Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 17 - Evidence - February 9, 2011
OTTAWA, Wednesday, February 9, 2011
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill S-201, An Act to amend the Office of the Superintendent of Financial Institutions Act (credit and debit cards), met this day at 4:28 p.m. to give consideration to the bill.
Senator Michael A. Meighen (Chair) in the chair.
[English]
The Chair: Welcome to this meeting of the Standing Senate Committee on Banking, Trade and Commerce. A number of senators have been held up by the bad weather but they will be arriving in the next few minutes. We have a quorum so we will begin this meeting. We are already a bit late.
I will begin by introducing myself. My name is Michael Meighen, chair of the committee, and I am a senator from the province of Ontario.
I would also like to introduce the senators who are present. The deputy chair of the committee is Senator Hervieux-Payette, from the province of Quebec. She is joined by Senator Greene from Nova Scotia; Senator Kochhar from Ontario; Senator Ringuette from New Brunswick; and Senator Harb from Ontario.
Today, colleagues, we will resume our examination of Bill S-201.
[Translation]
This bill amends the Office of the Superintendant of Financial Institutions Act to confer on the superintendant new duties: monitoring the use of credit and debit cards and making recommendations on that matter.
It provides for the presentation of a report to the minister as well as a response from the minister to the superintendant.
[English]
Colleagues, joining us for the first hour of today's meeting is Richard Bilodeau, Acting Assistant Deputy Commissioner, Civil Matters Branch, Division B, Competition Bureau.
[Translation]
Welcome to the committee, Mr. Bilodeau; if you have a statement, the floor is yours.
Richard Bilodeau, Acting Assistant Deputy Commissioner, Civil Matters Branch, Division B, Competition Bureau: Mr. Chairman, my name is Richard Bilodeau and I am the acting assistant deputy commissioner of competition of the Civil Matters Branch at the Competition Bureau.
Thank you for inviting me to appear today as you study Bill S-201, An Act to amend the Office of the Superintendant of Financial Institutions Act (credit and debit cards). While the bill does not directly relate to the scope and mandate of the Competition Act, the bureau is following developments in this area closely.
The Competition Bureau, as an independent law enforcement agency, ensures that Canadian businesses and consumers prosper in a competitive and innovative market place.
The bureau is responsible for the administration and enforcement of the Competition Act, which applies, with limited exceptions, to all sectors of the Canadian economy, including the financial services sector.
[English]
The bureau has been very active in the financial services sector over the last few years. I would like to give a brief description of two recent matters in this area as they may be of interest to the committee.
The first matter I would like to touch on is the debit card market. Specifically, I would like to review the matter of Interac's 2009 request that the Commissioner of Competition agree to vary a 1996 consent order to allow Interac to restructure from a not-for-profit association structure to a for-profit model.
Recognizing the importance of the debit market to Canadians, the bureau conducted a comprehensive assessment of Interac's request. Based on the information available at that time, the bureau announced in February 2010 that it did not support changing or removing the safeguards in the consent order, which are effective in protecting consumers from the potential anticompetitive activity subject to the consent order.
Second, I would like to briefly speak to the matter of credit cards. As committee members will recall, the bureau confirmed to this committee in the spring of 2009 that we had begun an investigation into certain practices of Visa and MasterCard. On December 15, 2010, we announced the filing of an application with the Competition Tribunal to strike down restrictive and anticompetitive rules that Visa and MasterCard impose on merchants who accept their credit cards.
I would be happy to answer questions on the bureau's investigation and application to the Competition Tribunal to the extent possible, which may be limited given that the matter is now before the court.
I would now like to turn to the matter being deliberated by this committee, Bill S-201. The bill before you today calls for the Office of the Superintendent of Financial Institutions to monitor the credit and debit card systems in Canada and provide an annual report to the minister regarding the operation of those systems, the fees and charges relating to such cards, and privacy of users.
As I mentioned at the beginning of my remarks, Bill S-201 does not directly relate to the scope and mandate of the Competition Act. However, the bureau continues to follow recent developments in this area with interest.
For example, the Commissioner of Competition welcomed the release of the Code of Conduct for the Credit and Debit Card Industry in Canada, which was announced by the Minister of Finance in April 2010. The bureau supports measures to increase transparency and flexibility for Canadian merchants and consumers.
In June 2010, as you know, the government also appointed an independent task force for the payments system review to conduct a wide-ranging review of the payments systems. The bureau will continue to follow the work of the task force, which is expected to report to the Minister of Finance by the end of 2011.
[Translation]
To conclude, the Competition Bureau understands the importance of competition in this very complex market to all Canadians, including retailers and consumers.
I would like to note that while we recognize that high prices are an important concern for Canadian consumers, the bureau does not have the authority under the Competition Act to regulate the daily operations of markets or the level of prices in any particular industry, including the pricing of financial services in Canada.
If the Competition Bureau finds evidence of a contravention of the Competition Act, in this or any other industry, it will not hesitate to act to ensure that Canadian businesses and consumers prosper in a competitive and innovative market place.
Once again, thank you for inviting me here today. I would be happy to answer your questions.
[English]
The Chair: We have one questioner, Senator Ringuette. If any other senators have questions, please let us know.
I wish to beg Senator Ringuette's indulgence and ask one process question before I turn the floor over to her.
For the benefit of everyone, you indicated in your presentation that the Competition Bureau has challenged certain Visa and MasterCard rules. Could you describe the process and what happens now and what the time frames might be?
Mr. Bilodeau: Absolutely. We filed our application to the Competition Tribunal on December 15. At that point, we triggered a first-time frame where Visa and MasterCard had 45 days from that point to file a response to our application, which they did last week on January 31. At that point, we have 14 days which brings us to next Monday, February 14, to file our reply to their responses to our application.
Tomorrow, on February 10, persons interested in participating in the proceedings, who may have the ability to bring a specific perspective, have the ability to seek from the tribunal leave to intervene in the proceedings. Parties interested in doing that need to do so by tomorrow.
There is a process that goes from there, where we are allowed to respond to those requests. It is up to the tribunal at that point to decide whether individuals seeking intervener status will be given that status.
From our perspective, there are a number of steps that will happen. First, there will be scheduling issues to sort out with the tribunal and Visa and MasterCard, where the tribunal will decide on the next steps and when those steps will happen.
For example, exchanges of documents are common in these proceedings, just like a fully litigated matter before a superior court. There is the possibility of examination for discovery and exchanges of experts' reports and witness statements, which brings us eventually to the hearing of the Competition Tribunal.
Unfortunately, I cannot tell you when it will be; I do not know. That is up to the Competition Tribunal to set. We will have to wait a few more weeks before we have a good idea when that hearing will be.
The Chair: If I were to make a guess, would I guess in months or in weeks?
Mr. Bilodeau: More months than weeks. If you look back at the history of the Competition Tribunal, it can be anywhere from eight months to a year. It varies, depending on the availability of judges, for example, and how busy they are.
The Chair: To follow through to the end, once the Competition Tribunal renders its decision, is there an appeal from that?
Mr. Bilodeau: There is an appeal that is allowed. If it is an appeal on a question of fact and law, they do not need permission; it is an appealable decision to the Federal Court of Appeal and then, obviously, to the Supreme Court of Canada, if we get that far.
The Chair: And if they get permission?
Mr. Bilodeau: From the Supreme Court, absolutely.
Senator Ringuette: You were right in your statement that you made in the spring of 2009, which was two years ago. The Competition Bureau came before us and informed us that it was reviewing a case with regard to Visa and MasterCard and their share of the Canadian market. At the same time, you also informed this committee that a similar process was going on in the U.K., in other European countries and also in the U.S.
It took the U.S. a year to come out with its position on the issue. Unfortunately, I have not followed the issue in the U.K. However, when the U.S. came out with its position, Visa and MasterCard rushed in to sign an agreement with the U.S. government rather than go to court.
Having said that, that was a year ago. They did that a year prior to your positioning with regard to Visa and MasterCard. During that two-year period of time, what research was done to arrive at your conclusions?
Mr. Bilodeau: I cannot get into every detail of our investigations because they are conducted in private, as you know. However, on credit cards, the market is very complex compared to many other markets. In our investigations, as you can guess in this situation, we spoke to many merchants and subject matter experts who informed us about how the market operates and gave us their views. We talked to participants in the marketplace from every angle. We need to be able to understand how the market operates so that we can come to a comprehensive and informed decision on what the next steps need to be.
In this case, after we did that comprehensive investigation, we came to the conclusion that we needed to take action, which we did in December.
Senator Ringuette: Is it possible for this committee to have access to the slate of documents in which you have invested Canadian taxpayers' money in order to come to a conclusion?
