Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 17 - Evidence - February 10, 2011
OTTAWA, Thursday, February 10, 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 10:30 a.m. to give consideration to the bill.
Senator Michael A. Meighen (Chair) in the chair.
[English]
The Chair: We will call this meeting of the Standing Senate Committee on Banking, Trade and Commerce to order.
Before we begin, I will introduce the members of the committee who are present today. Senator Ringuette has a matter to discuss before we introduce our first witness.
The Deputy Chair of the committee is Senator Hervieux-Payette from Quebec. Also present is Senator Mockler from New Brunswick; Senator Kochhar from Ontario; Senator Massicotte, from Quebec; Senator L. Smith from Quebec; Senator Greene from Nova Scotia; Senator Ringuette from New Brunswick; Senator Harb from Ontario; and Senator Moore from Nova Scotia. We expect other senators to arrive momentarily.
Senator Ringuette: I wish to discuss two issues. At the end of our meeting yesterday, the clerk of our committee informed us that two technology providers, Moneris Solutions and Chase Paymentech, would not appear as witnesses at this committee. I think they are a very important component of the credit card and debit card system and therefore, I would like the clerk to ask Moneris Solutions and Chase Paymentech again to appear before us. I think we can be flexible to accommodate their agendas. I hope that they will be able to appear before the committee within the next four weeks. If once again, they do not accept our request, this committee has subpoena power, and I would like this committee to subpoena Moneris Solutions and Chase Paymentech to appear before us so that we have the full view of the situation.
The Chair: In terms of reissuing the invitation with a strong encouragement to attend, great minds think alike because I was thinking the same thing last night. I agree with you Senator Ringuette.
I do not know whether we should leave it entirely to the clerk, or whether I should phone as well. I am quite happy to do so. I thought I might call all witnesses that were unable to attend.
Senator Ringuette: They are major players.
The Chair: AMEX provided a written brief; the others are Moneris Solutions, TD Canada Trust, Chase Paymentech and Global Payments. We could contact at least those four. Give me some guidance; what if they say they will send a written brief.
Senator Ringuette: No, chair, a written brief is nice, but it does not allow the members of this committee to put questions to the witnesses. It only allows them to give us their spin. They are an important component of this very complex industry.
The Chair: We could do a video conference.
Senator Ringuette: Absolutely.
The Chair: I would like to come back to this committee, if we get a refusal, before taking the ultimate step.
Senator Mockler: I agree; I think we should support what Senator Ringuette is sharing with the committee. Second, I think that before we go to the step to subpoena witnesses, the chair should contact them.
The Chair: I want to have contact with you as well before we take that step.
Senator Moore: Will you give them a call — you or the clerk? Are you thinking of contacting them yourself? Whoever does, I think when you make the call and the second request — maybe it is the first request, I do not know —
The Chair: It is the second request.
Senator Moore: For all of them, Mr. Chair?
The Chair: Not from me, the clerk invited them.
Senator Moore: I think it might be useful in the course of your connection with them to mention that the committee has the power to subpoena. It is very rare that we use that power, so we would like to have your cooperation to appear. I think that might save you a few steps.
The Chair: I happened to discuss this with Senator Mockler over breakfast this morning. He indicated that he had mentioned the same to someone in connection with their appearance before another committee. It had the desired effect.
Senator Kochhar: It is more effective to do that before threatening the witness with a subpoena. It will give them a strong sense of responsibility on their part to appear before us. If they do not agree, then we go to the ultimate step.
Senator Massicotte: I have immense confidence that Senator Meighen's persuasion will convince them to appear. The bar is high, but we have confidence in the chair of this committee.
The Chair: I have immense admiration for the way that you just set me up.
Senator Ringuette: The second issue concerns two witnesses. I would like the committee to invite the Reserve Bank of Australia to appear via videoconference. They have distributed a new report on the issue of the payment industry.
The Chair: Has it been distributed?
Senator Ringuette: Yes, it was sent via email. As well, an interesting discussion paper was prepared by the Bank of Canada entitled Merchant Acceptance, Costs, and Perceptions of Retail Payments: A Canadian Survey. It was prepared by Carlos Arango and Varya Taylor and is dated December 2008. I would like them to appear before the committee as well.
The Chair: Does anyone object? Thank you, Senator Ringuette.
We are fortunate to have Mr. Mark O'Connell before us once again. Mr. O'Connell has appeared on at least two previous occasions. He is the President and Chief Executive Officer of Interac Association. Welcome before our committee, Mr. O'Connell. I will not give you a more fulsome introduction because we have done it before and you are known to the members of the committee. We would appreciate your comments, if any, and your willingness to answer questions on Bill S-201, which we are studying.
Mark O'Connell, President and Chief Executive Officer, Interac Association: I thank all members of the committee. I have been here before but it is nice to receive the invitation to discuss Bill S-201, An Act to amend the Office of the Superintendent of Financial Institutions Act (credit and debit cards). Obviously, the debit side is close to my heart.
Interac is Canada's leading payment brand today. Our organization operates an economical, world-class debit system that serves Canadians well. It is also Canada's only domestically conceived and run coast-to-coast debit payment network, handling nearly 60 per cent of all card transactions in Canada. Nearly 4 billion Interac debit transactions are processed annually. Indeed, Canadians are among the highest debit users in the world on a per capita basis. We also have an established history of being merchants' economical, flat-fee-per-transaction payment method.
We securely connect Canadians to their money at the ABM, at retailers in Canada and in the United States and online through our two web services. First is Interac online for secure online purchases without sending personal financial information to merchants; and second is Interac e-Transfer for secure person-to-person money transfers. This latter service was expanded recently to the mobile environment, for example for your phone to receive payments on a person-to-person basis. We have launched Interac Flash. This is a new contactless enhancement of Interac debit. As this new feature rolls out nationally, it will provide consumers with an even faster payment alternative to cash for everyday small purchases. We are also a leader in the prevention and detection of debit card fraud. Consumers are fully protected from fraudulent transactions at Interac via our zero liability policy. With our broad merchant acceptance and our 24/7 reliability, security and efficiency, we have helped to make Canada a recognized world leader in debit card services and Interac services an everyday part of life for Canadians.
