first of all, likely leave us and, second, it is possible they would take their banking business elsewhere. It is important for us that we provide good value for the services we provide.
Senator Harb: Is a CRTC, type of setup something the government should consider?
Mr. van Duynhoven: As Mr. Baumgartner said, this business is competitive today. I think the competitive landscape is making it competitive and fair for merchants on the level of services that acquirers deliver to those customers.
The Chair: You said, in terms of your competition, that there are some players that come into the market who might go to your merchants. If the merchant at that time was operating through Visa, would they say, "You really should be with MasterCard'' for these reasons, or do they merely go to the merchant and say, "We can offer you a service that is cheaper than the one you are using now''? How do they attract the business?
Mr. van Duynhoven: It is typically the latter. One of our customers might get a phone call or a knock on the door and be asked what they are paying for the merchant services they receive and they would be told they can do better than that particular rate.
That may be true; someone may provide a better price. Alternately, it could be through different types of pricing offered. Perhaps less transparent pricing could happen.
Senator Goldstein: What would be different types of pricing?
Mr. van Duynhoven: Lower prices, first, and different types of pricing would be charges. When Visa, as an example — I am a Visa acquirer — changed its interchange rates; they changed from two rates back in April 2008 to a total of 21 different rates. They are available on the Visa.ca website; they disclose their rates.
From an acquiring perspective, we needed to change the way we priced because those rates range from 1.21 per cent to 2 per cent. Someone may say, "You have a lower `flash rate''' but some of the other card type transactions — because there now are 21 rates — may be added up differently. The total cost to the merchant may not be the same. It is confusing for some merchants.
TD provides great transparency on our statement. We give them a list of every single transaction they have done by card type. Therefore, if we have a higher cost for a premium card, for example, we clearly disclose the number of transactions, the dollar value of those transactions and the extra cost associated with that.
Senator Goldstein: Are the differentials a function of the amount of each transaction, or is the differential is a function of the nature of the card — premium or other?
Mr. van Duynhoven: It could be both, because this is a margin business with percentage rates. Clearly the higher the dollar value of that transaction, the more is charged. If we are charging our merchant discount rate on a percentage basis, we may be comfortable taking a lesser margin on a bigger transaction than we are on a smaller transaction because there is an element of fixed costs that need to be allocated over that basis.
Mr. Baumgartner: There are other components, as well. There may a merchant statement fee or a terminal rental fee. There are a whole bunch of different components to the overall cost of doing business, of which the largest by far are the fees that Mr. van Duynhoven alluded to.
The Chair: Mr. van Duynhoven said the merchants sometimes find it confusing. I venture to say that they are not the only group who finds it confusing.
Senator Massicotte: I have a supplemental. From my understanding, it is people like yourself that negotiate the terminal fees. It is not done by the brand cards, such as Visa or MasterCard?
Mr. Baumgartner: That is correct.
Senator Massicotte: Is it you who decides and negotiates with the Visas of this world to decide how much they receive and how much the bank receives?
Mr. Baumgartner: No, we do not. Those rates are set by Visa and MasterCard and then Amex would negotiate the fees directly with the merchant. On average, Amex would tend to be more expensive.
Senator Massicotte: Therefore, you have a set fee determined by Visa to decide what they will charge for the brand name and each institution decides what percentage the issuer wants. Is that also set?
Mr. Baumgartner: No, that is set, as well. The interchange is a flow-through.
Senator Massicotte: You have those fixed costs. All you can negotiate is your processing costs. You take those two others, add your costs and that is what is charged the merchant.
Mr. Baumgartner: Essentially, that is correct.
Senator Massicotte: It is not the Visas of this world who go to see the merchants, it is you.
Mr. van Duynhoven: The example that I handed out with the deck I provided beforehand gave an illustrative example. I think it was the same example the Department of Finance used earlier: The $2 for a $100 transaction. Visa or MasterCard sets the interchange rates. In that particular example, it is $1.50. That is collected by the acquirer and paid to Visa. Visa then funnels that to the appropriate issuer because they would deal with multiple issuers, potentially including international issuers, as well.
Senator Massicotte: Of the 100 per cent that Visa charges, how much goes to Visa and how much to the issuer?
Mr. van Duynhoven: All of it goes to the issuer. Visa does not make its money by interchange. Its charge fees to acquirers. Out of that 50 cents in the example, we have fees that we pay to the card company for access to their network and access to the brand. They also charge fees to the issuers. I am not familiar with the quantum of those fees, but they do charge fees to both parties.
Senator Massicotte: Therefore, the only thing the issuer decides is the terms and conditions of his credit, the interest rate, is that right?
Mr. van Duynhoven: Correct. The features and benefits of the card itself — the interchange rate — is established by the issuer.
The Chair: One supplement cuts into your time, you understand.
Senator Moore: That is fine. I just want to follow up. There is a merchant statement fee and I think Mr. Baumgartner also mentioned the terminal rental fee. You do set some of these things, right?
Mr. Baumgartner: Yes.
Senator Moore: These are over and above the $1.50, as shown in the presentation deck.
Mr. Baumgartner: That is correct.
Senator Ringuette: Thank you for bringing clarification to these issues.
It is interesting that Visa and MasterCard set the fees that you charge and you enter into the contractual agreement with the small- and medium-sized enterprises. Is it possible for you to supply an example of one of your contractual agreements with a business?
Mr. Baumgartner: Certainly, we would be happy to provide that.
Mr. van Duynhoven: Yes, and we as well would be happy to do that.
Senator Ringuette: Thank you.
We have heard that there are some rules applied to the contract. For instance, that a merchant cannot advertise the cost of using a credit card, or any discount that might be available for payment in cash. Can you confirm that rule?
Ms. Glowinsky: I will speak for Moneris Solutions only and Mr. van Duynhoven will speak for TD Merchant Services. In our agreement, a merchant can offer a discount if a customer wants to pay in cash. Visa and MasterCard, who will speak to this when before the committee, have a prohibition on charging an additional fee if someone wants to pay with a Visa card or MasterCard.
Senator Ringuette: That is the reverse of the scenario I asked about.
Ms. Glowinsky: They do not prohibit a discount for cash payment.
Senator Ringuette: You raised the issue of Visa and MasterCard establishing the rules. You are the interface with Visa and MasterCard for the business community so the rules that they fix have to be included in your contract. Is that correct?
Ms. Glowinsky: That is correct.
Senator Ringuette: You are confirming, in a way, that the business community cannot advertise a discount price for payment in cash.
Ms. Glowinsky: They can offer a discount for cash payment but they cannot say, I will charge you extra if you pay by Visa or MasterCard.
The Chair: Could we find out if TD Merchant Services operates on the same basis?
Mr. van Duynhoven: There is no clause in our contract that prohibits a cash discount or the advertising of any cash discount. Any merchant is welcome to offer and advertise a discount for cash payment. We would welcome them as a client.
Senator Ringuette: In your specific case.
Mr. van Duynhoven: Yes, for TD Merchant Services. I cannot speak for other contracts with other acquirers.
Senator Ringuette: You are two of the major players in the Canadian market. What is your current share of the Canadian market?
Mr. Baumgartner: We have about 34 per cent to 35 per cent of the Canadian merchants.
Mr. van Duynhoven: I believe that Mr. Baumgartner mentioned in his opening remarks a figure of 300,000 customers. We have about 116,000 to 117,000 customers, so we are smaller. Mr. Baumgartner is the big player in the market, but we will all try to catch up to him.