Mr. Bilodeau: The answer to that right now is, no. The Competition Act has confidentiality provisions to protect the investigation that allow us to conduct the investigation and to collect the information. However, during the course of the tribunal process, much of that information likely will come to light. It would be unreasonable to expect that we would file documents that we have collected during our investigation to make our arguments with the Competition Tribunal. Some of the information we have collected will be made available through that process.
Senator Ringuette: Will it be available publicly?
Mr. Bilodeau: As far as I understand how the Competition Tribunal works, you will not be able to access the website and consult everything. I do not want to be quoted on this, but I understand that if a document is made public in the court system, you are able to go to the court and seek to have access to some of those documents, unless they are protected by a confidentiality order of the tribunal or a protected order of the tribunal; that is up to the tribunal. Our investigations are covered by section 29 of the confidentiality provisions so we are unable to release the documents we have at this time.
Senator Ringuette: Can you tell me why is it that, unlike AmEx, Visa and MasterCard use Canadian financial institutions to issue credit cards? Why were Visa and MasterCard, who are not direct issuers in Canada, the ones targeted? Why were the financial institutions, who are the real issuers, not targeted? Why were they both not targeted?
Mr. Bilodeau: Visa and MasterCard are responsible for over 90 per cent of the transactions by volume. In our application, we are targeting the rules that they have promulgated. Those rules come from Visa and MasterCard and not from the others. We are trying to change the conduct engaged in by Visa and MasterCard. That is why we targeted Visa and MasterCard. Given that they are responsible for 90 per cent, we thought they had the greatest impact on the marketplace. Therefore, they are the respondents to this action.
The Chair: If I may, Senator Ringuette, I would ask Mr. Bilodeau to outline briefly the rules they are challenging that he referred to as being promulgated by Visa and MasterCard.
Mr. Bilodeau: Essentially, we are challenging three rules. The first rule is the honour-all-cards rule, as it is referred to commonly. It requires merchants who accept Visa or MasterCard to accept all of them. They cannot choose which cards within one brand that they will accept. The second rule we are challenging is the no-surcharge rule, which prohibits merchants from adding a surcharge on a particular transaction made with a credit card. For example, on a premium credit card that carries a higher cost to the merchant, a merchant is not allowed to add an additional cost to the transaction. The third rule prohibits discrimination between card brands.
Senator Ringuette: Did you say, ``prohibits?''
Mr. Bilodeau: I mean discrimination between card brands. For example, it prohibits applying a different surcharge between Visa and MasterCard.
The Chair: I ran into a situation when dealing with a taxi driver. I was told that if I wanted to use a MasterCard or a Visa, I would have to pay an extra $1.50. Who made that rule?
Mr. Bilodeau: I understand that to be a City of Ottawa bylaw. I am not sure if it is a rule of Visa or MasterCard, but you cannot surcharge unless it is permissible by law. If there is a bylaw permitting a surcharge, then that is how they do it. With regard to taxis, it applies to credit cards and debit cards.
Senator Ringuette: Perhaps I could add to that. As a business, a taxi must use the mobility technology provider because they are always in motion, contrary to the business that is located in a stationary establishment, where the cost is less.
I will go back to your finding, which ties into the chair's question. You said that there were three rules. We heard from witnesses from Visa and MasterCard before the committee in 2009. They said that they do not sign contracts with Canadian merchants and, therefore, they are not responsible. They do not sign contracts that force merchants to honour all cards, and they do not force merchants to surcharge, et cetera. Representatives of Visa and MasterCard before this committee on that issue told the members of this committee, publicly, that they do not sign contracts with merchants. Yet, the three rules to which you refer apply directly as between a service provider, such as Visa and MasterCard, and merchants. There is another in-between, such as the banks are between the credit card companies and the consumer.
Mr. Bilodeau: Yes.
Senator Ringuette: Visa and MasterCard, being wise players in the market, have devised an in-between that sits between them and the merchant community — the technology provider. Where does the technology provider in the system stand in respect of the three rules, given that Visa and MasterCard publicly said before this committee that they do not sign contracts with merchants?
Mr. Bilodeau: I cannot speak for the acquirers or the service providers that you refer to. I do not want to speak to the testimony of Visa and MasterCard before this committee. Our understanding of the market, as you can see on the graph in the way that a transaction flows, is that the acquirer is the in-between between a merchant and Visa and MasterCard. Our understanding of the issues, as we laid out in our application before the Competition Tribunal, is that Visa and MasterCard have rules that require acquirers to impose these rules upon merchants.
Senator Ringuette: Exactly. I thank you very much because it took us two years for certain members of this committee to understand that the finger is being pointed by both Visa and MasterCard at either the Canadian banks and the consumers of banking institutions, or the technology providers. They are trying to wash their hands of any responsibility in the marketplace and I want to congratulate you for a job well done.
The Chair: We will see what happens once the hearing is held. Maybe you will be able to reiterate your congratulations and maybe you will not.
Senator Ringuette: Absolutely. I have confidence.
Senator Hervieux-Payette: I also am happy but I think it is not just the members of this committee; I think probably a great majority of Canadians have problems understanding who the players are in that game. We are not the only ones.
None of us has been in that business — at least, I do not know any bankers here; are there some? We have some financial background but not necessarily in banking or any business related to that industry.
I want to stress that we may not have been as informed before we had all these hearings, and I would like to congratulate my colleague, Senator Ringuette, for educating us on this.
The Chair: See, we are a mutual admiration society here.
I will turn the floor over to someone who does have some financial background and knowledge, Senator Massicotte.
[Translation]
Senator Massicotte: I am going to continue congratulating you because your position is similar to that expressed in the committee's report, which was unanimously adopted by all members. We recommended the same measures as you are advocating. You are obviously very brilliant because you are following this committee's recommendations.
That being said, however, when we heard the witnesses on this matter, for the three measures you are proposing, there was a debate among them. Will this permit adequate competition because that is in fact what you are looking for. We believe there are two choices in a free market: you ensure that there is adequate competition or you assert your authority. I assume you have read our report.
Mr. Bilodeau: Yes.
Senator Massicotte: It is well written. We debated whether the measures were adequate because a fundamental condition in our market is competitiveness. Adequate competition guarantees benefits to society. Otherwise, the government gets involved, as it occasionally does. That is the debate we had. Senator Ringuette had the same questions.
What is your bureau's opinion, if ever the three practices are adopted? Are you convinced? Do you have evidence from other countries whether those three measures will permit real competition among the major players? Will that solve the problem?
Mr. Bilodeau: We believe that, if we are able to convince the courts to abolish these three sets of regulations, yes, that will increase competition between Visa and MasterCard. We pay among the highest rates in the world. It is more costly in the United States than here, but in Australia and New Zealand, in Europe, virtually everywhere, we pay more than in those jurisdictions. Some of those jurisdictions allow the surcharge, and the rates are lower there. We firmly believe this, and that is why we have taken this kind of action. If these regulations are eliminated, there will be more competition between Visa and MasterCard. This has the potential to lower the level of interchange fees and to cost merchants and consumers less.
Senator Massicotte: Merchants can tell consumers: instead of a credit card, you can pay cash and I will give you a discount, or there will be a surcharge if a credit card is used.
Mr. Bilodeau: We are not telling merchants to apply a surcharge; we want to give them the tools either to use the surcharge or to refuse to accept a premium card that costs more. We can give merchants these tools so they are in a position where they have more bargaining power with Visa and MasterCard.
Senator Massicotte: It is a good debate that we are having in this committee, to say: we have nothing to lose, we should try, and if that does not work, the government could take other measures. I hope it is good enough because we have heard from witnesses who said: I am afraid of scaring off my clientele. When you use a credit card, it is easy; it is known. It is true that consumers do not know the real cost; they indirectly pay for this service. Time will tell.
In your presentation, you refer to the Interac system, which is fundamentally important and separate in Canada, where we have a system in place that is not costly; it is a cost per transaction, not a percentage. Here we see two major players, Visa and MasterCard, that are entering Canada and are trying, with considerable promotion, to enter the debit card market. I believe, contrary to our report this time, that we were hoping to release Interac and to give it a bit of a free hand to compete against those two major players. You have adopted a policy contrary to that. You want to maintain the existing policy for Interac.
Can you explain your rationale a little more? We saw a major threat in the two major players. Interac is caught up in that; consumers do not know the real cost, but they like the gifts they receive and that give them the impression it is free.
Mr. Bilodeau: You have to put yourself back in the context in which we made the decisions in February last year. Interac had asked us to release it from its non-profit status so that it could become a for-profit corporation. Our role — a consent order was issued by the tribunal in 1996 — was to look at the market conditions last year and to see whether the provisions in the consent order still had a place in today's market.
In making that decision not to agree to release them from that condition of being a non-profit entity, we had to consider that Interac was still dominant in the debit market. It still has a large market share, enormous when you compare it to other debit companies. We believe that the provisions that were put in place to prevent Interac from being able to exclude certain players from the market still had a place so that the debit market would remain competitive.