While Interac certainly has been successful in the past, the payment market place is changing rapidly, and how it evolves will have a significant impact on Canadian merchants and consumers. For all stakeholders involved, including government, I believe that we must ensure that the payments marketplace in Canada continues to remain healthy, competitive, innovative, safe and secure, and that it works for all participants.
In this regard, I would like to take the opportunity to commend the Honourable Senator Ringuette for her early recognition in December 2008 of the significant problems that were emerging in the Canadian payments arena and for her leadership on that issue. Left unchecked, these problems threaten to create an unhealthy competitive environment and negative consequences for payment system users, in particular merchants and consumers.
I also wish to thank the Standing Senate Committee on Banking, Trade and Commerce for agreeing to her request to conduct hearings in the spring of 2009 on these marketplace concerns. We believe that your efforts followed by the hearings of the joint meeting of the House of Commons Standing Committee on Finance and the Standing Committee on Industry, Science and Technology were absolutely instrumental in shedding light on the critical nature of these concerns. We believe these hearings helped influence the Minister of Finance's subsequent Code of Conduct for the Credit and Debit Card Industry in Canada. We believe that the federal government's code of conduct, which took effect on August 16, 2010, is a pragmatic tool that will help to enhance the competitive payments landscape in Canada by promoting fair and healthy competition and, maybe most importantly, re-establishing choice and transparency for all users. Provision 1 of the code of conduct mandates better and clearer disclosure of information on the acquirer agreements with merchants and on monthly billing statements about the costs associated with payment card acceptance. Merchants will now have information on the effective merchant discount rate, MDR, from each type of payment card from a payment card network. They will have information on interchange rates and, if applicable, all other rates charged to the merchants by the acquirer. They will receive the number and volume of transactions for each type of payment and the total amount of fees applicable to each rate. They will receive the details of each fee and to which payment card network they relate. In addition, this information must be presented in a manner that is clear, simple and not misleading.
As we understand it, the objective of Bill S-201 is to have the Office of the Superintendent of Financial Institutions, OSFI, monitor, collect and publish data on the cost of credit and debit card payment use, such as card fees and the operation of the system; and to feed this information into the public policy decision-making process.
Provision 1 of the code of conduct and Bill S-201 respond clearly to one of the frustrations heard in the debate over the last couple of years, which is the lack of information about payment card costs and the related confusing nature of merchant statements. While Bill S-201 is well intentioned, we believe that the same objectives will be met with the new information available as a result of provision 1 and the Financial Consumer Agency of Canada's oversight of the code of conduct.
As you heard from FCAC officials last November, the expanded role that the government gave the FCAC under the Payment Card Networks Act provides the scope to carry out information collection and research. In addition, the FCAC reports regularly to the Minister of Finance regarding its findings and tables a report annually in Parliament. In addition, we believe this type of work better aligns with the FCAC, the market conduct regulator, rather than OSFI, the prudential regulator.
In summary, we believe that new mechanisms are in place that will achieve the policy intent of Bill S-201. These are now being put into practice, and time needs to pass to determine whether additional measures will be required.
In this regard, we firmly believe that the code of conduct should form the foundation for any additional measures to ensure that the rights of merchants and consumers are protected when market players are unmotivated to change practices that undermine a healthy competitive marketplace. With that, I thank you and I welcome your questions.
Senator Ringuette: Mr. O'Connell in some instances, I agree with your comments and in other instances, I do not. However, I believe we must discuss the root of the problem and that is the fees.
Understandably, you are not at the centre of the controversy because Interac's fees are extremely low. However, with regard to Visa and their new debit card, have they entered into an agreement with you to use your debit network?
Mr. O'Connell: No, they have not and I will clarify. Te last time I was here they bit of a phantom at the gate. Visa and MasterCard are aggressively entering this market and competing in debit. We are used to them in credit.
Are you referring to the Visa Debit Card that was issued by CIBC?
Senator Ringuette: Yes.
Mr. O'Connell: That card was set up in adherence to the code of conduct. The code of conduct basically says that if you are to issue, you can issue as many cards as you want from different networks, but each card shall not have two networks competing for the same transaction type on the same card.
That card was set up so that domestic debit, over the counter, point of sale transactions will be Interac; international phone and e-commerce debit transactions via that card will be Visa. Each network rides its own rails for those transaction types. If someone pulls it out of their wallet at a Canadian merchant, that would go over the Interac network with our fees and cost structure. If they were online or ordering a pizza over the phone, that would through VisaNet and their cost structure to the merchant and so forth. There is no cross-pollination allowed or agreements required by virtue of the code of conduct.
Senator Ringuette: That item is in the code of conduct, which is overseen by the Financial Consumer Agency of Canada that appeared last night at the Standing Senate Committee on National Finance.
When we had our hearings in 2009, there was a lot of discussion on financial literacy. However, the bottom line is that at that time we — certainly I — indicated that there was a conflict between the agency's supervisory role and the fact that not only was their mandate to supervise financial institutions to ensure they complied, at the same time, 80 per cent of their operating budget comes from the same institutions.
The Task Force on Financial Literacy reported in September, I want to read what they had to say about the Financial Consumer Agency of Canada.
Other participants, however, perceived the agency as having a low or misunderstood public profile and some suggested that its mandate, i.e., financial institution regulation, coupled with responsibility on financial education, is potentially conflicting and confusing.
Even the Minister of Finance's Task Force on Financial Literacy says there is a conflict. I say this because of the issue with Visa Debit; they broke the code of conduct. They still are because merchants in my hometown told me two weeks ago that when one of their clients put their Interac card into the system, it went through Visa Debit and the merchant is charged 50 cents for that transaction. That problem has not been corrected.
What has the financial agency done with regard to oversight and compliance measures to protect the code of conduct with regard to Visa Debit using your network and charging fees of 50 cents per transaction to merchants?
Mr. O'Connell: You are correct. Although the card was set up properly by the issuing bank, when it got down to the processing level, at the merchant and terminal level, the domestic point of sale transactions were being processed through the United States and VisaNet at their cost structure. The transactions, as per the letter of the code and the way the card was set up, were to be Interac network transactions but were processed through VisaNet.
I understand some blocks have been put in place and technical remediation is under way. We have been regularly trying to keep in touch with the FCAC on this issue, as it is important to us that adherence comes back around.