The Chair: Together, your shares are just under 50 per cent of the market.
Mr. van Duynhoven: Our share is about 15 per cent to 17 per cent.
Mr. Baumgartner: The next largest would be Global Payments, in Atlanta, Georgia.
Senator Massicotte: What percentage of the market share do they have?
Mr. Baumgartner: My guess is about 28 per cent or so. Chase Paymentech, from New York, has a goodly sized share as well.
Senator Moore: What is the percentage held by Chase Paymentech?
Mr. van Duynhoven: It is about the same as our share.
Mr. Baumgartner: It varies.
Senator Goldstein: Are you still owned by the Bank of Montreal?
Mr. Baumgartner: Yes, we are a joint investment with the Royal Bank of Canada and the Bank of Montreal.
Senator Ringuette: TD Merchant Services is owned by TD Bank.
Mr. van Duynhoven: Yes. We are not a separate legal entity but are a part of the TD Bank.
Senator Ringuette: Visa and MasterCard establish the fees but you receive fees as an issuer and as a processer.
Mr. Baumgartner: In our case, we are a separate company. The fees that are paid are set by Visa and MasterCard, who compete against one another for a share of consumers. As well, they compete against American Express, which has a growing share in the Canadian context. The three compete against each other for the share of all credit card spending. Those fees are set and given to us. We in turn will pass on a portion of those fees to the merchant.
Senator Ringuette: In the debit card scenario, there is one fewer player in the process. Statistics Canada indicates that the full cost per transaction for debit card use is 12 cents, based on a break-even scenario. How can we justify that for one transaction with a credit card, which includes Visa and MasterCard, the cost is 50 cents per $100 purchase? Your input to the process is just one less interface. How can you justify the transaction cost going from 12 cents to process a debit card payment to 50 cents for a $100 purchase? For a $1,000 purchase, the processing fee is much higher but the steps taken to process the transaction are the same.
How do you justify the discrepancy in fees charged for processing?
Mr. Baumgartner: That is a great question.
Senator Massicotte: For clarification, on a $100 purchase using a debit card, the fee is 12 cents. For that same purchase using a credit card, the fee is about $2.
Mr. Baumgartner: It is a little less than $2 on average,.
Senator Massicotte: That is the discrepancy.
Mr. Baumgartner: There is quite a difference in terms of the operating infrastructure cost to process a debit card versus a credit card. For example, a debit card is basically a completed transaction and requires very little exception management on the back end. For example, if you bought an airline ticket with your debit card, the transaction goes through exactly how you alluded to it and the fee would be directionally what you alluded to earlier. If you purchased the ticket with a credit card, we would have to underwrite the purchase. Our underwriting group would look after whether the airline was solvent and whether we needed reserves. There can be disputes or fraud in respect of the transaction. Merchant fraud tends to be high on the credit card side. So it is a combination of things.
As we negotiate individually with merchants, they will look at their total cost of payment acceptance. They will look at debit and credit card, which are negotiated in concert. It is rare that we would state our rate for credit and then have a separate negotiation on debit. They tend to be holistic negotiations.
Senator Ringuette: Will there be a second round of questions?
The Chair: If we have time.
Senator Ringuette: Regardless of what you are saying, the only additional scenario here in the processing issue is Visa and MasterCard.
You raised the issue of airlines. We have provincial legislation in Ontario, Quebec and B.C. that states that airlines and tour operators must have a reserve to protect consumers. Why are you charging these industries additional fees to protect the consumer when there is already legislation and provincial funds to do this?
My further understanding is that you only pay the business, or the travel agency, or the airline, 90 days after the person has taken the trip or the flight.
Mr. Baumgartner: We would like that to be the case from a risk perspective. Unfortunately, from our perspective, we either settle on the same day or the day after with the vast majority of our transactions.
Ms. Glowinsky: The day after transaction, not the day after travel.
Mr. Baumgartner: That is our particular case. I think different merchant processers have different risk methodologies.
Senator Ringuette: I was informed that was particularly the case with Moneris Solutions.
Mr. Baumgartner: No; definitely not. With the vast majority of the merchants, we settle either same day or the next day. In the U.S., they tend to get settlement a day or two after they do in Canada.
Regarding your other question, this is an area where we could actually use some help from the government in some respects, because the insurance regimes that you mention do protect the cardholder for getting their services. Unfortunately, the way the process works is that we are charged the refund. If you buy an airline ticket on an airline customer of ours and charge it to either Visa or MasterCard but you did not get that flight service, you will dispute that with your card issuer. The card issuer will then charge Visa or MasterCard and Visa or MasterCard will charge us. When we go to the merchant, if they are not there to answer, then we eat that entire charge. We get the charge and pay the settlement. The insurance regime makes it almost a double whammy on the travel agency and the travel industry because they are forced to hold reserves for that regime, and in some cases the weaker ones are forced to hold reserves for us.
Ms. Glowinsky: To add some clarification, for the airline industry, there is no regime in place; it is particular to the tour operator. Furthermore, it is only in certain provinces. As Mr. Baumgartner pointed out, if the tour operator fails and that charge comes back through to us and the tour operator is not there, we will have to fund that. For us to go and then claim against those funds — and we have been in that boat before — has been challenging. We have had ongoing dialogue, particularly in Quebec and in Ontario, with the provincial folks who are in charge of that. We would welcome a further dialogue because we work closely with the travel industry.
For about five years now, we have been trying to resolve this issue where we cannot necessarily attack the funds. We are funding it but we cannot get to the funds that are being set aside. We tell merchants, "We need to figure out a way so that we can be protected, because we end up funding those costs.''
Mr. van Duynhoven: I wish to make a small comment on Senator Ringuette's comments.
I want to clarify the issue of the fees. The example the senator used was 50 cents for a $100 transaction and 12 cents for a debit transaction. Our average debit transaction is in the neighbourhood of $40. The averages work. If you were to look at this as a level playing field, and if you were to increase that $40 amount and say that the average transaction was $100, that would be two and a half times or 30 cents compared to the 50 cents. That is an illustrative example in that particular case. As Mr. Baumgartner said, the difference between a credit card and a debit card is fraud and the risk that accrues back to the acquirer, which we have and which does not exist with debit.
We need to be careful. If you took that down to a $40 transaction, at 50 basis points that would be 20 cents for a $40-transaction that is the average debit transaction at 12 cents. We need to be careful that we are comparing apples to apples.
Senator Ringuette: We were, because if you look at $100 purchase on a credit card, the merchant fee would be, as in the example provided by the Department of Finance, a $2 fee. However, if it was a debit card, it would be probably a 12-cent fee.
The question is: How can you reconcile those major differences? I am sorry, Mr. Chair. I could talk for days and days about this.
Senator Massicotte: I am now mixed up.
To clarify, I understood that the average debit cost per transaction is 12 cents and that the average percentage on credit cards is close to 2 per cent, whether it is a transaction for $40 or for $100. You seem to suggest that is not accurate.
Mr. van Duynhoven: I was trying to explain that if you were trying to equate a $40 credit card transaction.
Senator Massicotte: That would cost you 80 cents, for example, and the other one is 12 cents.
Mr. van Duynhoven: Yes, but I am talking about the acquirer portion, though.
Senator Massicotte: I agree; I understand your point.
Mr. van Duynhoven: I understand the merchant cost, but there is the piece that the acquirer controls.
Senator Massicotte: I appreciate that. You are talking about your portion only.
Mr. van Duynhoven: Yes. That is all we can control.