Senator Massicotte: You are referring to the decision made nearly a year ago?
Mr. Bilodeau: Yes.
Senator Massicotte: You can talk about the past, but a lot of things have changed now. There are two major players doing a lot of promotion. Is this a decision that deserves to be supported? Will a review be conducted based on changing facts?
Mr. Bilodeau: We are not the ones who decide whether the order should stay in place. It was the Competition Tribunal that issued the order in 1996. It is up to the tribunal to decide whether it still has a place. What Interac could have done last year, and what it can do now, is go to the tribunal and ask to be released from that.
When we made our decision in February, we communicated it to the public: we are open to certain changes and further discussion if the market changes. So it is the tribunal that is keeping the order in place.
Senator Massicotte: Pursuant to your recommendation nevertheless.
Mr. Bilodeau: Yes, but that has never been before the tribunal. Interac has to ask the tribunal to do that. It has not done so. It is really up to them to take those measures, to go before the tribunal and to ask it to change the order. They chose to come and see us to get our consent in advance. That is one method. They can come and see us first.
Last year, we remained open to discussing the matter with the association, but the market at that time was still dominated by Interac, and we believed that the consumer protection provisions should stay in place.
Senator Massicotte: And what is Interac's percentage of the market today?
Mr. Bilodeau: I could not give you an answer.
[English]
Senator Gerstein: I would like to go through the process as I understand it and try to relate the process for the code of conduct and the adoption of it, and what it is that you are looking to the Competition Tribunal for.
As I understand it, in May 2010, which is less than a year ago, all of the processors, banks, et cetera, adopted the code of conduct. The next specific date was August 2010 when the code was to take effect. As I understand it, it is actually this month, February 2011, which we have just entered, when the disclosure must take place.
Could you relate what it is they have agreed to in the code of conduct versus what you are looking to the Competition Tribunal to rule on? Why would you not give the code of conduct some time to see what it is? It seems like you have jumped into the middle of it.
Mr. Bilodeau: We are supportive of the code. What the code did was very good. It increased transparency, information to merchants, and the flexibility of merchants.
Senator Massicotte: As recommended by this committee.
Mr. Bilodeau: Take a step back. We have a specific mandate to enforce the Competition Act. We investigated the practices of Visa and MasterCard. Under the provisions of the Competition Act, we determined, in our opinion, that there was a contravention of the act, which is why we took action. We view our action as complementary to the code of conduct. In fact, it builds on the code of conduct to give more tools to merchants. The two actions do different things on parallel tracks, if I may suggest. The code of conduct makes clear that discounting for cash and for debit with varying discounts for Visa and MasterCard is a tool in the tool kits of merchants. We are trying to give them more tools by eliminating the honour-all-cards rule and the no-surcharge rule in the context of determining that there was a contravention of the Competition Act. Ultimately, the Competition Tribunal will make that determination, we believe.
Senator Gerstein: Would you not have thought there was a basis for seeing what the first disclosures were, and how they were working with the new code of conduct, before putting a court challenge or a tribunal challenge to it?
Mr. Bilodeau: We always start from the premise that more information, in this case for merchants or consumers, is always a good thing. When consumers make purchases, the more informed they are the better it is. That is a plus. It is one thing to know what you are paying but it does not help if you cannot do anything about it to increase competition. It is good to increase their knowledge to help them make better decisions. The step beyond that is being able to inject more competition within Visa and MasterCard.
The Chair: Mr. Bilodeau, I have one question. If the tribunal were to find in your favour, what could they do? Could they order that the practice cease? Could they impose a fine or do both?
Mr. Bilodeau: They cannot impose a fine under section 76 of the Competition Act, under which we are bringing this application. We are seeking that they have an order prohibiting the use of these rules.
Senator Moore: What happens if they get a favourable decision?
You cannot impose a fine. You can ask the companies, and the courts can direct them in their ruling, if you receive the finding you seek that they must eliminate these rules from the contracts. How do you know whether they have complied?
Mr. Bilodeau: An order of the tribunal is the same thing as an order of the court. If an order of the tribunal is not obeyed, there are consequences.
Senator Moore: What would happen?
Mr. Bilodeau: It is a criminal offence to disobey an order of the tribunal. Under the Competition Act, it is a criminal offence to disobey an order of the tribunal.
Senator Moore: That is good to know. The third rule that you said you were challenging prohibits discrimination between card brands. How does that work now? What are they doing? Can you explain that? I did not understand what that meant.
Mr. Bilodeau: Merchants under that rule are not permitted to treat the brands differently.
Senator Moore: Practically speaking how does that work?
Mr. Bilodeau: If we are successful before the tribunal in eliminating the no-surcharge rule, getting rid of the rule on no discrimination would allow a merchant to apply a surcharge on a Visa but not necessarily on a MasterCard. That would be discriminating between the two brands. It would not have to be the same surcharge on both brands.
Senator Moore: The second rule on no surcharge has been eliminated.
Mr. Bilodeau: Yes.
Senator Moore: If you get that one, it means that the merchant can apply a surcharge?
Mr. Bilodeau: Yes.
Senator Moore: The third rule says that you can charge varying amounts on various cards?
Mr. Bilodeau: It would allow for that, yes.
[Translation]
Senator Hervieux-Payette: I have a technical question concerning your organization. How much time did it take you to conduct your investigation, first to file your document with the tribunal? How many people work on these kinds of files? I just want to know the amount of work that represents for an organization such as yours.
Mr. Bilodeau: Regardless of the case, when a case is a priority for us, I believe that the fact that we filed it with the tribunal gives you an indication. We put a lot of resources into the case, but every case that goes to the tribunal requires a lot of resources. It is not something that can be done by one or two persons.
Senator Hervieux-Payette: How big is the staff of your organization? Do you have the resources to conduct a number of investigations at the same time?
Mr. Bilodeau: We always want more resources. We have the resources that we have. We prioritize our cases and try to select cases in which a violation of the act has had significant impact on the market. We have the resources that we have and we have enough to be able to do more than one case.
Senator Hervieux-Payette: For more than one case at the same time?
Mr. Bilodeau: We have the resources to do more than one case.
Senator Hervieux-Payette: Are we talking about 500 persons or 50?
Mr. Bilodeau: The bureau has between 400 and 450 employees. I would not be able to tell you the exact number, but it is between those figures.
Senator Hervieux-Payette: To prepare the case. So the tribunal is completely independent.
Mr. Bilodeau: The tribunal is independent of the Competition Bureau.
Senator Hervieux-Payette: If we have young students who want to go and work for you, what kind of training, what kind of expertise do you have at your agency?
Mr. Bilodeau: In general, the officers who conduct the investigations have legal or economic training. We have people who have master's degrees in business, MBAs, and we have people in commerce, but it is generally economics and law that we have.
Senator Hervieux-Payette: When you go to the tribunal, who goes and presents the evidence? Is it the commissioner? Will he be accompanied by a team of experts?
Mr. Bilodeau: Before the tribunal, our lawyers who represent the commissioner, handle the case. We can expect that an expert will come and testify.
Senator Hervieux-Payette: Witnesses?
Mr. Bilodeau: Normal witnesses. That is the usual method for all cases that go to the tribunal.
Senator Hervieux-Payette: Are these public hearings?
Mr. Bilodeau: Yes, with an exception at times; there may be a business that comes to testify, that wants to discuss sensitive commercial information and does not want its competitors to have access to it. The tribunal may exclude the public from the room for that part, but, in general, everything is public 95 per cent of the time.
Senator Hervieux-Payette: Is it televised or not?
Mr. Bilodeau: It has not been televised to date.
Senator Hervieux-Payette: I think these are interesting topics for the general public.
Mr. Bilodeau: It would be up to the Competition Tribunal to answer that.
Senator Hervieux-Payette: As a representative of Canadian citizens who are affected by all the decisions you make, I get the impression this is something that might be very useful for economic education. That is why I focused on this agency, its credibility and its operation. To move forward with prosecutions, what kind of evidence are we talking about? Is it a preponderance of proof or a proof beyond a reasonable doubt?
Mr. Bilodeau: It is a preponderance of proof at our tribunal. In a criminal context, it is proof beyond a reasonable doubt. At the tribunal, it is a preponderance of proof.
[English]
Senator Greene: Would you review the main reasons that the Competition Bureau denied Interac's request to vary the consent order?
Mr. Bilodeau: When we looked at the Interac's situation last year and in 2009, we determined that they were still the dominant company in the debit card market. We felt that the safeguards put in place by the order of 1996 were necessary to protect competition in the debit card market. That is why we felt the protections were still required, based on Interac's dominant position in the market.
Senator Greene: Okay. It seems like a very arbitrary decision. Interac had a different view and it understands the market it is in as well or better than the bureau would.