They are investigating the issue. I know they have been involved. I do not know, because we have not been in the centre of that issue, to what extent or whether it has been particularly effective or not.
This is a highlight of something we do believe. We believe that no one in our industry, issuers and acquirers as like, treats this code of conduct as voluntary. The Minister of Finance has been clear on that point. However, we believe that ongoing policing is necessary to some degree, not draconian. We merely are stating that as a market conduct regulator as opposed to a prudential regulator, the Financial Consumer Agency of Canada seems to fit that mandate. It is not a competency issue, and we are not particularly predisposed either way. It seemed to fit the mandate and is in place, so we felt it should be allowed to play itself out. However, I do not know the details of the effectiveness of the response to the issue happened around the first Visa Debit Card.
Senator Massicotte: We issued a report on this issue about 18 months ago. Many of your customers appeared as witnesses before this committee. We had a concern at that time and I would like you to tell me whether that concern still exists.
You have a non-profit technology and processing oriented organization. It is not market oriented in that it does not offer freebies, et cetera. That is why you have such a low cost. With the structure of the industry, the person who pays in the end, the consumer, is not aware of the direct costs paid by the merchants. The merchants not having significant negotiating power with you, Visa and MasterCard are stuck to accept what someone else decides. There are complex hidden costs and, therefore, there is immense leverage from the two monopoly players basically to impose whatever they choose to impose.
Our concern is that Visa and MasterCard came to Canada with such great marketing strength and structure that they were able to entice consumers to use their cards. The consumer initially believes it is a freebie and does not realize that indirectly he or she is paying. We had the concern they could wipe you out quickly in a period of 10 to 15 years. Your hands are tied with a non-profit, limited rate charge.
Things have moved. Your organization eight or nine months ago saw no significant threat when the report came out because MasterCard and Visa were not dominant in the marketplace; but now they are here and spending significant money to promote their services. Does that threat still exist under the current code of conduct or should we not worry about the issue?
Mr. O'Connell: It absolutely still exists. I get up every morning faced with that and the considerable resources being employed by those two organizations. The code of conduct levelled the playing field to some degree. Provision 6 allowed merchant choice to be much more prevalent than it was prior to the code of conduct. Given that I have a low acceptance cost, merchants are a strategic bastion for Interac. Therefore, they have greater choice in the area of which debit cards they will accept. The utility of that card is partially that the consumer wants it to work everywhere, and that is why we are careful and will always be the economical provider in the market. We need to maintain that merchant acceptance base over and above those competitors or we will be in dire straits, to say the least. However, you are right in that they have tremendous financial resources, not only to induce consumers, who are somewhat oblivious to some of the costs, but also the merchant community. There are various ways and programs by which to achieve that acceptance issue. They are chipping, and will continue to chip away at that, which is why I have been so vocal in saying code of conduct or no code of conduct, Interac cannot be frozen in 1994 in terms of the way it is structured, funded and governed. It needs to change; 1994 in any industry was a long time ago. Interac needs to be able to react at the same speed and have the same abilities that our competitors are employing vigorously in the marketplace today.
I took this job because I passionately believe that it is important for Canada and for all constituents in the payments chain, even some that may not realize it fully, to realize that we have a strong, low-cost domestic option in this marketplace.
Senator Massicotte: In the end, I am not sure who wins out with the low-cost transaction fee, which is relevant to a merchant. Look at a credit card. Many merchants do not like certain credit cards because they are too expensive. Eventually, when the consumer comes into your shop and wants to use such a card, the merchant either foregoes the sale or pays the extra cost. Most retailers have accepted the higher cost of certain credit cards to please the consumer. They are not happy about it but the power of the customer is strong. In time, will your excellent relationship with retailers matter, because the consumer might wish to use a certain form of debit card, even if it has a higher cost for transaction. You might be out to lunch.
Mr. O'Connell: That is the tension given the strategy being employed by my competitors. I will say, though, that a card is only useful if it has utility and is accepted widely. Consumers do not care about the reward points if they can use their card in only one out of every 10 stores. That is the tension of this market between the consumer and the merchant. That is the danger we face, so we have to ensure that we have a value proposition for both sides of the market. I hope you have seen Interac become a much more marketing oriented business, and I am not talking only about the fantastic iconic truck that is in our commercials.
We are trying to change within our current confines; and I will get back to that. Interac needs to have some emancipation from those confines because we are drastically different in our abilities by virtue of those confines than are our two competitors. Left completely status quo as an organization, it will be difficult.
Senator Massicotte: I suspect that the Competition Bureau has faced them with three issues, which are very important to you, in particular the ability to surcharge to give discounts, because you would win out. If the customer had an idea of the cost, you would have a competitive advantage. I suspect those issues are important to your organization's future. Is that accurate to say?
Mr. O'Connell: Yes, in the United States, those types of activities are prevalent. There are merchants who steer the consumer to the lower cost payment type, and there is lots of activity in surcharging and so forth. You see it in other jurisdictions. It has not been prevalent here, but certainly it puts a little more stewardship in the hands of the merchant, who is paying those costs.
Senator Massicotte: The Australia report talks about the surcharge options, which have become popular whereby many consumers are using that option on credit cards. It has become a bit of a competition.
Who owns Interac? Do the financial institutions in Canada own Interac?
Mr. O'Connell: No, its 65 members own Interac. It is a pure association. It is not even a legal entity, per se. It is constituted by contract with its 65 members.
You are right; those members include the large financial institutions in Canada, the credit unions, payment processors, acquirers and small white label ABM companies. The membership really runs the gamut of the entire industry.
Senator L. Smith: I will follow up on Senator Massicotte's line of questioning. It is five years from now and you are still the CEO of Interac; you have a unique selling point at this time, which is cost effectiveness. You have 60 per cent of the transactions for debit cards in Canada. Where is your business in 2016 and what have you done to get it to that point?
Mr. O'Connell: Strategically, we need to port the card environment that we have all been used to for the past 50 years to the smartphone and mobile environment. That is one of the key battlegrounds that will say who is in debit 10 years from now. It will be who won the battle of the phone and the e-wallet, if you will. That is why our Interac Flash is very important. That is a contactless chip that can be either in a phone or on a card, allowing consumers to use both.