Senator Massicotte: I appreciate that. Therefore, Senator Ringuette's summary is probably accurate.
Be that as it may, you give a big explanation about why the different costs of debit cards and credit cards are what I call sale charge backs, or fraud, or refunds. The user of a credit card is 30 days to say but I did not buy that service. Is that a big number? What is the annual cost — and, you probably have a better name — of those sales charge backs per year? What would the number be in your case?
Mr. Baumgartner: In our case, it is millions of dollars.
Senator Massicotte: How many millions?
Ms. Glowinsky: It would depend if we had a large insolvency. In a particular year where we had a lot, it would be much larger.
Senator Massicotte: For an average of five years, what would it be?
Mr. Baumgartner: I would have to get back to you on that.
The Chair: Would you do so?
Senator Massicotte: Do you know the number for the industry? We were told yesterday that fraud, which includes sale charge back, is $500 million a year.
Ms. Glowinsky: That is accurate.
Senator Massicotte: That includes the sale charge backs for which you cannot get refunded?
Ms. Glowinsky: No. That is broad.
Mr. van Duynhoven: That is number is what the issuer side is absorbing. The numbers I heard were $400 million for credit cards and $100 million for debit cards, roughly.
Senator Massicotte: Including sale charge backs or fraud only?
Mr. van Duynhoven: No. That would be what the acquirers absorb. That would not include that piece because, as Mr. Baumgartner says, that is extra.
Senator Massicotte: These numbers look big, but you have $212 billion per year of transaction in credit cards. There is a sense of relativity I want to put to that.
You allow merchants to advertise cash discounts, but I look at the summary of Visa charge back and there is a significant difference to merchants whether they use a gold card or infinite card or other commercial products. It could easily be half a percentage point different, which is a lot to merchants. Does the merchant have the right to say, "I refuse your Visa gold card but give me your Visa regular card.''
Mr. Baumgartner: No. Amex, Visa and MasterCard rules would not allow that. Therefore, we are not allowed, either.
Senator Massicotte: Could he say, "Do not give me your credit card; give me your debit card instead?''
Mr. Baumgartner: They could suggest that. An alternative for a merchant — and we do see this in some of our customers — is steering the customer it a lower cost product. They use rewards or loyalty to do that. That is not an uncommon practice as well.
Senator Massicotte: That is not offensive to the agreement they sign with you?
Mr. Baumgartner: No. The retailer has the right to suggest that debit is better.
Senator Massicotte: They cannot refuse a Visa card, even one with higher fees?
Mr. Baumgartner: That is correct.
Senator Massicotte: I accept your assumption that there is a competitive environment for merchant processers or acquirers. You have four or five players. That is not a lot, but you can argue that it is competitive in nature. I buy into your arguments that credit cards have significant value to our society from an economic point of view, flexibility and use of credit.
I have some problem with the brands names. There is a lot of competition on the issuer side. There are over 200 cards. However, you must admit that MasterCard and Visa control a high percentage of brand name products. That is significant. Meanwhile, the poor little merchant does not have much choice. He has you knocking at his door. You have a set cost from Visa and MasterCard that is non-negotiable as far as the merchant is concerned. How do the merchants get fair value? How can they have a fair bargaining process when they are caught? That 2 per cent is a lot for them, but they do not want to lose a sale. Merchants rarely refuse credit.
As we see in the world, there is a significant problem in many countries with the non-competitive nature of the Visa and MasterCard brand name products. How do you manoeuvre into a fair bargaining situation?
The question is very good: There is a difference of product between a debit card and credit card and we acknowledge that. However, is a $100 transaction equal to $1.88? It is a significant difference. I am not sure the competitive nature allows us to get full value for the increased costs from that Visa credit card.
Mr. Baumgartner: It is a great question. When we started the business back in 2001, there were of one or a couple of interchange levels — the rates you are referring to — the cost of goods sold.
Therefore, we are sort of like a gas retailer. Instead of having only unleaded gas, now there are different types of gas being offered. Consequently, our prices have changed and there are different mixes for premium gas, et cetera. Overall, those costs have gone up. From a merchant perspective, I believe they have gone up less than the rate of inflation; so our average rate has gone up but not as aggressively as inflation.
Part of that component is the mix of transactions. I do not know if you have corporate cards, for example, or government cards for travel that you use. Those have become more popular and those tend to be more expensive because they do not revolve — you have to pay those off. In order to compete with American Express in that particular market, Visa and MasterCard have had to have an interchange level for governments and corporations that are competitive with American Express. Amex had the whole market probably 15 years ago. Now, with a differentiated interchange, it is an example of competition was inspired.
The other new emergence is Internet transactions, which tend to be more risky. Those have more fraud and, therefore, they cost a little more. As the mix of Internet transactions has gone up, the weighted average cost of interchange has gone up, as well.
Senator Massicotte: You made a comment that the increase has been less than inflation. Are you talking about the percentage as having gone up less than inflation?
Mr. Baumgartner: The cost to the merchant, from our average portfolio, the percentage has gone up certainly less than inflation.
Senator Massicotte: Why would it go up at all because it is a percentage of retail sales? Retail sales go up with inflation automatically.
Mr. Baumgartner: The difference between what we charge the merchant and our cost of the goods sold has come down since we started the company. It has come down quite a bit.
Senator Massicotte: Anecdotally, you said governments or certain corporations have been able to negotiate a better deal and get the interchange. That seems to suggest in a pretty conclusive manner there is a lack of competition. When the bargain power is fair, it looks like you can get a lower interchange. The poor little merchant is obviously paying a higher rate because he is not the Canadian government and cannot negotiate a better deal.
Mr. Baumgartner: I am sorry if I misspoke. I was talking about the users of the cards themselves. Prior to 15 years ago or so, there was really no competition on the commercial side for corporate travel. For example, if you have a government travel card, it was basically American Express.
Senator Massicotte: It is the same conclusion, though: Given the issuers have now become involved and have significant bargaining power, they are able to negotiate down fees. What does Wal-Mart pay for interchange fees?
The Chair: We have to move on. It is a very interesting line of questioning and very important. If you want to make a 10 second response, Mr. Baumgartner, please go ahead.
Mr. Baumgartner: Sure. I do not know. They are not a customer of ours. I am sorry. However, in general, the larger merchants — as with any sort of "larger'' situation — will tend to be more aggressively priced because there is less relationship management. In the case of Wal-Mart, there is less credits risk, et cetera.
[Translation]
Senator Hervieux-Payette: We are talking about the different points where costs are incurred. I can tell you that, when I wanted to use my credit card to pay for my car, the dealer was not very happy. I wanted to use my credit card in order to accumulate air miles. I would like to know if there is a card where you pay for the service and not for all the gimmicks. For practical purposes, you are almost forced to take the features even if you do not want to. After negotiating, I paid for half the car by credit card and the other half by cheque. We can also put donations to charities on our credit card. It is no longer worthwhile to send a cheque. We use our credit card and earn points. It is not a purchase but a donation. It seems to me that it is automatically part of your costs and that it is the combination of all the features that makes it more expensive in Canada than in Australia.
You told us that you have your operating expenses, equipment, staff, and what you pay to Visa. Two components are variable: the amount of fraud — for which you have an estimate but not an exact amount — and rewards.
I wonder what percentage of cost can be attributed to rewards and fraud. With that figure — given that they are the only variables that we can discuss — we could help taxpayers to limit the cost of using a credit card, if one existed that did not have add-ons.