Mr. Bilodeau: We undertook a comprehensive review. It is a complex issue and we took their request very seriously. We conducted a number of market contacts and spoke to a number of subject matter experts. It is not a decision we took lightly.
We took it after thinking about it awhile and talking to a number of market participants. We did our due diligence. We know how important it was.
Senator Greene: What were the two or three main reasons that led to your decision? What are the main issues?
Mr. Bilodeau: Back into 1996, the reason behind the order was because Interac engaged in practices that tended to exclude smaller banks from participating in the network. The tribunal put in safeguards for that, and one of those safeguards was having them operate on a not-for-profit basis.
Transporting that to 2009-10, we looked at the marketplace at that time. Interac still had a large market share. Because of that, we felt that safeguards which the order had put in place in 1996 were still justified in February 2010 when we made that decision. That is essentially why we took the decision we took.
Senator Gerstein: Supplementary? Going back to the situation with Interac, as I recall, their main plea was to get a level playing field. Since the consent order was put in, they had not received any capital from their supporters, which I believe went up to something like 64, and they were not able to develop their technology.
In fact, they may have maintained market share but it was going to deteriorate it because you cannot be in that type of business without investing in the future. They did not have any capital to do so, remaining as a not-for-profit. I do not know how much you are at leisure to be able to talk about some of these things. How you reacted to it appears to be so arbitrary.
Mr. Bilodeau: I cannot get into the details but we did offer Interac some changes. We were willing to accept some changes to allow them to make certain changes. They have that possibility if they so wish and want to discuss it.
In the time we made our decision public, we stated that we were willing to make certain changes to allow them to be a bit more flexible, which would preserve the safeguards I talked about earlier to protect competition and consumers.
Senator Gerstein: Did anything allow them to have additional capital?
Mr. Bilodeau: I cannot get into the discussion we had with them. Those discussions are covered by confidentiality. I wish I could but —
Senator Gerstein: So do we.
The Chair: I think Interac is coming tomorrow, so you will be able to ask them some of those questions.
Senator Massicotte: I know your discussions are confidential but the judgment by the tribunal was not, and the rules emanating to Interac made it clear there is a return on the investment. What was not clear was the way it was calculated. However, I think if they invest more, they do get a return on that investment, am I correct? They may disagree with the rate of return but there was something in there about that issue.
Mr. Bilodeau: I would have to go back and look. I cannot answer that question right now.
Senator Ringuette: I have here your press release of December 15, where you reiterate the fact that merchants in Canada pay an estimated $5 billion annually in hidden credit card fees. Canadians purchase about $240 billion with those credit cards on a yearly basis.
Then you say that Canada has the highest fees in the world. It goes from 1.5 per cent to 3.9 per cent; I have seen merchants' statements that they have sent to me — 3.9 per cent over the last three years.
Three years ago, the Retail Council and I asked the government to put forth legislation, the same as in Australia. If it had been done at that time, Canadian merchants, instead of paying $5 billion annually on hidden credit card fees, would have been paying probably around $1.2 billion. That would have been a savings of $3.8 billion a year times three years; we are looking at over $10 billion in savings for the Canadian small and medium-sized business community, notwithstanding and not counting the effect on consumer prices.
I really hope that this process goes ahead. I hope that once and for all, whichever party rules the government, that they recognize the importance and emergency of this issue; and how this issue not being dealt with, as was done in Australia, is not helping Canadian jobs and it is not helping the Canadian economic situation.
I want to reiterate my support.
The Chair: I think we know where Senator Ringuette stands.
Senator Gerstein: I do not know how familiar Mr. Bilodeau may be with the Australian experience, but my recollection was when we had testimony, there was no indication that retail prices fell as a result of the changes in the Australian legislation, nor was it appropriate for Canada.
Mr. Bilodeau: I can answer that partially. A lot of what we do at the bureau does not involve consumers directly — it involves upstream markets, for example. We feel that if through competition, through the elimination of these rules, it can result in low interchange fees for Visa and MasterCard, Canadian retailers are mostly in very competitive environments and, because of that, eventually the reductions in interchange fees and the fees merchants pay will be reflected in consumer prices.
The Chair: Thank you very much for coming this afternoon, Mr. Bilodeau. We have all been very impressed with your evidence.
I know you are acting under constraints because of the matter before the tribunal, but notwithstanding that, you did extremely well. I am sure everyone on the committee hopes that when next you come before us, you will no longer be wearing the acting title but rather will be assistant deputy commissioner.
Honourable senators, for the second hour this evening, we are joined by three witnesses. I welcome from the City of Ottawa, Ken Hughes, Deputy Treasurer Corporate Revenue and president of the Association of Municipal Tax Collectors of Ontario; and through the wonder of video conferencing, from the University of Saskatchewan, Richard Florizone, Vice-President, Finance, and Marion Van Impe, Director, Student Accounts and Treasury. Welcome.
Honourable senators, Mr. Hughes has an opening statement that has been submitted in English only. Do I have permission to ask the clerk to distribute it?
Hon. Senators: Yes.
The Chair: I presume that neither of you, Mr. Florizone or Ms. Van Impe, has an opening statement written. Will you provide comments verbally?
Richard Florizone, Vice-President, Finance, University of Saskatchewan: I apologize. I could have sent it to you in advance. I could send it to you afterwards. It is just under two pages and six or seven minutes.
The Chair: Thank you. Without further ado, do our guests from Saskatchewan wish to go first?
Mr. Florizone: I would be pleased to do so.
The Chair: Please proceed.
Mr. Florizone: Thank you for the introduction and the opportunity to appear before the committee and inform some of your deliberations.
I understand that your mandate in reviewing Bill S-201 is to look at the role of the oversight body needed to monitor and make recommendations relating to the use of credit and debit cards in Canada. I thought that my colleague, Ms. Van Impe, and I would try to share our recent expertise with credit and debit card fees at the University of Saskatchewan as a case study to inform your deliberations.
By way of background, the University of Saskatchewan as part of the Canadian Association of University Business Officers, CAUBO, strongly supports the code of conduct for debit and credit card companies as it makes fees and rates more transparent to consumers, and promotes competition and choice for business. In our business practices, we strive to balance the desire to be client oriented with the need to be responsible with public funds entrusted to our institution, while also being conscious of what our comparator institutions are doing. I will tell you about our history with credit cards.
Universities, as you know, are large enterprises. We have revenues from many sources, including tuition, bookstores, residences, food services and donations. Our revenue in any given year is approximately $800 million, similar to mid-sized Canadian companies. In May 2000, the University of Saskatchewan began accepting credit cards for tuition payments. At that time, our estimate was that this would cost the university approximately $140,000 per year based on credit card fees at the time of 1.6 per cent and our estimate that about 18 per cent of tuition would be paid by that method.
During the following 10 years, both participation and fees increased. It is quite convenient for students and their parents to use credit cards and so participation increased to 42 per cent. As credit card use expanded during that same period, the fees charged by the credit card companies increased from 1.6 per cent to 1.9 per cent. In our fiscal year 2009-2010, the cost escalated to $900,000.
As we and our partner universities across the country watched the system grow, we realized that the cost was no longer sustainable. We looked at what other universities were doing and found that many universities in Canada have never accepted credit cards for tuition payment. Those would include McGill University, the University of Toronto and the University of Ottawa. Others like us have discontinued credit cards either before we did so or at about the same time due to their high cost. That includes the University of British Columbia, the University of Alberta and Dalhousie University.
A survey by the Canadian Association of University Business Officers reported in 2009 that approximately 70 per cent of universities either do not accept credit cards for tuition or were considering discontinuing the acceptance of credit cards.
Based on surveys and consultations with our student groups last year, we determined that acceptance of credit cards provides benefits to both students and the universities and that we wanted it to continue. However, because of the high costs and because many other tuition payment options are available to students, we decided to attach a user fee to those who chose to use credit cards for tuition payments. We were supported strongly in this by our students' union. We passed on the cost to the students and/or their parents.
The credit card payments will continue to be accepted and, to clarify, the fee applies only to tuition fees. We would not apply fees to other transactions, such as the purchase of books in our bookstore or a request for a transcript.
When we made that change, we went into extensive negotiations with the credit card companies. MasterCard is still accepted at the University of Saskatchewan for tuition fees but with a 1-per-cent user fee for all tuition payments. That 1 per cent represents about one-half of the university's costs. Visa agreed to allow cash discounts consistent with the code of conduct but would not allow a percentage user-based fee. Since we were not able to reach a compromise with them, we no longer accept Visa for tuition payments.
I would like to give you a sense of what has happened since that time in the last year. As a result of the change, the majority of students who formerly paid by Visa have changed to online banking. As you know from your deliberations, that has resulted in very low fees to both consumers and businesses. There has not been a significant change in the level of MasterCard payments following the introduction of the 1-per-cent fee. Basically, the use of MasterCard for tuition fee payment, even with the 1 per cent, has not changed.