I highlight that product set — there are certainly more that I will not go into — to say that is another example of how we will only be successful if we are able structurally and from a funding perspective to invest in those products. We are a world leader today. We now have a different competitive environment. We can be a world leader tomorrow, but only if we have the funding speed and governance structure. We are currently trying to put it in place.
Think about it. As I said, this is not a legal entity. It has a membership of 65. It has a one-year business cycle; it has a one-year cost recovery planning cycle. How many companies do you know that have one-year horizons, then you flush out the budget and start anew the next year?
It also has a governance structure that has worked in the past, but which I argue today is difficult. You have a board of 14 horizontal competitors. The horizontal competitors are your users and are free to use competitors' products. Each of them respects and uses his or her fiduciary duty, but it is a pace of the slowest type governance structure. I think more independence is needed.
Those are the hallmarks where I do believe, as long as we respect our economic position in the market — and we do have the scale to build upon that; we have the five services to build upon that — we can continue to serve Canadians in a much better fashion than our competitors and the merchant community at the same time.
Senator L. Smith: Will you get the support to market so that you can compete against tied sellers like your competitors who will tie into other products?
Mr. O'Connell: As you know, we have been dealing with the Competition Bureau to try to get some of that support. That is an arduous process but I believe we will get there. Some days I go home and I want to kick the cat.
Senator L. Smith: Your hair is not very grey.
Mr. O'Connell: I am hopeful that we get there because I truly believe Interac is important for Canadians and for this payment infrastructure in this country.
Senator Kochhar: I am trying to understand the difference between Interac and debit cards. The reason you can operate at a low cost is because it is almost risk free, because when consumers use your card, you realize your money instantaneously from their bank account; am I right?
Mr. O'Connell: That is true. A Visa or MasterCard debit transaction and Interac transactions are all good funds immediately. They are out of your bank account; there is no chargeback risk.
Senator Kochhar: There is a risk because you have 30 days to pay Visa and MasterCard and 80 per cent of the people pay within 30 days without paying any penalty. They are taking a risk on 20 per cent of the people who do not pay. In addition, they are international whereas Interac is a Canadian entity.
Mr. O'Connell: Senator, we were born and raised in Canada. We cover the United States, though, and we are international in ABM access. You can use your Interac card at about 90 per cent of merchants across the United States.
Senator Kochhar: Do you promote your cards to institutions and municipalities? Instead of people paying tuition fees with Visa and MasterCard, they could pay with Interac, with very low charges. If you promote enough, you could hurt Visa and MasterCard substantially. Do you have any strategy to do that?
Yesterday we heard witnesses who said that parents are paying huge amounts of money in tuition fees. The municipalities are paying huge amounts of money collecting money from the people. Do you have a marketing strategy to increase your base by going to these institutions?
Mr. O'Connell: Yes, we do. We promote both to the issuing side of the market and to the acquirers who promote our services to the merchants and the municipalities. We believe we have the best value proposition and we need to continue to do that; you are right, senator.
We are breaking into new markets, which I discussed. They include online and mobile phone markets or small value payments. Currently people do not use electronic payment methods very much; they use cash and coin. The Interac Flash application is about being able to flash your card for that coffee and go. Talk about speeding up lines and value for merchants, but electronic lines present an entire new transaction set. That is our strategy for growth.
Senator Greene: You have recently been turned down by the Competition Bureau. You wanted your consent order varied. Can you explain to us why they turned you down, and whether you think that process is now over with, or do you intend to go back and try again? I am interested in the future of Interac and how we can help create a stronger future.
Could you also describe how you raise money within your association to do necessary research and marketing?
Mr. O'Connell: I understand they pointed to market share in their analysis of the for-profit revision of the consent order. I respectfully disagree. Two massive multinationals are in the market now and are very aggressive, so I do not agree with that analysis per se. However, we have no plans to revisit that for-profit aspect.
If you read the commissioner's press release, the door was left open for revisions to the consent order on our structure and some of the elements I have been talking about today. We are pursuing that together with our board, but it takes time. Consensus is tough to achieve in my world, but we continue to pursue. It might not be the touchdown, but it is the field goal. It will enable us to get much closer to being fully competitive in that respect.
With respect to the raising of funds, Interac charges a switch fee on a transactional basis to issuers and acquirers — the two sides of the transaction. The first side of the transaction occurs when the check is made of the bank account for sufficient funds. The other side of the transaction is the processing of the money into the merchant's account through the acquirer. That fee this year is 0.7 cents. The less-than-1-cent fee is one of the wholesale prices and is what we charge the constituents in the payments chain. Of course, they add services and the acquirer provides processing and other settlements for the merchant. What you have for an ultimate price charged in the marketplace, given the various elements of data, is around 6 cents to 8 cents per transaction, which is a flat fee. It does not matter whether the transaction was $15 of milk and bread or a $1,000 television. The merchant is being charged the same flat fee, as opposed to the percentage-based fees charged by MasterCard and Visa. Those switch fees and the 4 billion transactions, even though it is only 0.7 cent per transaction, give the organization the funding on a per-year basis to operate the network, do the marketing and try to employ the product development and things we need to do to be competitive. We really have to buttress that and develop more flexibility in the Interac model.
[Translation]
Senator Hervieux-Payette: I wanted perhaps to finish with the Interac operational issue. Do all your 65 members have the same right to vote, the same weight? Does a small organization carry the same weight as the Royal Bank? Do the 65, when they participate, have a right to vote, a right of review, or are you entirely independent of your 65 participants?
I am going to start over. We have people who are in Quebec who listen from time to time; I believe we can speak to them in other ways than through a translator. Based on information that you provided on your company — because you ultimately provided general information — I wondered, in operational terms, whether the 65 members are simply clients or whether they have a say in Interac's operations. Do they all carry the same weight, are they treated in the same way, do they pay the same membership fees? That is my first question.
Second question: if I go outside Canada, can I then automatically have access to Interac or Visa, and there Interac carries Visa in Canada, and internationally, it is Visa that has control over the transaction? There are networks and agreements with the networks.