It seems to me that it was more difficult to obtain a credit card 25 years ago than it is today. What rules do you use when issuing a credit card? And what about the credit check that allows you to decline a credit card application so that other card users do not have to bear the expense of those who do not pay?
[English]
Mr. van Duynhoven: While these are excellent questions, they are really better posed to the issuers. I believe the CBA was here yesterday and you have had other issuers before the committee. I say that because most of those issues are relevant to the issuer side of the business and less so from my business or Mr. Baumgartner's business — from an acquiring perspective.
Visa and MasterCard are the ones setting those rates and the issuers decide which features and benefits appear on the various cards, as well as the terms and conditions of those cards. That has nothing to do with the acquiring piece of the payment process.
[Translation]
Senator Hervieux-Payette: You mean TD does not issue credit cards? There are TD credit cards.
[English]
Mr. van Duynhoven: Definitely. There are numerous TD credit cards but I represent the merchant services business, so I cannot speak to what the issuer practices are. I am just not familiar with those. I could answer questions on the acquiring business, but not on the issuing side.
The Chair: Mr. Baumgartner do, you want to add to those questions?
Mr. Baumgartner: I really do believe it is more of an issuer question. I would add, however, that the charity is a very good example. The charity that could take credit cards really does increase their availability and donations as a result.
The Chair: There is a cost to them, of course.
Mr. Baumgartner: Yes.
I would like to add one other thing that is sometimes overlooked in these discussions. I am trying to not speak for the issuer side because it is not my business, but there is aggressive competition with American Express regarding premium cards. American Express tends to have higher-end customers. The banks and card companies are all trying to go for the higher-end customers. To do that, they offer rewards points because it is a big draw. They have higher costs as a result, so that is part of the reason for some of the difference.
Senator Goldstein: I will limit myself to one question because we are running out of time.
My question is about data security. Do you process all of your data in Canada or is any of it sent abroad for processing?
Mr. Baumgartner: Speaking for ourselves, our whole system — the authorization piece that Senator Ringuette was referring to earlier — is in downtown Toronto. Therefore, yes, it is done here in Canada. Our settlement engine is also in Canada.
We are trying to give our U.S. business, which is not insignificant, the benefit of our Canadian scale. Therefore, as we grow in the U.S., we may use our Canadian infrastructure to process U.S. transactions. The same is not true in reverse.
Senator Goldstein: I am glad to hear that.
Mr. van Duynhoven: For us, all our operations are here, so all our data and processing is done in Toronto, as well.
Senator Goldstein: Are you satisfied with your data security mechanisms?
Mr. Baumgartner: We are very satisfied and spend a great deal of money on it. I do not know if you have read about some of the breaches that have occurred but they are extremely serious. I believe the movement to chip technology is an outstanding example of how we can get a better handle on the issue of data security, which is an issue that keeps me up at night. You probably cannot spend enough money on security because the bad guys continue to try to keep pace with changes and improvements.
Mr. van Duynhoven: For a financial institution, data security is of paramount importance, so we take great care.
Senator Goldstein: Thank you.
Senator Gerstein: We all recognize that the majority of merchants must have the ability to take credit cards and debit cards, et cetera. In your opening remarks, Mr. Baumgartner, you referred to the fact that you are involved in a scale business. Scale suggests that you are big. I would like you to wear the hat for a moment of a single store independent operator. I would like to understand what access they have to your services. To what degree do you reach out to them? What are some of the costs that they bear? How difficult is it for a single proprietor to take advantage of your services?
Mr. Baumgartner: That is a great question. We are about the eighth largest merchant processing company in the world. The rest are U.S.-based and a few are not. The scale allows us to keep our costs down and it is hoped that the merchant will be on the receiving end of that benefit.
We have many different ways to reach the small merchant and try to sell them. If they are with Mr. van Duynhoven, for example, we will have a sales force out on the street knocking on doors and looking for that TD terminal and saying, we have a much better deal than these guys have. He does the same thing; we are great competitors.
Since we started the company in 2001, the number of times that the merchant interfaces with a salesperson has risen dramatically as a result of competition. One of the companies that had the data breach is now in Canada as well, and there are others.
Senator Gerstein: Are you saying that if I open a business, I will have access to your services almost from day one?
Mr. Baumgartner: Absolutely.
Senator Gerstein: Is the process not overly encumbering to me?
Mr. Baumgartner: No. Many of our new customers are brand new businesses. I talked about fraud and credit. We do not have as much of a credit concern as an issuer might have. For example, with a new restaurant, there is less likelihood of payment fraud or a dispute arising. We might have a little less need to look at that particular merchant. We want to know if they have done bad things in the past, et cetera, but in general, our approval rate is something close to 92 per cent to 94 per cent.
Mr. van Duynhoven: As a financial institution, access is quite simple because we have over 1,000 branches across Canada. You can walk into any TD Bank branch and liaise with a small business adviser and connect to my business. They take the basic information and we call the merchant back. It is an effective and efficient process for small businesses. Access is available.
Senator Moore: I want to touch on a question that Senator Goldstein asked with regard to processing in Canada. Do you send any information to the United States authorities under the Patriot Act?
Mr. van Duynhoven: No. All of our processing is done in Canada. Processing Visa is run through Visa, which has facilities globally. Therefore, information could traverse to Visa from an authorization standpoint. Our processing and what is between the four walls we control is all based in Canada. Visa and MasterCard are global organizations, however, so they have processing elements outside Canada.
Senator Moore: With regard to the contract that either one of your companies has with a merchant, we have heard comments about those contracts being unilaterally changed. How often do you change a contract and what is the process?
Mr. Baumgartner: In our case, it is fairly rare that we would change the contract. If we get a pricing change from the card companies, that would be typically the only case. Normally, they have not changed the cost much over the years. Over the past few years, there have been more dynamics to the interchange structure, and that is when we notify the merchant. If they change our assessments, we might have a change.
In terms of the contract terms outside of pure price, it is rare that we would make a change. In the case of a national agreement with larger merchants, it almost never happens.
Ms. Glowinsky: The only exception might be a new rule. Data security is a good example when that was introduced and there was more rigour around compliance.
Mr. Baumgartner: That is an example of the big guys being penalized because because they handle so many card transactions, they have to go through an independent audit to ensure that they are keeping the data secure.
Senator Moore: The key thing would be changes in the fee. How much notice do you provide to a merchant that there will be a change in the fee, which would affect his bottom line.
Mr. Baumgartner: It will vary by customer. Some of the contracts are 30 days, some are 90 days and some are 180 days. It varies by customer.
Mr. van Duynhoven: Our contract with Visa gives six months' notice of an interchange rate change. I only know six months so obviously I cannot provide notice. Once we find out, we have to start our process. Similar to Moneris solutions, our typical notice would be 30-90 days, depending on the merchant.
Senator Moore: If you received notice today from Visa that six months hence there would be an increase, how much notice would you provide to your merchants? Do you send it out right away? Do they find out 30 days before the six- month effective date?
Mr. van Duynhoven: We advise our customers as quickly as possible. First, we have to understand the impact of the change. The last change, as I said, went from 2 to 21 rates. Clearly, we had to do a great deal of analysis within our business to understand what the end cost would be for a particular merchant. Quite honestly, we had to go through our entire book of merchants and look at how they process. That interchange took a much more time on our side. Obviously, merchants were squeezed a little bit from a notice standpoint.
Our objective is to get out there as quickly as we can to do that. We all have budgets that we try to work within. Understandably, they want to know as quickly as possible so we endeavour to get that information out quickly.