Overall, the percentage of tuition paid by credit card has fallen from 41 per cent in our 2009-2010 fiscal year to less than 20 per cent this year. You can see how it has fallen by half mostly because of Visa.
The university has had strong support from the students for the change. It has gone well. We have had requests for information on our implementation from other post-secondary institutions as well as from MasterCard Canada. That completes my opening remarks. We will be pleased to take questions. My colleague, Ms. Van Impe, was deeply involved in the implementation and worked more closely with the credit card companies. Thank you.
The Chair: Thank you, Mr. Florizone. Mr. Hughes, please proceed with your presentation, after which we will go to questions.
Ken Hughes, Deputy Treasurer Corporate Revenue, City of Ottawa, and President of the Association of Municipal Tax Collectors of Ontario: Mr. Chair, senators, thank you for allowing me to address your committee. My name is Ken Hughes. I am the Deputy Treasurer of the City of Ottawa and the President of the Association of Municipal Tax Collectors of Ontario. While I know the committee is familiar with the City of Ottawa, the members may not be familiar with the Association of Municipal Tax Collectors of Ontario. Our association of about 500 includes members from almost every municipality in the province of Ontario, and a number of companies and organizations that work within the field of municipal property taxation. We are a varied group of financial and tax professionals with broad responsibilities and areas of expertise.
We work on our municipal budgets, develop tax policies and collect provincial offences, parking tickets and other municipal receivables. We bill and collect taxes, appeal over- and under-assessed properties, liaise with upper and lower municipalities, as well as the federal and provincial governments. In short, we are valued employees who contribute significantly to the financial well-being of our organizations.
Generally, it is our members who are responsible for the revenue of the municipality and who are therefore responsible for the relationships with the credit card companies. In my presentation, I will use examples from the City of Ottawa, which are representative of the situation in other municipalities.
It is well known that municipalities, as the junior governments, have experienced significant budgetary difficulties in recent years. At the same time, there has been pressure to maintain existing service levels while holding the line on tax increases. To lessen the burden on the taxpayer, municipalities have turned to user fees where the consumer of a service can be specifically identified.
We are all familiar with a user fee for a bus trip or to use the local swimming pool or skating rink. Local governments, however, are now identifying the beneficiaries of various services that used to be offered at no charge for cost recovery purposes. After determining the cost, the users of those services are charged for the services that they consume.
Municipalities across Ontario and across the country are now charging fees for new accounts, changes of ownership, replacement copies of lost bills, changes to mailing addresses and so on. As an example, for the City of Ottawa, these user fees reduce tax bills by about $6 million annually.
I am here to talk to you about a significant and growing expense for municipalities that could be addressed by the subject of this meeting, namely, Bill S-201. I am talking about the cost associated with payment cards. The City of Ottawa, like most municipalities, accepts credit cards for payment of some services. You can purchase bus tickets, pay for swimming lessons or enrol in a first aid course and pay with a credit card.
Last year, the City of Ottawa accepted $63 million in credit card payments. For the convenience of some of the customers of the City of Ottawa, all of the taxpayers of the City of Ottawa had to pay almost $1.4 million in fees for credit cards. The situation would be similar in other municipalities across the country.
Unfortunately, the agreements with the payment card industry, as we heard earlier from Mr. Bilodeau, do not readily permit the charging of a user fee to those who pay with a credit card to recover these costs. It is for this reason that almost all municipalities will not allow the payment of property taxes with a credit card. It is just too costly.
For municipalities, these payment card fees, known as merchant fees in the business, range between just under 2 per cent to over 3 per cent. Although most people know that merchants have to pay these fees, they are not aware that the fee for the merchant differs by card. Generally, the more benefits for the cardholder — like travel miles, for example — the higher the fee for the municipality. This means that two customers making the same purchase can cost the municipality two different amounts. Without the ability to charge these fees to the users of credit cards, the costs incurred are transferred to all of the taxpayers of the municipality.
However, there is a new and growing cost of accepting credit cards that many municipalities and merchants are now only discovering. The increased incidence of credit card fraud has necessitated the improvements of controls around credit cards.
The industry has developed tough new standards that have to be met to protect credit card data. Municipalities and other merchants have to meet these new stringent requirements in order to be able to accept credit cards.
These standards require a detailed review of credit card practices and a continuing certification by an independent party of the organizational compliance with these new standards and practices. To obtain PCI, payment card industry, compliance, the City of Ottawa has spent $2.5 million to date and will require an additional expenditure of over $800,000 each and every year to remain compliant.
As the agreements with the payment card suppliers do not allow the municipality to readily pass on these costs to the credit card users in the form of user fees, all taxpayers of the City of Ottawa and any other municipality must cover these costs. As a holder of a credit card, I am pleased to see these tough new standards, but as a municipal property taxpayer and a municipal tax professional, it is frustrating that these costs cannot be passed on to the users.
In summary, while I acknowledge that the convenience of credit cards comes at a cost, I believe that municipalities and other merchants should, at their option, be able to pass on the significant costs of the merchant discount fee, as well as the increasingly growing PCI compliancy costs, to the users of credit cards.
Thank you, Mr. Chair, and members of the committee, for the opportunity to address you.
The Chair: Before I turn the floor over to our first questioner, Senator Harb, you heard the evidence from Mr. Florizone at the University of Saskatchewan. What would prevent you from doing what they did?
Senator Harb: That was one of my questions.
The Chair: Sorry.
Mr. Hughes: Mr. Chair and Senator Harb, the agreements that we currently have with the payment card suppliers prevent us from doing that. It is something that we have explored, but as Mr. Bilodeau indicated to the members of the committee earlier, there are those three rules that we must comply with. Although they would have no problem with us offering a discount for those people who paid cash — for example, for swimming lessons or bus tickets — currently we are not able to charge a user fee.
The Chair: Presumably that could be renegotiated when the agreement expires, is that correct?
Mr. Hughes: Presumably, four years from now.
The Chair: Next time he is in town, I will ask Mr. Florizone to come and give a seminar at Ottawa city council on how it is done.
Senator Harb: You both spoke about the convenience of the card but also the cost that comes with it. Have you done any analysis in terms of the saving that you would get as a result of, for example, using the credit card versus the cost?
For example, if someone was to pay you by cheque, often those cheques bounce and you have to chase those people who have given you a payment by cheque. Furthermore, if someone pays you in cash, you have to store the money; you need people who will take care of that. At the end of the month or the week, you would have to bundle all that money and put it on a truck and take it to the bank, so there are costs involved in all that.
It would be interesting to find out whether any cost analysis was done, taking all those issues into consideration — looking at the good and also the bad and figuring out, on balance, what we are dealing with. Have you done any study?
That question is for both of you.
Mr. Hughes: That is a good question and certainly we have.
The reality is that as a municipality — and it may differ for a university setting — we have to maintain all of the regular channels of payment. There are no savings afforded to us as long as we need a client service centre where someone can come and pay by cheque or cash.
As long as we are receiving cash payments, we still need the secure car services, et cetera, to handle the deposits. We still need the remittance processing equipment to handle cheques.
You are absolutely correct that one of the risks of a payment by cheque is that the cheque may not be honoured. The reality is that we have an excellent group of collectors who ensure they get that money. I am pleased to say that we have one of the highest collection rates in the province.
More importantly, we would engage in a denial of service for someone whose funds were not honoured. Generally, we are talking about the registration for a swimming program or for something along those lines. I would have to say that, in the end, the costs of the credit cards do not outweigh the savings.
Mr. Florizone: That is exactly the question we asked before we went down this path. I wish to echo Mr. Hughes's comment that we still need the cash option. There is not a savings because we still need the infrastructure in place to accept cash.
In terms of the bad debts, that is definitely something to consider. Maybe this is something, as Mr. Hughes indicated, that it is different for public organizations versus private; maybe it has to do with the nature of the business.
Like Mr. Hughes, we have ways of dealing with that specifically for universities. Unless your debts are paid, we will not award you your degree. That gives us a fairly powerful tool. As well, we looked at our bad debts and felt that the benefits outweighed the costs. Ms. Van Impe, is there anything else you want to add on the bad debt issue?
Marion Van Impe, Director, Student Accounts and Treasury, University of Saskatchewan: One of the reasons for the decision not to pass on the full cost of our credit card, including the PCI compliance that Mr. Hughes mentioned, was that we recognized there were some benefits to the university as well. We receive money more quickly and we need fewer clerical staff to process online tuition payments. There are benefits to us. The cost is very expensive but the cost of our clerical staff is not $900,000 a year. I have only four people accepting student payments, and they are not paid that much. It was a good decision to implement the fee to try to recover a portion of our costs while recognizing that there are some benefits to the university as well.