I would like you to explain to me, if I use your card today, whether I pay the same price as if I were in Canada? Is the cost of the transaction the same as if I were in Ottawa? If I have Visa, will the cost be identical? If I get a Visa debit card and I am in Mexico, then the next week in Brazil, is it the same cost if I have an Interac card or a Visa debit card? Does it cost the same amount for both merchant and consumer?
Third, is implementation of the code of conduct complete? Is everyone now complying with it?
My fourth question: you said you were frozen in the present structure. Just to remind you that, when we issue a cheque — we have been issuing cheques for about 100 years — we do not find that obsolete. I would not put myself in the shoes of those who say you are going to remain a non-profit organization, but do you not believe that Interac is a public utility and that, from the small consumer to the biggest, the fact that you have a non-profit cost structure benefits the entire population of Canada? Whether I have a lot of money or not very much, when I write a cheque in Canada, as I did 25, 30 years ago, it is the same process. Perhaps it costs a little more to write a cheque today. To all intents and purposes, I did not attend the hearings where you argued before the Competition Tribunal. It seems to me that one of the reasons why your case did not move forward is quite simply because we have not witnessed that state of affairs. When you talk about marketing, that troubles me. I definitely do not believe that the average consumer, low-income people in Canada, want foreign travel or all the things we pay for with our credit cards anymore than I do.
We have to have an objective. I want to know what the objective is. Is it just to increase your marketing budget in order to compete with Visa and MasterCard, or do you want to remain a universal non-profit utility? To ensure that the entire population of Canada has access?
And if we want a Visa or MasterCard and all the interest that goes with them, we are going to pay for them. The cost associated with that service has to be very specific, because what is important right now is the cost. You have a very reasonable cost. I believe that members are aware that your system works well. First, you are probably the top performing organization in the world. Changes are rare when things are going well.
The first question was: how does your association operate internally? The second one concerned the international aspect, costs. The third was about the codes of conduct, and the fourth was about the need to change the structure of your organization.
[English]
Mr. O'Connell: Thank you senator, for those great questions. I will start at the top. Interac has 65 members, and anyone can join — small and large companies alike. The consent order prescribed a representative 14-person board structure to govern the conduct of the Interac Association. They represent the 65 members. There are rules. There are the founding members on the board and others. There have to be certain numbers from the different categories. There is a merchant on the board as well as someone from Petro-Canada, for example. By transaction, seats are awarded on a yearly basis. Thus, different board members come and go. Together with management, they try to direct the operations of Interac Association. That is how that works in conjunction.
As I said, it has challenges. One naturally tends to move at the pace of the slowest member of a governance structure. We are looking at ways to get around that, in particular when our competitors are public companies with independent boards that are making rapid investments and long-term business decisions, et cetera.
I completely agree with you; our mantra and vision is to continue to provide Canadians with all kinds of different ways to pay with their own money. Debit payments are very important for financial management, et cetera. I think it is important that Interac, as a network, should be able to put out products that allow Canadians to pay for things any way they want to. We want Canadians to have the opportunity to go to an ATM in Mexico, for instance, and do an Interac transaction and pay with cash at a vendor elsewhere in Mexico. Perhaps the Canadian does not want to do an electronic transaction at that place of business. We want to facilitate that option for Canadians. This is one of the gaps we have to fill. If you are travelling to the United States, you can use your Interac card not only at the ABMs but also at the merchant point of sale. When you go to Brazil, you will be able to access cash from your bank account in Canada using your Interac card.
We have done deals with China Union Pay and other networks around the world to try to expand the footprint to allow Interac cards to be used at merchants in those jurisdictions. That is a strategy we are employing.
Obviously, when you are talking about foreign transactions, there is foreign exchange and other elements to the transaction that add to its cost. We are not in that business; you would have to direct that to the banks and so forth that are involved with foreign exchange. For example, you would not have the same cost structure for a Visa credit transaction abroad as you would for an Interac card debit transaction.
I think your final point was on the code of conduct itself.
Senator Hervieux-Payette: Are you comfortable that it is all in place and everyone is now on board?
Mr. O'Connell: I am. Everyone in the industry that is within our sphere I see on target for the dates that have been prescribed for those provisions in the code of conduct. I have not seen or heard any alarm bells, so I think the industry is adhering to the code of conduct and that is a good thing.
The Chair: Given what you just said, did I hear you earlier saying that you were not concerned but you were vigilant with respect to enforcement.
Mr. O'Connell: Absolutely.
The Chair: Do I take it that you want from whomever — FCAC, I guess now — a greater enforcement activity?
Mr. O'Connell: Yes, including on ourselves. We are fully compliant. We are implemented with respect to the code of conduct. However, we do believe, as has been proven in other jurisdictions, that we need to ensure this code of conduct is adhered to, and that requires some oversight.
The Chair: Have you had occasion to raise what you consider to be non-compliance with the code of conduct by someone else?
Mr. O'Connell: As we started out this session, Senator Ringuette pointed to a very early example of something that went awry — again, not by setup of the card, which was in complete adherence to the code. Somewhere in the processing, we had some transactions going the wrong way, and that needs to be rectified. Therefore, I understand the FCAC is on top of that issue.
The Chair: We are out of time, I am afraid. We could continue, I am sure, this interesting discussion as I know there are other questions from senators. However, regretfully, I have to thank you, Mr. O'Connell, for appearing before us and giving your evidence in such a forthright manner.
[Translation]
Welcome. My name is Michael A. Meighen, chair of this committee. Today we are hearing from Patrice Dagenais, Director, Payment Services and Business Partnerships and Vice-President of Desjardins Cards Services, Desjardins Group. You will agree with me that that is quite a title. Mr. Dagenais is on our left, and to his left, we have Bernard Brun, Director of Government Relations with the Desjardins Group.
Welcome to you both. We apologize for the high tech problems.
Bernard Brun, Director, Government Relations, Desjardins Group: Very briefly, as you said, we are going to proceed a little more quickly. We will simply provide some background for Desjardins and Cards Services. Desjardins is here as an acquirer in its relations with merchants.
Desjardins is the leading cooperative financial group with assets of over $175 billion. It is active in the debit and credit card payments sector. We are talking about 10 per cent of the Canadian market and more than 50,000 merchants served by Desjardins' services.