Senator Massicotte: How quickly are they notified of interest rate changes by the issuer?
Mr. van Duynhoven: I do not know what the time frames are but I know that all of them have specific agreements. I am sure they would abide by those agreements in terms of notice. Interchange changes do not require a notice to a cardholder because it is revenue for the issuer.
Senator Moore: I am confused about 2 rates and 21 rates. Can you explain that to the committee? At one time, you had 2 rates.
Mr. van Duynhoven: Yes.
Senator Moore: You said one rate was 1.21 per cent and the other was 2 per cent.
Mr. van Duynhoven: That is the range of rates today.
Senator Moore: Was it within 21?
Mr. van Duynhoven: Those are the 21. The lowest rate of the 21 for Visa credit cards is 1.21 per cent and the highest is 2 per cent from an interchange perspective. It can be complicated. The old consumer rate was 1.75 per cent less 25 cents. Therefore, the cost to acquire was much less and they negotiated rates accordingly. When interchange rates were changed by Visa, those merchants in the $20-average transaction size saw the greatest increase because it moved higher.
Senator Moore: Was that the low side? You said there were two rates.
Mr. van Duynhoven: The consumer rate is 1.75 per cent of the transaction, less 25 cents. It is always less 25 cents. This is where it gets confusing. You had different effective rates. There was a curve that went down to a $20 transaction being around 1 per cent and then it went up. It was very confusing. It is now a flat rate per transaction. The old rate on commercial transactions was 2 per cent, less a dime. It is now a flat percentage rate.
The Chair: Senator Ringuette has one final question that I will allow. She promises only one but no more.
Senator Moore: I am not sure if I understand. Somewhere, there is a new program of 21 different rates within a range of 1.21 per cent to 2 per cent of the transaction.
Mr. van Duynhoven: By card type, yes. There are seven rates for consumer cards, seven rates for infinite cards and seven rates for commercial cards, depending on the type of transaction, who the merchant is, the industry and how that transaction is processed.
The Chair: You explain that to your customers? You tell them, "There are 21 rates.''
Mr. van Duynhoven: Yes; we try. The rates are published. Merchants know what the rates are.
Senator Massicotte: Mr. Pigeon gave me a table this morning that outlines most of those rates. It is available to all of us.
The Chair: MasterCard does not publish those rates, is that correct? Can you verify that for me?
Mr. Baumgartner: MasterCard did. I am not sure if they still do or not, but they have in the past.
Senator Ringuette: With regard to MasterCard, because you are both acquirers and accept all card issuers, what were the rate changes for MasterCard? Visa went from 2 to 21. What were the changes from MasterCard?
Mr. Baumgartner: MasterCard is fairly similar, actually. They had a fairly simple rate structure when we started the company and they have expanded it to a lot more. I am not sure of the exact number of tiers. I do not believe it is quite as many.
Senator Ringuette: Were the rates changed at the same time?
Mr. Baumgartner: No; they were at different times. Earlier, MasterCard was really low and having a hard time attracting Visa issuers, who were also competing against American Express. From my experience in other jurisdictions, they were unusually low and raised it early. Since then, they have done an increase and made it more tiered.
Senator Ringuette: You both process both cards, Visa and MasterCard.
Mr. Baumgartner: That is correct.
Senator Ringuette: You are saying that the fees for both Visa and MasterCard that hold 94 per cent of the Canadian market are very similar?
Mr. Baumgartner: No. They vary, based on different types of transactions. They may be going after different markets, so they may stress different rates. For example, they use the 21 rates to go after different types of markets that were previously underserved or underrepresented or where merchants could not take credit cards. It varies by customer.
The Chair: We will have to pursue that with Visa or MasterCard.
Thank you, witnesses. Let me ask one thing. In the present economic situation, the cost of money has gone down. I understand your evidence to be that Visa and MasterCard sets the rate and you are concerned with the processing rate. Has the economic situation changed your pricing ability at all? One would prima facie think you might charge less.
Mr. Baumgartner: That is a great question. In our particular case, we do not get a benefit for the float because we are essentially funding our customers at the same time we are getting the money from the card companies. As a result, fluctuations in interest rates have little impact on our overall profitability.
Senator Goldstein: Who gets the benefit of the float?
Mr. Baumgartner: Generally, the issuers would get the benefit of the float, if interest rates were to come down, like they have. Conversely, my experience on the issuer side says that their charge-offs or losses tend to go up in these types of cycles as well.
The Chair: We have had a most instructive and interesting session and we thank the witnesses for appearing.
Before introducing our next witness, I draw senators' attention to the fact that Senator Ringuette has provided us with a document. It is a bill introduced in the U.S. Congress on March 12 with respect to national consumer credit usury rate. That is for background and it will form part of our record.
The Library of Parliament has also obtained from Visa Canada's website the interchange reimbursement fees. We have that as part of our record and senators should all have a copy of each of these documents.
We now have the pleasure of welcoming Mel Fruitman, Vice-President of the Consumers' Association of Canada. We were expecting Duff Conacher from the Canadian Community Reinvestment Coalition, though he does not seem to be present. Mr. Fruitman, we will go ahead with your evidence. I gather you have provided us with a document?
Mr. Fruitman: It is a very brief document.
The Chair: We appreciate "brief.''
It is only in English, so it has not been distributed.
Senator Fox: Is there any way we can get these documents and statements beforehand?
The Chair: To be fair to the witness, you are quite right: We should try. I know the clerk will provide all witnesses whom we invite with some advance notice to provide those to us in advance. Unfortunately, Mr. Fruitman was invited only two days ago and he was kind enough to appear. We cannot blame the messenger.
Senator Fox: Let it be noted for the future, Mr. Chair.
The Chair: According to the Bank for International Settlements, there were 64.5 million credit cards in circulation in Canada in 2007, and Canadians used their credit cards in 2006 to make $214.7 billion in purchases.
Mr. Fruitman, Vice-President of the Consumers' Association of Canada, is here to tell us about credit card issues from the consumer perspective. We welcome you and appreciate your appearing on such short notice.
Mel Fruitman, Vice-President, Consumers' Association of Canada: The Consumers' Association of Canada is pleased to have this opportunity to present its views to this committee. CAC is a 62-year-old independent, not-for-profit, volunteer-based organization — I am a volunteer, by the way — with a national office in Ottawa and provincial territorial representatives. Our mandate is to inform and educate consumers on marketplace issues, to advocate for consumers with government and industry, and to work with government and industry to solve marketplace problems in beneficial ways.
In the past with respect to credit cards, CAC has taken the position that, while interest rates are extremely high, there are many payment options open to consumers that do not oblige them to pay those fees. We had also noted that, in some cases, the grace period actually allowed consumers the advantage of deferring payment for several weeks, at no cost. However, as we are all well aware, times and circumstances have dramatically changed.
Buying on credit and carrying balances have become a way of life for most Canadians. At the same time, as we heard this morning, the card offerings have become more numerous, more complex and more expensive. Even those consumers who take the time to work their way through the wealth of information provided by the Financial Consumer Agency of Canada probably wind up more confused than when they started, as I did when I tried going through this yesterday.
Up until a few months ago, consumers were bombarded with solicitations to apply for, or were often even pre- approved for, new credit cards. They were also being encouraged to increase the amount of debt they carried on existing cards. Many consumers were lured into taking on new or additional cards by offers of low interest rates.