The Chair: What do you do about donations? Are you happy to accept my donation by credit card?
Mr. Florizone: Absolutely.
Ms. Van Impe: Absolutely.
The Chair: I thought you might be happy to do that.
Ms. Van Impe: We will take that number down.
The Chair: On a further point of clarification, Mr. Florizone, did you have to wait for the expiry of an agreement in order to renegotiate with the credit card companies? Mr. Hughes said that currently his hands are tied because of an agreement.
Senator Moore: He is locked in for four years.
Ms. Van Impe: We had another four years remaining on our agreement but we pushed hard with the credit card companies. Obviously, we were not successful with Visa but MasterCard has a program, which they do not advertise widely, for universities and governments whereby they will allow a convenience charge. They restrict it to non-profit areas so it is not available to the retail sector. I have had discussions with MasterCard subsequent to our implementation so they can see how it is going. They realize that their stats have not changed in our marketplace, so they are pleased with our implementation. I am pleased to say that we have a good working relationship with them.
The Chair: Mr. Hughes is taking notes. Are you not a government, Mr. Hughes?
Mr. Hughes: I want to indicate that we are talking to our supplier, and proposals are on the table. When you look at the significant cost and the volume that we are doing, it puts us at a different level on the PCI compliance costs. To be honest, that is the biggest issue on the table. However, we are talking to the supplier and we are expecting proposals. It will be better than what we are paying now. We have asked the supplier to address the passing on of user fees, but at this time we cannot pass on user fees.
Senator Ringuette: I thank you both for being here. This committee must acknowledge the impact on government, universities, Crown corporations, et cetera, of these credit card merchant fees. The term is ``merchant fees.'' You are not merchants, but you are certainly paying a great deal in fees.
I will go first to Mr. Florizone and Ms. Van Impe with regard to the University of Saskatchewan and their experience. I find it absolutely unacceptable that Canadian parents and students who want to pay tuition fees with a credit card have to pay, in the case of MasterCard with your new agreement, an additional almost 3 per cent. In your new agreement on user fees, MasterCard has not reduced their fees to you. They are still receiving the same amount of money that they used to receive. However, the parents and the students are paying 1 per cent more because of the user fees.
MasterCard had a 41-per-cent increase in profits for the last quarter only, as dated February 3, 2011. We are playing their games. In Australia, for any government, university, Crown corporation, et cetera, fees are capped for Visa and MasterCard at 0.33 per cent, not 1.9 per cent or 3 per cent. It has been at 0.33 per cent for the last seven years. Can you imagine the savings that Canadians could have had at that rate? Can you imagine how more alluring it would be for the financial management of students and parents to pay tuition fees with a credit card at that rate? We are talking about the same taxpayer that also deals with the municipal, provincial and federal governments. All that money is lost because Visa and MasterCard are reaping historic profits on the backs of the same Canadian taxpayers.
I understand that, at the university level, you had to take some kind of measure because that was unacceptable. On the other hand, we must recognize that by doing so, MasterCard has not reduced its user fee for tuition. Instead, it has increased the consumer price for tuition by 1 per cent.
The Chair: Would you like to comment on that, Mr. Florizone?
Mr. Florizone: Yes, briefly. Our overall philosophy is that the credit card companies provide a valuable service. The issue is: What is that service worth and who should pay for it?
Senator Ringuette: What is reasonable?
Mr. Florizone: How much should it cost? Who should pay it? That is where we have differed with them because of the growth in the costs.
I want to clarify one factor on the math about 3 per cent. The cost is 1.9 per cent.
Ms. Van Impe: That is the average cost.
Mr. Florizone: On $100 of tuition, $1.90 would go to MasterCard. If someone pays with MasterCard, they would pay $101 and $1.90 would go to MasterCard. It would be split between the student paying and the parent. It is not really 3 per cent. It is not fair to add 1.9 per cent to 1 per cent. However, I am not sure if I explained it well.
Senator Ringuette: The user fee is 1 per cent?
Mr. Florizone: It is 1 per cent on the user fee and MasterCard gets 1.9 per cent. The 1.9 per cent does not come from the university; it comes from the person paying the tuition.
Senator Ringuette: I understand. Mr. Hughes, do you want to talk about that?
Mr. Hughes: We are talking about the same issue of a fair rate and who should pay the rate? Currently, without the ability to charge user fees, all of the taxpayers of the City of Ottawa, even those who do not open credit cards, are paying not only the user fees but also the PCI compliance costs.
Senator Hervieux-Payette: Mt question is in addition to that and the discussion by you as well. Does that mean if I pay $100 you will receive $98.50?
Mr. Hughes: That is correct.
Senator Hervieux-Payette: I want to make sure we know what you get. That is $1.50. If the system is changed, you would get the $100 and then there would be $1 added to the taxpayer, is that right?
Mr. Hughes: There could be a couple of ways. The merchant fee could be reduced to a lower level, which would perhaps give us more money. The other possibility is to have the cost of that transaction, plus the costs of becoming PCI compliant, charged back to the purchaser of a service who was using that credit card.
Senator Hervieux-Payette: What do you consider to be reasonable? If you get everything you want in your negotiations and you think of the best interests of your taxpayers, what is the best scenario?
Mr. Hughes: The best scenario and the best interest of my taxpayers is where we do not have to pay a merchant fee at all — that the merchant fees and the PCI compliant costs are either covered by the credit card providers themselves or we are permitted to pass them on to the users of credit cards.
Senator Hervieux-Payette: For my $100 example, what would that mean? Can you tell me for people who are watching this session?
Mr. Hughes: I think what is fair for a university or for a municipality is when the cost of something is $100, the municipality or the university should receive $100. The cost of providing that service, whether it is the cost of the infrastructure needed by the credit card companies or the additional costs of reducing fraud, should be passed on to the person who wants to use that credit card.
Senator Ringuette: I am looking at your statement, Mr. Hughes. With regard to just the fees on a yearly basis, you said that it is $1.4 million for the City of Ottawa and a range of 2-per-cent to 3-per-cent merchant fees.
Mr. Hughes: As a clarification, the merchant fees for municipalities range between around 2 per cent to the high 3 per cents. The City of Ottawa has negotiated much lower fees; our average comes in around 2 per cent. I think our lowest rate is 1.63 per cent, if I am not mistaken.
Senator Ringuette: What would be your average?
Mr. Hughes: The average works out to about 2 per cent. Once again, the cards that are the most expensive are the ones where there are more benefits to the cardholder, for example, the ones with air miles and cash back, those cards.
Senator Ringuette: Notwithstanding your compliance and equipment costs, on a yearly basis, if the merchant fees for government in Canada would be capped at the same rate as in Australia — at .33 per cent — you would be saving at least $900,000 a year, and growing.
Mr. Hughes: That is correct. For the taxpayers of the City of Ottawa, that would be about a 0.1-per-cent tax reduction.
Senator Ringuette: Of the rate?
Mr. Hughes: Yes.
Senator Ringuette: In your presentation, Mr. Hughes, you also indicate that you are president of the Association of Municipal Tax Collectors of Ontario.
Mr. Hughes: That is right.
Senator Ringuette: Has this issue been discussed at that association level province wide?
Mr. Hughes: We have discussed both issues at the board level and we have made presentations to our members on PCI compliance — those additional steps that municipalities must take in order to continue to accept credit cards.
The reality is that the City of Ottawa is at the beginning of that curve. There are a lot of municipalities that have not yet had to become PCI compliant and they have not seen these costs yet. We put on a training session last fall for our members, and it was quite an eye-opener for the municipalities when they saw what they will have to do and what those costs might be.
Senator Ringuette: Are you also involved in any kind of national organization for municipalities, like the Federation of Canadian Municipalities?
Mr. Hughes: I am involved with the Federation of Canadian Municipalities in a different area, when I have my tax collector's hat on. That is generally in the area of payments in lieu of taxes.
Senator Ringuette: Everyone is paying; we are losing billions of dollars in the Canadian economy and, by that same token, probably quite a few good jobs for corporations that register a 41-per-cent leap in their fourth quarter profits.
Are the mayors and the city councils and town councils aware of this growing issue? We had the Retail Council of Canada, which represents 370,000 Canadian businesses, that wants to have these fees capped just like New Zealand. Thus far, they received a deaf ear from government.
The Chair: We have to move on to other questioners, Senator Ringuette; I am sorry.
Senator Ringuette: I appreciate your presentation, Mr. Hughes, and also that from the University of Saskatchewan. Unfortunately, two years ago, when we had our first discussions on these fees, I had not identified people in your field. However, I think it is very important and I want to thank you for your comments.