Beside me, Patrice Dagenais, Director of Payment Services, who has prepared a brief, will be able to give you an idea of the situation with regard to the bill and our relationship with both merchants and card issuers.
Patrice Dagenais, Director, Payment Services and Business Partnerships, Vice-President, Desjardins Cards Services, Desjardins Group: Mr. Chair, I am pleased to have this opportunity to speak to you about credit and debit cards in Canada. The last time was nearly two years ago. However, I am still a little disappointed to see that not all the problems have been resolved and that the climate of trust between merchants and the card issuing financial institutions and networks has not yet been restored.
On a more positive note, I would like to recall certain important steps made in recent months. The payment networks and their members have all approved their voluntary code of conduct published by the Department of Finance. That code is being implemented and will help address a number of concerns raised by merchants. Starting next week, it will provide more transparency and clarity with regard to these fees for the acceptance of payment cards at points of sale. It will enable merchants to better plan changes in their costs as they will receive 90 days' notice of all rate increases.
Merchants will be able to cancel their contracts, without penalty, if they do not accept the new rates.
Merchants will have more freedom of choice of methods of payment that are accepted at their institutions. They will no longer be required to accept all the credit and debit products of a single network. If they wish, they may urge their clients to use one method of payment more than another, by offering them discounts if they use a method of payment that they consider less costly for them.
Acquirers have undertaken to stop using practices of default adherence to new products. The code also provides a framework for the issuing of ``co-badged'' debit cards and ensures that the Interac debit product will continue to be the product used at points of sale in Canada for those cards and that Interac's rates and rules will apply to those transactions.
Lastly, payment card issuers have undertaken not to issue cards combining debit and credit functions and to provide a clearer framework for the issuing of preferred cards by restricting them to specific cardholder groups and issuing them solely in response to a cardholder request.
This is an entire series of measures that responds to requests by merchants. I would also like to mention the recent announcement by Visa and MasterCard, which, at the request of merchants, have agreed to postpone for six months the implementation of new rules governing liability for fraudulent transactions as a result of the introduction of chip card technology.
Visa, MasterCard and their members acknowledge the complexities involved in migrating to this new technology and wish to allow merchants additional time. Desjardins is proud to be one of the promoters of this decision.
I also want to mention the work of the Task Force for the Payment System Review. This government initiative is helping to bring all stakeholders together, payment card networks, issuers, acquirers and merchants, to discuss the best way to evaluate the current system.
These are steps in the right direction, and they should be producing some results in the next few months. In spite of that, not all the problems have been solved. Merchants tell us about their concerns about rates in view of the increasing popularity of cards and payments by card; their card acceptance fees form an increasing part of their expenses. They want to anticipate how they evolve and to understand the rates that apply to each type of card and transaction. Although the payment networks and their members have made numerous changes to the rate structure in recent years, they are not always clearly explained to merchants on the basis of the services they provide and the benefits they derive in operating their businesses.
Merchants believe they do not have the option of negotiating rates with their payment service providers, while others say they do not really have a choice whether to accept the cards because their clientele demands them. They believe the system no longer has any offsets and are appealing to government to regulate prices.
In Canada, it is unusual for the government to set prices and to determine, for example, the interchange rate applicable to payment systems. Desjardins does not believe it is necessarily the government's role in a market economy to decide what is a fair and equitable price between a service provider and its clients. The market itself should ideally determine that price based on supply and demand principles.
Moreover, the new Payment Card Networks Act already provides that the Governor in Council, on recommendation by the Department of Finance, may regulate these networks where abusive practices are reported to it. We do not believe additional legislation is necessary at this time.
Canadians are among the biggest card payment users in the world. That level could not have been achieved without the involvement of all stakeholders, including merchants. Merchants accepted these means of payment no doubt because they derived some from it and believe there was a balance between the price charged and the benefits they derived. The payment systems and card issuers have been very successful with the payment services that they put in place and that users would no longer want to give up today. This has given them a social responsibility to maintain a fair balance in the distribution of contributions in support of those services. The onus is on them to establish an appropriate and fair rate system for merchants, who are central to the acceptance of cards as a method of payment.
Like all Canadian merchants, we believe in the principle of free enterprise subject to competition. Like them, we believe that healthy competition must be carried out in a context in which stakeholders are on an equal footing and have complete information at their disposal in order to exercise free choice.
The commitment to the code of conduct by payment networks and their members will guarantee this transparency and freedom of choice. We want to be able to continue distinguishing ourselves in our offer of payment services: our rate structure is simple, clear, easy to understand and competitive. We are in constant dialogue with our clients. We want to be able to continue to innovate without rigid regulatory constraints.
Allow me to take advantage of this opportunity to tell you about the launch of our new end-to-end data encryption solution, which will enable our merchants to meet the security standards required by payment networks without having to invest in costly changes to their card transactions processing systems.
Thank you for listening. I am ready to answer your questions. Thank you.
The Chair: Thank you, gentlemen. I now give the floor to Senator Ringuette.
Senator Ringuette: It is always a pleasure to speak with you. When I say ``you,'' I mean the Desjardins Group. You are part of this payment system and I feel you enjoy somewhat special status relative to other organizations because, and correct me if I am wrong, you are both issuers for consumers and suppliers of credit card utilisation technology as well. So, for that purpose, how do you compare to the industry as a whole, especially on costs?
Mr. Dagenais: That is in fact an excellent question. Yes, we are one of the rare financial institutions that has both merchants and cardholders. So we are in constant dialogue with both merchants and cardholders. In terms of distinctions, there are a number, but one of the distinctive features we have retained in recent years is that we have a rate structure that is still very simple for merchants. Currently, for example, we still have a single rate that we offer for merchants. So that is one of the distinctive features that we have relative to the competition.
Senator Ringuette: I understand. On your technological gadgets that are identified as Desjardins, I believe you nevertheless use Moneris?
Mr. Dagenais: No, we work with people from a number of businesses to deliver all our services. But the service is entirely under Desjardins' responsibility, from A to Z. And we do not work particularly with Moneris or other acquirers in Canada. Desjardins is really an acquirer on the same footing as Moneris, Global Payment and the others in the market.
Senator Ringuette: You are both the financial institution and the technology provider. So you achieve savings. Are the fees that you charge merchants to use Visa or MasterCard different, or does the Groupe Desjardins have to submit to the contract that Visa and MasterCard sign with all Canadian financial institutions?