However, as the economy slowed and many consumers found themselves unable to pay off the debt, either in full or in a timely manner, they found that those low interest rates suddenly became very high rates. They also found that their credit limits were being reduced and that the terms and conditions were being modified: Grace periods have been dramatically reduced or withdrawn, and methods of calculation have been altering, always to cause more interest to be paid. All of this is putting more pressure on already-beleaguered consumers.
While we certainly encourage competition between financial institutions, we believe that current offerings are deliberately complex and intended to confuse rather than offer clear choices. We would like to see some standardization and simplification in the methodologies, leaving room for competition and easy comparison of rates. We would like as well: a relaxation of restrictions which cause immediate cancelling of preferred rates; a return to traditional grace periods; and elimination of calculations which preclude achieving a zero balance.
As an aside, the gentleman from Moneris this morning implied, if not admitted, that competition has actually increased prices, which is the antithesis of what our economic textbooks have told us.
With respect to debit cards, we have a number of issues regarding the way the system is evolving to include both new players and new technology. Security is always a major concern. While new technology such as chip cards is claimed to be more secure, we understand that hackers have already managed to breach some of these security measures. Security at the point of sale still is and probably will always remain an issue.
Will new devices and utilization of more cards issued by more providers make it more difficult for consumers to keep their information confidential when making a transaction? Will we be obliged to memorize more PIN numbers? Many questions arise from the new developments.
Privacy is, of course, closely related to security. What data will be collected, personal and financial? Where will it be stored? We already touched on that this morning. Who will have access to it? How will it be used? Who is responsible for safeguarding the data? If a debit card is provided by a credit card company rather than by the financial institution which maintains the customer's bank account, does this give a third party access to the individual's account?
The Canadian Code of Practice for Consumer Debit Card Services needs to be further reviewed and possibly updated with consideration given to possibly legislating compliance. One sacrosanct provision in that is zero liability for consumers in the event of unauthorized access to accounts.
I have attempted to be brief and just touch on some of the issues affecting consumers. I would be pleased to answer any questions.
The Chair: Thank you, Mr. Fruitman. We appreciate the brevity and clarity of your presentation.
Senator Harb: I am intrigued by your presentation. Thank you for appearing before us.
The whole issue, in the end, is who pays for it? Does the consumer pay for it or does the merchant? It does not matter how we slice it. If you introduce technology into the marketplace, you have to find a mechanism in order to support it. Both consumers and merchants are your clients because merchants are consumers. I am sure you agree with that.
When the Canadian dollar was at par with the U.S. dollar, did you study whether there any savings realized were passed on to consumers by large corporations or merchants? For example, did any big chains pass some of their savings with the appreciation of the Canadian dollar on to consumers? If there was a reduction in fees, would that be passed on to the consumer by these big chains?
Mr. Fruitman: As you are probably aware, we had great issues with the retailers in Canada with respect to the price of merchandise, which was highly visible to consumers and showed that prices were not being lowered because of reduced costs to the merchants. Given that these credit card fees, for the most part, are hidden costs, the simple answer is, no. Any savings that might have occurred were not passed on to consumers in the credit card and debit card operations.
Senator Harb: I heard you say you support competition and want more competition, which is good. However, you also said that you need a kind of minimum standard. Are you calling on the government to set up an entity similar to the CRTC to provide guidelines for all who want to enter the market? Do you promote something along those lines or what is it that you promote?
Mr. Fruitman: We are not quite there yet. We are concerned and upset with the changes that are taking place. As we heard this morning, competition is increasing costs, which, presumably, will increase costs to consumers, and we do not think that is appropriate. There needs to be a good hard look at whether some additional oversight is required over and above the normal oversight provided by the FCAC. We are not calling for a cap on rates and we are not calling for specific legislation limiting the operation. However, we are looking for simplification and better understandability and reassurance for consumers that they are not being gouged.
We are not at the point of saying that we need some strict control, but we certainly need more control than we have.
The Chair: Mr. Conacher, do you have remarks to make at this time?
Duff Conacher, Chairperson, Canadian Community Reinvestment Coalition (CCRC): Unfortunately, the email I sent to the Clerk of the Committee did not go through because the Parliamentary system went down. I mentioned that because I thought I would be late today, I would forgo my opening statement. I made a submission on Bill C-37 because many of these issues are interrelated. We do not have a system of strong rules, enforcement or penalties to ensure that everyone is being served fairly at fair prices in the credit card system and in every area of the financial services industry, including the investment side. That is what we need.
The solution, which you have seen detailed in my submission, is to empower the FCAC or the Auditor General to do an audit of the actual costs and revenues and, therefore, the profit margin. A public report on the findings would cause the fees and rates to come down the next day because there is ample evidence that there is rampant gouging in these areas. I can give specific examples, if you like.
As well, we need to empower and mandate the Competition Bureau to study the actual level of competition in the local market, local market by local market across the country, for basic banking services and access to basic credit. That study will show there are monopolies and duopolies effectively across the country. What follows when you have monopoly and duopolies? Price regulation or subsidy to create competition will follow. It will be one or the other, which is appropriate because access to basic banking service and basic credit are essential services. Every dollar that is a dollar of gouging is a dollar that goes into the bank's pockets. That hurts the Canadian economy over all, whether it hurts individuals by taking it out of their pockets or it hurts businesses by increasing their costs. It is now at least 20 years overdue to have some sort of public interest and ongoing annual price review. Our suggestion is that these audits should look backwards at least one decade to find the extent of the gouging and lack of competition over that time. Some compensatory measures should be the result of such an audit.
We propose the need for a lobby group that is as well resourced as the bank. You simply require them to enclose a one-page pamphlet once or twice each year in their mailings to customers that describe and invite customers to join the group for a nominal annual membership fee. Twenty million plus customers would receive it.
If only 3 per cent joined at $30 per year, you would have a group of 600,000 members and an $18-million annual budget. Then, I would be here on time because someone else would be doing my work. I am sure that the crowd here today is the same group of financial industry lobbyists that have been here over the last 12 years that I have been before the committee.
They can add a loonie to each of the 20 million customers' charges somewhere, and presto, they have $20 million. Consumers pay for the bank lobby and the banks should be required to facilitate the consumer lobby.
The Chair: I am sure there will be many questions.
Mr. Conacher, we are studying costs and charges relative to credit cards. Do you have any specific comparative data between Canada and the United States?
Mr. Conacher: No. You cannot compare these markets. We have to look internally at our market structure and profit margin. That has to be examined.
Senator Fox: Mr. Fruitman, I have always had a great deal of respect for the Consumers' Association of Canada and the role it played. I am being exposed for the first time to Mr. Conacher's organization, but he is indeed well known and not necessarily well liked in the area, which is probably a tribute.
You offered to mention a couple of examples of gouging, which serves as an important educational illustrative purpose. Could you give a couple of examples of what you consider to be gouging?
Mr. Conacher: Certainly. How many of you in the next two-week break are heading outside of the country or have been outside of the country recently?
Senator Fox: We do not like to admit those things, but go ahead.
Mr. Conacher: This is revealed by an individual initially reported in the Winnipeg Free Press and then on CBC one and a half years ago: If you use your credit card when outside the country, there will be a fee on the statement when you come back. It will be about 2 per cent of the purchase cost. I think the regular spokesperson for Visa must have been away because the person to whom the reporter spoke said, "We only charge the banks 1 per cent.'' Visa does the exchange calculation and handles all of that and charges the bank 1 per cent of the purchase price. I am not quite sure why it is 1 per cent of the purchase price as opposed to a flat fee. Maybe there are costs of exchanging more dollars and larger numbers on a calculator. I do not really think so, but the banks double that. Some are at 2.5 per cent, and they do nothing. That is pure gouging.