Senator Moore: I want to ask a couple of questions of our colleagues from the University of Saskatchewan. I do not think I heard this correctly. With regard to MasterCard, they charge you 1.9 per cent, plus 1 per cent, is that correct?
Mr. Florizone: No, it is 1.9 per cent; then we charge a 1-per-cent user fee. Again, to use the $100 example, if there is $100 in tuition, if you pay by cheque or by Interac it would be $100. If you pay by MasterCard, you would be charged $101. From that, MasterCard would get $1.90. We add 1 per cent on and then we give 1.9 per cent. Effectively, we are sharing the 1.9 per cent that MasterCard gets between the student or the payer of the tuition and the university, recognizing that we both get a benefit.
Ms. Van Impe: The change that occurred is that last year, of that $100, the university would have a net revenue of $98 and now our net revenue is $99.
Mr. Florizone: Roughly.
Senator Moore: How long do you do these deals — year to year? What is the term of this transaction?
Mr. Florizone: It is a five-year contract.
Senator Moore: Is there any room to negotiate changes within the agreement? If your budget changes, if the university or Ottawa says there is no money coming this year, what will you do? You have to start looking around where to make cuts. Can you go back to these people?
Mr. Florizone: I will defer to Ms. Van Impe on that.
Ms. Van Impe: Not on the fee side, we could not. We could walk away from the contracts — we could give 60 days' notice and terminate the contract if we decided to no longer accept credit cards. We were successful in negotiating with them around their non-discrimination clause and their surcharge clause, but we have not been successful in negotiating on the fee side.
Senator Moore: Who do you negotiate with? Is it with MasterCard or with the acquirers, the people supplying the equipment?
Ms. Van Impe: We negotiated with the acquirers. Due to the number of conversations, we were involved in conference calls with the payment card industry. Visa, MasterCard and Moneris were all involved in conference calls trying to negotiate the contract.
Senator Moore: Is your contract with the acquirer?
Ms. Van Impe: Yes.
Senator Moore: It is not with MasterCard.
Ms. Van Impe: That is correct.
Senator Moore: Gradually I am beginning to understand the process.
The Chair: It is complicated.
Senator Moore: Yes, it is complicated. MasterCard and Visa said with lily-white hands that they have no involvement. Yes, and I just fell off the cabbage truck this morning.
Who started PCI compliance and when?
Mr. Hughes: Senator, that comes from the industry.
Senator Moore: What industry?
Mr. Hughes: It is the payment card industry. PCI stands for payment card industry.
Senator Moore: Does the acquirer tell you to do this?
Mr. Hughes: Our agreement is with our acquirer.
Senator Moore: Who is your acquirer?
Mr. Hughes: We happen to have the same acquirer, Moneris, which requires that we be PCI compliant.
Senator Moore: When did they start that?
Mr. Hughes: It is an exercise that began, I believe, 18 to 24 months ago.
Senator Moore: It was about two years ago. What does that mean? They say you must be PCI compliant with standards set by them, I guess.
Mr. Hughes: That is correct.
Senator Moore: What kind of things do they give you for $800,000? What did you get for $2.5 million?
Mr. Hughes: We do not pay the $2.5 million or the $800,000 to Moneris. We had to spend $2.5 million in order to hire the reviews that we had to perform to reach the standards that they dictate. One of the requirements is that an independent third party be hired and paid for by the merchant, or by the municipality in our case. The independent third party has to review the work that we have done and report to our acquirer, Moneris, on our progress and whether we are PCI compliant. We have to pay for that independent review. That figure is to date with the software that had to be purchased, the consultant that had to be paid and the outside agencies that have had to be hired to review the work we have done. That has cost us $2.5 million. On an annual basis, we will have to hire additional staff and maintain a relationship with an independent third party who, on a regular basis, will tell our acquirer, Moneris, that we continue to be compliant. That will cost us $800,000 a year.
Senator Moore: Unbelievable. Today, most of these cards have a chip, which is supposed to be the ultimate security so far as technology has been developed to date. What other security do you need? What does this expenditure get for the taxpayers? I used to be in municipal politics. This would drive me crazy if I were sitting on Halifax City Council and this came in. These people should be eating some of these costs themselves because they are taking in a great deal of money. Come budget time, I would have them on the mat. Beyond the technology of the chip, what are you getting? Where is the security?
Mr. Hughes: That is exactly our position. We have to do a number of things. We have to review from the top to the bottom of the organization all of the practices around credit cards.
Senator Moore: You mean the personnel who might handle that?
Mr. Hughes: Correct. It depends on the size of the organization. A smaller municipality will not cost $2.5 million. For an organization the size of the City of Ottawa, a number of community centres have to be visited, and all of the policies and procedures that exist for every area that accepts credit cards have to be reviewed. All staff who accept credit cards have to be trained to a certain standard.
Senator Moore: It is interesting that you are paying $1.4 million for credit card fees and $800,000 for these fees.
Mr. Hughes: Absolutely.
Senator Moore: University of Saskatchewan, what are your PCI compliance fees per year?
Ms. Van Impe: We approached it in the way that we originally set up our PCI compliance. We ran into this about five years ago because the number of transactions we were doing online put us on the payment card industry's radar a little sooner than if we had been doing face-to-face transactions only. It cost us about $60,000 per year. We did not track the costs of becoming compliant in the first place because we used our internal IT, information technology, department to do that. We did not outsource it.
Subsequent to that, it costs us about $60,000 per year to maintain compliance. We put some measures in place to minimize the cost as much as possible.
Mr. Florizone: To add two pieces of data, I noticed Mr. Hughes's example in which he talked about $63 million in credit card payments. When we were at 40-per-cent tuition payments, the total would have been about $30 million. Sorry, in 2010, it was $67 million and $44 million for tuition. That is right because it is non-tuition. I wanted to compare to Ken's experience. We may have fewer locations, I suspect, and that might make a difference, I am not sure. I thought I would offer that. Our experience is a little bit different.
Senator Moore: You were not required to hire an independent agent to set this up. Rather, you were able to do it with your in-house technology people?
Ms. Van Impe: You still need to have a third party.
Senator Moore: That is to certify you after you have done your work.
Ms. Van Impe: They scan your servers and certify that you are compliant. That costs $3,000 per year. Our internal costs to maintain our infrastructure around PCI compliance is about $60,000.
Senator Moore: Mr. Hughes, that is $63 million versus $67 million. I know you have many more locations where people access your various facilities. I do not know how many cash counters are at city hall. There is probably one large desk.
Mr. Hughes: We are talking about every community centre, pool, skating rink and all of the other city operations throughout the city. The requirements are different based on volume. Where their volume was the same level as our volume two or three years ago, I believe theirs has dropped significantly. We are talking about two organizations with completely different sizes and layouts.
Senator Gerstein: That is very enlightening. When Visa and MasterCard appeared before us last year, I must say that one of the most shocking numbers I heard was that 80 per cent of Canadians pay off the entire balance of their credit card each month. I would not have guessed it to be anywhere close to that. This takes me to the 20 per cent who do not pay off their cards each month. Interestingly enough, that is the same percentage that Mr. Florizone has indicated still use credit cards at the University of Saskatchewan.
I suspect that an individual uses a credit card for one of two reasons — convenience and a method of financing. However, which credit card is used determines how expensive that financing might be. It leads me to the fact that some, I suspect many, within the group who use it as a financial tool disregard the rate of interest they are paying. What is of utmost importance to them is the amount of the monthly payment they are making. I know that notwithstanding it is X per cent, I can afford to pay $200 a month on my credit card and just keep rolling it.
My question comes out of Senator Harb's question, which was excellent: If that is the case, whether there is another per cent or not may not make a difference, but I am asking the university in particular, is it impacting on your delinquencies? Are there students who are able to come to your school now because they can make use of a credit card, even if it is an expensive method of financing their education? Are you facilitating people that are coming to school? You mentioned that perhaps you have to yank less degrees at the moment they come through school.
I would be interested in what your delinquency situation is, and the number of students you might have had to deal with in that manner who were unable to fulfill their financial obligations by having to pay cash?
Ms. Van Impe: That is a very good point. That was one of the reasons we used when we originally implemented credit cards; it provided another payment option for students. They could use it as a financing method. We did actually see a reduction in our bad debt by about 0.1 per cent. Over the 10-year period we accepted credit cards for tuition, our bad debt ratio fell by 0.1 per cent.
Mr. Florizone: From 0.5 per cent to 0.4 per cent, so bad debts went down 20 per cent, in effect.
Ms. Van Impe: We are not sure what the impact will be this year. We are monitoring closely the number of students who still have outstanding accounts and making extra efforts to contact them and point out the other payment options. However, it is a good point that credit cards maybe provide the method of financing to students who do not have other methods, but it is not a method of financing we think is good for students.