Mr. Dagenais: We have to abide by the regulations of Visa and MasterCard respecting transactions conducted involving the trademark logos of those cards. The same is true with Interac. So we cannot offer, we cannot have any major distinctions relative to that. The rate structure of Visa and MasterCard is the default structure.
By definition, we can offer other rate components that are specific to Desjardins.
Senator Ringuette: Rate components to merchants?
Mr. Dagenais: Exactly, and to cardholders. However, we nevertheless have to comply with Visa and MasterCard regulations.
Senator Massicotte: We do not always understand the importance of a credit card. You are talking about the fees payable to Visa and MasterCard, what are called interchange fees.
With respect to fees paid by merchants, which are on average two per cent, what percentage do your transaction costs and the benefits you grant to credit card holders represent? What is the breakdown of the total cost of indirect fees payable by the consumer?
Mr. Dagenais: Interchange fees are the fees that the acquirer pays to the issuer. They do not go to the payment network. That aspect has to be clarified. On the whole, the transaction cost may represent a fairly large portion. I will not cite a specific percentage, but it is a substantially large portion of the acquirer's activities.
Senator Massicotte: The benefits, such as accumulated travel points or free products, are payable by the financial institutions that issue the credit cards, if I understand correctly.
Mr. Dagenais: Yes.
Senator Massicotte: The cost of gifts nevertheless represents a large portion of the two per cent total cost of the transaction to the merchant. Is that correct?
Mr. Dagenais: The card issuers also have other sources of revenue apart from their revenue from interchange fees. They also receive revenue for annual card fees and interest revenue. In actual fact, you cannot make as direct a connection between the points benefit and interchange fees as such, but that is part of the equation.
Senator Massicotte: Some American studies have shown that the fees can be segmented. In principle, interest rate revenue compensates for delinquent cardholders and increased annual fees for inherent credit risks. However, your position puts you in a conflict of interest. On the one hand, Desjardins makes a tidy profit on credit cards and, on the other hand, as an issuer, Desjardins says that the regulations are adequate.
Desjardins is very much aware of its customers, who are shareholders, and there is nevertheless a conflict. Your business interests are relevant. How big are your annual profits from credit cards, including annual fees and interest?
Mr. Dagenais: In actual fact, interchange fees have been around since 1968. This is not something new. Their purpose is to establish an effective network for both merchants and cardholders. For a number of years now, this has been the best way to improve and develop the payment network in Canada. If you look at the Canadian situation today and compare it with those of other countries, payment by card, including debit and credit, is more advanced than in many other countries in the world.
We rank second behind Norway, as a result of which the economy has progressed in that respect.
Senator Massicotte: We know the language. You know that the Competition Bureau is challenging certain common practices? Do you agree with that observation? What is your position on that subject?
Mr. Dagenais: That is a good question. Consider the case of the merchant account surcharge. As we speak, Interac is subject to the debit card surcharge in Canada, and that is a very unusual practice. So by definition, we believe that if the surcharge were allowed, merchants would not do it and that could have a negative impact on consumers. So some thinking has to be done in industry terms to determine what is better for both merchant and consumer.
As regards the rule creating an obligation to accept all cards, Desjardins was an ardent defender of merchant choice in being able to offer both debit and credit separately. We are in favour of merchants having a right and power to discuss the terms and conditions of those choices in future.
So to what extent and how could that be done, we cannot really say because, in fact, the consumer component also has to be respected. These are extremely complex issues that have to be examined from a network standpoint.
At the network level, when there are trademarks such as Visa and MasterCard on their cards, consumers expect to be able to use the cards wherever Visa and MasterCard are. Terms and conditions that do not currently exist have to be developed. Some thinking has to be done on that. We nevertheless agree that the networks should have a social responsibility for ensuring that new product innovation and use can be done with the merchants' consent.
[English]
Senator Moore: Thank you, gentlemen, for participating today. You are the acquirer, the card issuer and the network. Is that correct?
Mr. Dagenais: We are the network for Desjardins on some transactions only. We use Visa and MasterCard as the network and Interac for debit.
Senator Moore: You use Interac for debit.
Mr. Dagenais: We use Interac for debit and Visa and MasterCard for acquiring.
Senator Moore: For your own card, are you all three of the parties?
Mr. Dagenais: Yes.
Senator Moore: Do you participate in PCI compliance? Do you charge compliance fees to people who use your service?
Mr. Dagenais: No.
Senator Moore: Did you hear the evidence yesterday?
Mr. Dagenais: I did not hear it.
Senator Moore: We heard from witnesses that the University of Saskatchewan and the City of Ottawa have to pay PCI fees to certify that they are compliant; and the fees are substantial. You should read the evidence.
Mr. Dagenais: That is what we were talking about. The new product that we launched today will help merchants to be compliant with PCI and reduce many of their costs to be PCI compliant. That is the main intent of the new product launched today. We want this new product so that merchants will comply.
The Chair: What does the acronym PCI mean?
Mr. Dagenais: PCI is a standard for the card number you have in your system. Some merchants have card numbers in their systems and fraudulent people can access the merchant's PCI or the merchant's system and gain access to the card numbers. We have to protect the card numbers in the merchant's system. PCI is the name of the standard the merchant must accomplish for the protection of the card number.
Senator Moore: What does PCI mean? Does it mean Payment Card — what is the ``I''? Integrity?
[Translation]
The Chair: What is the equivalent in French?
Mr. Dagenais: In French, I do not know. I do not remember what PCI means, but it is a protection standard for card numbers used in merchants' computer systems.
[English]
Senator Hervieux-Payette: It means Payment Card Industry. That is a standard.
Senator Moore: Thank you very much. You do not do that now, but you are looking at it, is that correct?
Mr. Dagenais: Well, we are PCI. Every acquirer in Canada must be PCI. We want all merchants to be PCI. We help them to find solutions that will cost the merchant much less to become PCI compliant.
We are undertaking those solutions because we understand that it is a major challenge for the merchant community. We have developed solutions to help make it easier for merchants become compliant with PCI.
Senator Moore: Do you suffer from many fraud or bad debt transactions?