This person in Winnipeg had bought a car. For $25,000, he had a $500-charge — 2 per cent — and Visa charged the bank 1 per cent. There was a charge of $250 for doing nothing, multiplied by 20 million customers. That is sounds like unjustifiable profit to me.
Senator Fox: That is an interesting example but are there other examples? We all travel outside the country and we all notice that charge on our credit cards.
Mr. Conacher: The other one is the unilateral increases in interest rates that have happened in the past few months. Many people have been receiving letters about it. This is occurring based on what? Increased costs? Who knows? That is why we need the audit. Are their costs actually increasing, or are they saying, "We could make a good case that our costs would be increasing now because we can point to defaults and bankruptcies.'' They say they are, but maybe there is a whole bunch of interest that they will get because people who used to pay off their monthly balances are not doing so now. They will reap a huge reward.
We need an audit because the banks have all the figures and they can claim whatever they want and no one knows.
Senator Fox: I do not think we ever had a satisfactory answer to that question. The question has been put, because, obviously, it seems to some people around this table; the cost of money has gone down significantly. The answer has been, "Well, the fact that the Bank of Canada lowers its overnight interest rate has no effect on interest rates for the consumer,'' but the banks also get money from deposits and are paying very low rates of interest — far lower than they paid a while ago. They also have money from other sources at same time at lower interest rates. Yet, the 19.2 per cent interest rate seems to be stable; it does not seem to be going down.
Mr. Conacher: I would suggest as well that the committee look at the transcripts of the February 1997 hearings of the House of Commons Standing Committee on Industry. That was the only hearing ever held on credit cards. Unfortunately, the spring 1997 election call cut them short and there was never a report from that committee.
They asked several significant questions of the representatives of the banks who came forward and said, "We have low interest rate cards.'' They were then asked, "How many people can get them?'' Their reply was, "Well, we turn away 50 per cent of the people who apply.'' On what basis? There is much pertinent and important information in those 1997 hearing transcripts that can inform your deliberations on this issue now, 12 years later, because nothing has been done in between.
Senator Fox: Finally, I have a concern, but I am not sure that it is a valid one. I would like your input on it, both of you.
One of the reasons they tell us that the interest rates remain high is that the delinquency rates may or may not be rising. For some people like Caisses Populaires Desjardins, the delinquency rate does not seem to be rising. They are telling us that, although their delinquency rates are posted at 1 per cent, some people are talking about it going to 4 per cent or 5 per cent.
Since 70 per cent of the people pay off their cards on a monthly basis for the purchase of goods, those people are not in delinquency at all. It is the 30 per cent that do not pay them off every month that are, somehow, susceptible to the delinquency rates going up. Basically, the 30 per cent are paying for the costs of entire system. Is there equity in the cost of the system? There are costs involved in dealing with that 70 per cent. Money is advanced, there are lending costs and merchants are paying part of that, but it seems odd that the entire profit of the system seems to be on this 30 per cent who do not pay off on a monthly basis and are paying 19.2 per cent. Is there fairness in that? Would an audit bring out interesting facts on who is paying the costs of the system? We all believe there must be a credit system, but is there fairness in the system?
Mr. Fruitman: That is a difficult question to answer in that there are so many types of fees and charges built into the system, including so many of these new cards that actually charge an annual fee for the card as well. The companies have encouraged consumers to use their credit card; they are providing all kinds of incentives to use the cards. They are taking some of it out of the pockets of the merchants, so how the whole system is being paid for is quite an enigma, as Mr. Conacher says.
In terms of "delinquency,'' we must be very careful about what we mean by that term. Are we talking about default or simply delinquency in that someone who is supposed to pay $50 this month instead paid $40? I suspect that if it is the latter, yes that may be going up as people are having trouble making ends meet as unemployment goes up. It does not mean that that money is lost to the financial institutions. I would suggest that they are not really suffering much of an increase in loss, if any.
Senator Massicotte: Thank you for being with us today.
Mr. Fruitman, I am trying to understand why people accept to pay such high interest rates. There is a lot of information out there. In fact, the government association has a website comparing 220 credit cards. If you wanted to know what you are paying, that information is available to you. The banks or the issuers will argue that there is information and they give clear notice. Caisses Desjardins was saying that the interest rate you pay is right on the statement.
If that is the case, I am trying to understand why consumers pay such a high level of costs for credit where alternatives are available. What is the problem here? What is the psychology of that? I do not understand.
Mr. Fruitman: That is a question that has intrigued us for many years. Our position in the past has been that those options are available to consumers. If you want to pay 28.8 per cent on a department store card, why would you do it, but feel free to do so if you want to give your money away that way and if you do not want to accept a different credit card.
I think it goes back to the points I was making that the systems and the information is complex. FCAC has 220 data points, I think you just mentioned. If you want to compare cards, it is an almost impossible task for the consumer to say, "Here are the benefits, not just the costs, what other things are attached to that card besides the 19.8 per cent or a lower or a higher rate.'' It is very difficult to make comparisons and we are being hounded to take those cards and to use those cards. We have gone from a society that a generation ago did not buy on credit to one where everyone buys on credit.
Senator Massicotte: Do you have information from polling or something about whether credit card users know the interest rates they are paying?
Mr. Fruitman: No, I do not. I would suggest that probably most consumers are not fully aware of what rates they are paying.
Senator Massicotte: The other costs are important, but the interest rate is a big number. For 30 per cent of the people who do not pay the balance, that must be a big number. Why are they not getting informed? I do not understand. If you ask most people what they pay for their telephone, they know because it is a big enough number. Why do not they know how much they are paying if it is interest rates?
Mr. Fruitman: Unfortunately, the psychology of many consumers, particularly these days, is that the convenience factor, whatever it is to them, outweighs the costs and they do not look closely at it. That is the psychology that the financial institutions play on by distributing the cards, by making more of them available and by trying to lure us into carrying more cards and paying more interest.
Senator Massicotte: I am not a psychologist or an expert in these matters, but I suspect that is close to the right answer. Nonjudgmental ease of credit and convenience is probably the reason many people hold those cards. Yesterday, we heard that if you look at the strata of income levels, there are as many people who earn high levels of income who do not pay the balance as there is for low levels of income. I suspect that, compared to getting a loan at bank where you feel judged and you have to fill out a balance sheet, the other process is very easy. It looks like they have access to credit, and they love it very much. It looks like there are a lot of issuers.
You make the argument that, obviously, the issuers are providing a service that a consumer is prepared to pay for, whether it is very high or not. However, that cost seems to be less than the convenience and value they are getting from that usage.
Mr. Fruitman: Clearly, a credit card is much more convenient to use than applying for a loan for a particular purchase. Again, we are bombarded with advertising luring us into buying instant satisfaction. You do not have to wait until you can afford it; you can have it now by buying it now on credit.
Senator Massicotte: That is human nature. How do you change that?
Mr. Fruitman: At some point, perhaps if the charge is high enough, you reach the breaking point but I am not sure.
Mr. Conacher: If you look at the studies commissioned by the MacKay Task Force 11 years ago on the future of the financial services sector, there is still very relevant information in there about the very low level of financial literacy. The statement of interest rate, whether it is compounded monthly or annually, is lost on 90 per cent of the population; they will not understand the effective interest rate they are paying.