Mr. Florizone: If I can come back to the philosophical point, our perspective is using credit cards is valid and recognized in Canadian society as a legal and acceptable form of financing. Therefore, we accept that and we think it is a valuable service. Again, it comes back to the value.
When we went through this debate and the value and who should pay, when you think about credit cards you can get into the idea of should we do more of this so that it enables more students to come because it is a financing option, or should we do less of it because it results in very high financing costs for students?
We tried to stay away from that. We focused on the fact that this is a financing option for people. It is more the territory of the government than it is the university to regulate that, but it is valuable. Now it is just a question of what the fair cost is and who should pay. That is how we ended up with the solution of kind of splitting the difference.
Senator Kochhar: If you want to learn about the power of negotiation, you should visit India. They will teach you some lessons on how to negotiate.
This is a dumb question but I am told there are no dumb questions, so why would you not give an incentive to people who pay by cheque? If they pay by Visa, you are putting a 1-per-cent surcharge and you are paying a 1.9-per-cent fee. First, why do you not give a 1.9-per-cent discount if you pay by cheque?
Second, when it comes to negotiating with Visa and MasterCard, why could you not play one against the other? Why could you not tell them we will accept only Visa or MasterCard, whoever can come up with the lower fees?
Let us say you negotiate from 1.9 per cent to 1.5 per cent or 1 per cent; then give the same incentive to people who pay you by cheque. It is a win-win situation for the public or the people who pay their bills, rather than penalizing those who pay you by cheque.
Mr. Florizone: I will take the second one but then I will turn to Ms. Van Impe for the first one, or if Mr. Hughes wants to offer thoughts. In terms of playing one against the other, that is what we tried to do. We did not get any movement from either of them on fees. What we ended up with is the situation where we no longer accept Visa but we accept MasterCard with that extra per-cent charge.
We have done our best. I hear you entirely, but I think the reality is we just were not able to negotiate, working between the two of them, a reduction of fees. Is that fair to say, Ms. Van Impe?
Ms. Van Impe: Visa did move a little bit on fees but not enough to make the impact we needed on our bottom line.
Mr. Florizone: The incentives for cash was a route we went down.
Ms. Van Impe: We did look at incentives for cash but the administrative complexities with that, having to do it at the counter when you have a lineup, made it less appealing than charging the fee upfront to the credit card users. It is also very transparent then.
You could advertise a cash discount, but we did not want to have to do it at the point of sale is what it boiled down to. It was not available to do with online banking, which is our favourite payment method because you can do it 24-7.
It would be impossible at that point to offer it because it is being pushed to us from the bank's website, not on our website, and it would have resulted in us, after the fact, having to discount back to the students or parents by cutting cheques or some other method.
Mr. Hughes: If I could answer those questions, Senator Kochhar, our experience at the City of Ottawa is a little different. We go to RFP — a request for proposal, a public document — and then we continue to negotiate. We have been able to negotiate a reduction in fees. Our fees have gone down, not as far as we would like but we were able to negotiate a reduction.
We have thought about presenting to council the possibility of discounts for cash or cheques. Once again, the complexities of programming those into cash registers are much more difficult than having them built into the devices supplied by the credit card company.
If I could answer one other question that was asked earlier, I think, by Senator Moore, one of the prime differences between an organization like a municipality and a university is the average size of our transaction. In Ontario, tuition runs about $5,000, I think; my kids are older now, but it was $5,000 or $6,000. Therefore, a tuition transaction is probably in the $3,000 to $6,000 amount, whereas our average credit card payment is about $90.
We have 800,000 transactions. The requirement you have to meet with PCI is triggered by two things, the total dollar volume of transactions you do and the number of transactions. Although their volume might be half of ours now, the average number of transactions that we do, well over 800,000, puts us in a different league with the PCI requirements. That is what part of the difference is.
Senator Kochhar: To be fair, why would you not give discounts for cheque payments?
Mr. Hughes: We have looked at a discount for cheque payments and for cash payments. It goes back to some of the programming issues that we would have to build into the various systems that we have in the recreational area and in all of the streams that we offer as a municipality.
We looked at those and we quickly decided that was not where we wanted to go. It is much simpler if the programming is done by the credit card company, where a user fee was added by them through the machines that are provided sitting on the desks at all of our locations.
The Chair: We are out of time. It remains for me to thank you very much, our friends from the University of Saskatchewan and the City of Ottawa. You have been very helpful to us and we appreciate the time you have taken to be with us this evening — or late this afternoon in Saskatchewan.
I must say that the video conference facilities worked very well and I hope you could hear us. We heard you loud and clear. The more we do this video conferencing, I think the happier we are with it. I am sure Air Canada or WestJet are not that happy because you do not have to travel all the way down to Ottawa, but I am sure it pleases you.
I thank the witnesses who are excused with our appreciation.
Senator Ringuette has a matter to raise. She assures me it will take only a minute or two.
Senator Ringuette: Chair, I received an email from the clerk of the committee indicating that at the steering committee yesterday, the attached information was to be sent to all members in case some would like to participate in the summit on the web. Members can register individually for this. It is a summit in Chicago.
I received an invitation from Visa, who is the financial sponsor of the summit in Chicago, which said: ``I hope that you will be able to join me as a special VIP guest.''
Any member of this committee who would accept this invitation to be a VIP guest of Visa would be in conflict of interest with the current study of the committee and should abstain.
The Chair: I do not want to break your heart, but you are not the only person who received that invitation.
Senator Ringuette: I suspect that all the members of this committee received an invitation.
The Chair: Senator Hervieux-Payette received one and we talked about it. Certainly, I refused it for numerous reasons, including the one you cited. It does not behove any of us to go anywhere as such a guest. I do not want to pick on Visa only and would include any company involved in our deliberations. Visa is sponsoring the conference and if members want to attend on their own hook, that is their business. We can watch it on the web, which was the point of circulating that information.
I consulted with members of the steering committee. I hope you will understand that, on February 16, there will be the unveiling, 58 years after the fact, of a portrait of a former prime minister, being my grandfather. All parliamentarians have been invited and the Prime Minister will attend. I hope you do not mind. It will be between 4 p.m. and 6 p.m. so we have decided to cancel our regular meeting that evening.
Tomorrow we will hear from Interac and the Desjardins Group. Senator Massicotte sent a note to all of us. I would very much like to do that. If we complete Bill C-14 on Thursday next week, Wednesday being the day we will not meet, then we could do the full discussion at the first meeting after the break as Senator Massicotte proposed.
Senator Massicotte: Is that 2011 or 2012?
The Chair: It is 2011.
Senator Ringuette: Regarding witnesses on this bill, I had asked and recommended a list to the clerk that included the technology providers, such as Moneris and Chase Paymentech, who are between Visa/ MasterCard and the merchants, universities or municipalities. I would like to know whether they have been contacted. Why they are not coming.
The Chair: I can give you the answer. The following have been contacted and have declined our invitation: AmEx, which provided a written submission; Moneris; TD Canada Trust Merchant Services; Chase Paymentech, which is Scotiabank; and Global Payments, which is CIBC, all declined.
Senator Harb: Can we subpoena them?
Senator Ringuette: I want to ensure that it is on record that they declined to appear before the committee.
The Chair: With the slight exception. Did you receive the letter from AmEx?
Senator Ringuette: Yes, I received a letter.
[Translation]
Senator Hervieux-Payette: Senator Massicotte, you did not answer. I submitted your question to all our colleagues, and you did so as well. Is it all right with you if we have the meeting afterwards?
Senator Massicotte: I will be absent in the first week of March. Perhaps we could push things back.
Senator Hervieux-Payette: That is not the first week.
The Chair: It is March 2. You will not be with us?
Senator Massicotte: I will be absent until March 9. I would have liked to start the debate before that date. Perhaps we could take advantage of an opening to start tomorrow, for example, if we finish a little earlier. I would like us to take the necessary time and not to do what we usually do by taking only half an hour.
[English]
We should have another discussion rather than try to reach a conclusion right away.
The Chair: We can carve out some time. Will you be here Thursday during the first week of March?
Senator Massicotte: I am not here the first week of March at all.
The Chair: During the second week, perhaps we could carve out half an hour or three-quarters of an hour.
Senator Massicotte: Let us do that at least. Maybe we will get a chance to do it before, which I would appreciate.
The Chair: I should have welcomed formally Senator Larry Smith to his first meeting. I am sure you will not be as quiet and modest as you were this evening. Your reputation precedes you. Senator Moore raised an important subject: the business of people running around describing themselves as financial councillors or advisers or other. He wondered whether we could look into it but, regrettably, it falls under securities law, which is totally provincial.
Senator Moore: I have done further research, chair.
The Chair: It is a problem. Perhaps you could get the Government of Nova Scotia to do it.
Senator Moore: Many people lost a lot of money.
The Chair: Thank you for your cooperation and assistance.
(The committee adjourned.)