Mr. Dagenais: The reason we went to EMV, Europay, MasterCard and Visa, is fraud related; we wanted to reduce the fraud aspect on transactions. Now we are beginning to see the benefits of the large investment that the industry has made into EMV, but we are just beginning to see it. It is too early to say that it is over, but it is a pretty huge number.
[Translation]
Senator Mockler: Being a senator from New Brunswick, I could not let you go without asking you one question. I will take this opportunity to congratulate you on the service you are also offering in Acadia through Acadian caisses populaires.
Are the new products you are offering, or will be offering, available across the entire network of Acadian caisses populaires?
Mr. Dagenais: An implementation period is planned between now and the summer, and it will be available across Canada.
Senator Mockler: I would like to go back to the two per cent rate you mentioned. With regard to your fees and/or revenues, what part of that rate corresponds to bad debts?
Mr. Dagenais: That is a good question. Bad debts are a relatively minor issue for merchants. Car issuers suffer more from bad debts. On the issuer side, Desjardins is one of the issuers in Canada with the lowest rate of bad debts. However, I say that without giving you any specific figures.
Senator Mockler: Why do you not want to give us those figures?
Mr. Dagenais: As you have noticed, we are the only financial institution appearing before you, and we would therefore like to retain a certain degree of anonymity with respect to figures. If all the financial institutions reported their figures, we probably would not have any objection to doing so.
Senator Ringuette: Mr. Dagenais, you are right; the financial institutions have been protecting their data since the process started in 2009. And as this committee is a public interest committee, we cannot force people to provide financial data. If we could, those figures would probably justify the bill I have introduced even more. We have previously discussed the major problem that high fees represent. It is all well and good to say that we are a technological leader, but I am not convinced of that. For example, mobile technology in restaurants has just been adopted in Canada over the past year, whereas that has been in widespread use in Europe for six or seven years now.
So with regard to leadership, I am not convinced. Where we are in fact a leader is on costs to merchants for credit card transactions, which currently vary from 2 to 3 per cent and even more in Canada. Some merchants have started sending me their monthly accounts, and they are a terrible mess. Some transactions can represent up to 3.5 per cent or more.
So we are indeed a leader in that area, but what could you suggest so that we can be more of a leader in merchant fees?
Mr. Dagenais: I do not entirely agree with you that we are not a technological leader. It is true that some countries are more advanced than we are, but in terms of payment by card, we are the number two country in the world.
Earlier you discussed credit card fees. It is true that, if we do a comparison with the rest of the world on credit card fees, they are not among the lowest, and are probably among the highest. That is still a fact.
However, it is also true that we have some of the lowest debit card fees in the world, and that is extremely important. The two payment systems have been growing at roughly the same rate in Canada for a number of years now. We have to consider that, in actual fact, if we looked at the total equation of all debit and credit cards for the purpose of comparison with other countries, the gap would probably be as pronounced as you say.
Senator Hervieux-Payette: I would like to say a brief word about the Desjardins family. Have you issued a larger number of Desjardins cards than the number of Desjardins members?
In Canada, we receive promotional material in the mail from, for example, MBNA, offering credit cards that feature no interest for six months, obviously but after that period, you pay for the rest of your life. Do you promote your credit cards outside your circle of members?
What side of the fence do you stand on with regard to Interac? Do you find that being a non-profit corporation undermines Interac service, or to all intents and purposes do you view that as a successful method of payment?
Mr. Dagenais: We solicit our cardholders mainly through our caisses members, but also through a product called Financement Accord D, which we offer to 6,500 merchants across Canada.
We do very little or virtually no external soliciting such as what you mentioned, direct marketing outside the caisses network.
As regards your second question, we believe that Interac is a success and we support any developments that will enable it to remain a success. Currently, we do not disagree with Interac's present situation. However, we might be amenable to allowing it to evolve into another solution that would make it more competitive in the global situation in which it finds itself because Interac remains Canadian and a marginal player compared to its global competitors.
Senator Hervieux-Payette: Is the reason why you do not do any marketing across Canada to compete with cards already in the market that it is not your network and that it would not be worth the trouble? It seems to me that, from a competition standpoint, there could be more Canadian companies in this niche; you have to remember that Visa and MasterCard are American companies. I encourage you to promote your card to the 34 million Canadians, but would you have adequate resources to deal with that?
Mr. Dagenais: We have no system issues, but that is a challenge for us from a business practice standpoint.
Senator Hervieux-Payette: Good luck.
[English]
Senator Moore: Is Desjardins Group one of the owners of Interac?
Mr. Dagenais: Yes, we are.
Senator Moore: Are you one of the founding members?
Mr. Dagenais: Yes, we are one of the eight founding members of Interac.
Senator Moore: Do you have someone from your company on the board of Interac?
Mr. Dagenais: Yes, we are on the board of Interac.
Senator Moore: Are you the board member that represents Interac?
Mr. Dagenais: I am the board member, yes.
Senator Moore: I see a frustration and maybe a conflict. It seems to me that the big banks and the big not-for-profits or co-ops have a vested interest in getting more revenues through transactions over the Visa debit network than over the Interac. What is the demeanour of your board? Are you encouraging Interac to expand or is it a frustrating thing and you do not want it to get too big because you are making more money on the Visa debit network?
Mr. Dagenais: It is my point of view, and Desjardins is quite clear on this point: We want Interac to be a competitor in the marketplace and have a fair share of that marketplace. Desjardins has no interest in Interac being put aside. We want Interac to survive in the future and for it to be a major player in the Canadian market.
Senator Moore: Do you want to see it expand and to seek a greater share of the market?
Mr. Dagenais: We want to see it expand, exactly. We do not want to shackle Interac in the future. Desjardins wants no such thing.
Senator Moore: Do you think the majority of your fellow board members share that feeling?
Mr. Dagenais: The majority of board members see Interac as an asset. The majority would probably say the same thing, maybe not with the same words, however. I would say they are supportive.
[Translation]
The Chair: Unfortunately, our time is up. Mr. Dagenais, Mr. Brun, thank you for being here today and for your explanations in both official languages. They were very clear and will be of considerable help to us in our study. We hope to see you again on another occasion, and we apologize for the technical problems you encountered at the start of the meeting.
(The committee adjourned.)