The Financial Consumer Agency of Canada, FCAC, website is there, but just because you build a website does not mean people find it, go to it or use it. We have suggested for years that the FCAC send out pamphlets regularly in bank statement and credit card bill envelopes saying, "The website is here and here are the questions it can answer for you.'' It is never been done.
Senator Goldstein: I will be very brief. It is a question for both of you. I am trying to get a handle on who pays whatever it is that gets paid.
My understanding of an ordinary business is that there is a cost of goods, there are salaries, rent, light, heat and power — there is everything that you see on a business statement, if you want to put it that way. Then there is the cost of credit cards and it is 2 per cent or maybe less under some circumstances. However, that is built into the retail price of the service or object that you are getting. That is proposition one.
Proposition two is there are two kinds of people that do not use credit cards. The first are people who just do not want to use them for whatever reason and they pay cash. I am not all that worried about those people. There is another kind of person who does not use a credit card, and that is a person who cannot get credit and therefore cannot get a credit card. That number is fairly significant, as I understand it.
Am I wrong to say that the people who do not use credit cards are paying in the retail price the cost of the credit cards or is it the people who are using credit cards?
Mr. Conacher: In part, I think you are correct to say that. The retailers are quite concerned about that, both in the credit and debit card side of things in terms of the pricing they are having to pay as a merchant to be able to handle credit and debit cards and how that affects their overall cost and prices they can offer to people who use cash.
I think you are correct in that assessment.
Mr. Fruitman: Your first proposition also was correct: It is one of the many costs of doing business. It is spread among all purchasers.
Senator Ringuette: Thank you for taking the time to be here. Mr. Fruitman, you have brought forth an interesting scenario in regards to the issue of debit cards. If the market is opened up and we have — as they have in the U.S. — MasterCard and Visa entering into that market, suddenly, they have access to bank account information because of the debit card processing issue.
The Competition Bureau is currently looking at the Interac issue. Can I ask you to make an intervention at the Competition Bureau to signal your concern about that possibility?
Mr. Fruitman: We certainly will attempt to. As I say, it is a concern. Obviously, we have no information or data, but it does open the door to all sorts of questions about how the system will operate and about how to assure customers' security of privacy and of financial data, and finances themselves.
Senator Ringuette: Can I also ask of you, as representing the consumer group, to notify your concerns to the Privacy Commissioner of Canada?
Mr. Fruitman: Yes, indeed.
Senator Ringuette: Thank you very much.
You have also raised the issue of choices. I have with me my personal Visa contract. They list all their products. There are 27 different products and, of the 27, only one has an 11.9 per cent rate. The 26 other products all have interest rates from 19.5 to 20.5. Knowing that Visa and MasterCard hold 94 per cent of the market, the amount of choice is not that great. This is a VIAS statement and I suspect that MasterCard would not be that different in regard to interest rates.
You have also brought forward the issue bringing back the policy of having 30 days to pay. That is another item that has changed in the last few years. It went from 30 days to much shorter periods of time. There are some products here that require 17 days. If you take into account all of the mailing, processing and reviewing the statement, there is very little time. I am interested in having your comments in regards to those two issues.
Mr. Fruitman: I think the choice is more in the marketing than in the reality, when it comes down to it. With 27 different card products listed by one service provider, multiply that by as many providers as there are. That is not really freedom of choice; that is consumer confusion, as far as I am concerned. Besides, how many consumers will have the time to sit down and make the comparisons between the various offers to determine which one is the best for their circumstances?
Shortening the grace period is one way in which they have been taking more money out of consumers' pockets. They shorten the periods; the time from which we made a purchase until we actually had to pay without incurring an interest charge has been reduced and in many cases eliminated.
All these are incremental changes. They wind up costing consumers more and, ultimately, are putting a lot more money into the coffers of the financial institutions. However, they are the kinds of things that, because they are incremental, we, as consumers, do not necessarily notice. It may also be the case that we may have made a habit of paying our bill at a certain period after we get our statement or so many days before the due date. Suddenly, we find we are incurring charges. Alternately, there is a situation in which you have a bill that says: Balance owing: $40. Amount paid: $40. Now due: 18 cents. That is a real situation, in fact. That means you could never actually pay off that card.
Senator Ringuette: With regard to the consumer side and marketing, I am beginning to read the fine print on all these contracts. As a consumer and because there was mass marketing, I was always under the impression that, if you buy something with a credit card and are not satisfied with your purchase, you can bring the item back within 30 days and Visa or MasterCard guarantees that you will be refunded. I did not dream that it was part of the marketing and promotion of the product. However, all of a sudden, my new contract says that I must pay. There is no longer a guarantee. I have to pay for the product. I have to resolve the issue with the merchant.
Mr. Fruitman: This is something that some of the cards have offered as a feature of the card, as a customer convenience and as part of the lure to take that particular card. It was never written in stone. It was something that they did and this was why you should take that card or that particular one of their 27 cards rather than another card.
In fact, the financial institutions are neither obliged to make good nor are they obliged, contrary to what was suggested this morning, to make good on airline tickets, either. They should not be looking to be reimbursed when they do so, when they have undertaken to make that kind of commitment for marketing purposes.
Mr. Conacher: Again, that is why we have been recommending and pushing, since the coalition was created in 1997, that we require the banks and other financial institutions to enclose this one-page pamphlet, send it out to customers and invite them to join a group. We want them to facilitate the creation of a broad-based, well-resourced group that people would be able to call. This group would have people who are consumer education specialists who could spend their time reading all that fine print and come up with the information to be able to answer people's questions about what card is best for an individual as well as being an advocacy group.
Senator Ringuette: We have a federal institution that is supposedly mandated to do that.
Mr. Conacher: Yes, but they are sitting between consumers and banks as a regulatory agency. Banks have their lobbyists and their resources taken from consumers. Consumers need a group to call their own, and one that has no cost to either consumers or banks. This is the way to form it. This committee endorsed this proposal 11 years ago and said that the Finance Minister should implement it, as did the House Of Commons Standing Committee on Finance.
Senator Gerstein: Mr. Conacher, in your presentation of March 27, 2007 to this committee, you talked about the conflicts of banks. It caught my attention that the first item you indicated as a conflict was that "banks are the largest corporate sector donor to the ruling party every year.'' Could you give me a little background as to the facts on which you were making that statement?
Mr. Conacher: That was the case before donation limits were put in place, for the first time ever, in January of 2004. As a corporate sector, the banks were the largest donor to the ruling party in every year before that since we have had disclosure of donations.
Senator Gerstein: You are not speaking of the last five years?
Mr. Conacher: No.
Senator Gerstein: I am submitting that prior to that time — certainly speaking for the Conservative Party — that was not the fact. I will not presume to speak for the Liberal Party, but I suspect that was also the case for them.
The Chair: Senator Massicotte is very persuasive. He has 10 seconds.
Senator Massicotte: For merchant fees, we pay approximately 1.2 per cent in Canada. What do we pay in the United States, Europe and elsewhere?
Mr. Conacher: I would say those comparisons are not really relevant. What are relevant are the actual costs.
Senator Massicotte: Do you know what they pay elsewhere?
Mr. Conacher: No. I have not had the capacity to do that research.
The Chair: Thank you very much. I appreciate the cooperation of everyone. We are now adjourned for the parliamentary break. We will reconvene two and a half weeks hence to pursue our inquiry.
Thank you to both witnesses. We appreciate you appearing on such short notice. We have benefited from your testimony.
(The committee adjourned.)