Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 19 - Evidence - March 2, 2011
OTTAWA, Wednesday, March 2, 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 4:22 p.m. to give consideration to the bill.
Senator Michael A. Meighen (Chair) in the chair.
[English]
The Chair: Good afternoon. My name is Michael Meighen. I am from Ontario, and I have the honour to chair this committee.
Before I go any further, I will introduce the senators here with us. Senator Hervieux-Payette, from Quebec, is the deputy chair of the committee. Senator Percy Mockler is from New Brunswick, and Senator Larry Smith is from Quebec.
[Translation]
To my left, Senator Ringuette is from New Brunswick, Senator Tommy Banks is from Alberta and Senator Harb is from Ontario.
[English]
There will be other senators joining us. If I have a chance to introduce them, I will.
We resume today our examination of Bill S-201, An Act to amend the Office of the Superintendent of Financial Institutions Act (credit and debit cards). Our colleague Senator Ringuette is the sponsor of this bill.
[Translation]
This bill amends the Office of the Superintendant of Financial Institutions Act (credit and debit cards) 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]
We have already heard from witnesses respecting the substance of Bill S-201 in five prior meetings of this committee, the first being when the bill's sponsor gave testimony herself on June 23 of last year.
Joining us for today's deliberations, and we are very pleased to welcome you, lady and gentlemen, are representatives of Canada's payment processor companies. From Moneris Solutions, we have Jim Baumgartner, President and Chief Executive Officer and Fern Glowinsky, Senior Vice-President, General Counsel and Corporate Secretary. Also appearing before us today is Jeff van Duynhoven, President of TD Merchant Services, Sam Jawad, President of Chase Paymentech Solutions, and Jordan Cohen, President of Global Payments Canada GP.
Mr. Baumgartner is the lead-off hitter. As is our usual custom, we will hear from you all, unless there is something of great urgency that must be cleared up, and then I hope you will be open from questions with senators.
Jim Baumgartner, President and Chief Executive Officer, Moneris Solutions: Thank you for inviting us to appear before the committee regarding Bill S-201.
As some of you may recall, we appeared before the committee in 2009 during your study of the credit and debit card industry. We thought it would be helpful to review some of the remarks that we presented at that time, in particular because we recognize that some of the members of the committee are a bit newer.
Moneris is a Canadian-based payment processing company, with operations in Canada as well as the U.S. We are a joint investment of the Royal Bank of Canada and the Bank of Montreal, and we employ approximately 1800 people, the vast majority of whom are here in Canada. Our head office is in Toronto, and we also have offices in Sackville, New Brunswick, Montreal, Calgary, Vancouver as well as the United States.
Canada maintains one of the most ubiquitous, secure and successful electronic payment networks in the entire world, and the Canadian payment processing market is highly competitive. Merchants have a choice about card acceptance and do so because of the significant value that they derive from payments, including avoiding the costs associated with handling cash, reporting and reconciliation, finality of payment, speed and throughput at the point of sale, and increasing customer satisfaction by offering a payment method of choice to their customers.
Our role in electronic payment acceptance tends to be the least understood component of the industry, so I will walk you through what we do.
First, we enable merchants' acceptance of electronic payments by providing the supporting cardholder facing solution, which may be a standalone point of sale device, or enabling payments via cash register, gas pump, kiosk or even website.
Second, when a card is presented for payment, we route the authorization request through the payment network, which could be Visa or MasterCard, for example, to the card issuer, which would be the issuing bank. They send back an authorization message that we deliver to the merchant so that the merchant knows whether the card issuer authorizes the cardholder to complete the transaction using that particular card. Once the transaction is authorized by the card issuer, the merchant finalizes the transaction with the cardholder and sends a settlement file to us, which prompts us to settle the funds into the merchant's bank account.
We also provide reporting to enable the merchant to monitor transaction activity for the purposes of operational as well as financial purposes and fraud monitoring.
Another important element of our service is exception item handling, which includes tracing of individual transactions and mediating on behalf of the merchant where a cardholder disputes a transaction.
In our role as merchant acquirer, it is critical to note that we bear the risk for merchant transactions when the merchant does not deliver the goods or the services that have been paid for in advance — for example, where a cardholder purchases an airline ticket and the airline goes out of business prior to delivering the flight — and also in the case of merchant fraud and non-compliance with payment network rules — for example, in the case of fines and costs levied as a result of a cardholder data security breech.
I hope this summary of our role in the industry will be helpful to committee members as you consider Bill S-201.
Moneris has been and continues to be an active participant in the dialogue surrounding the credit and debit card industry. We are continuously advocating to the payment networks on behalf of our merchants, and we have a strong history of advocating for public disclosure of the payment networks' fees as well as their rules. We were proactively engaged with the Department of Finance as well as other stakeholders during the development of the voluntary code of conduct for the credit and debit card industry, and we adopted the code following its issuance by the Minister of Finance. We are also an active member of the Task Force for the Payments System Review.
With respect to Bill S-201, it is our view that the Financial Consumer Agency of Canada is an appropriate body, as chosen by the minister, to oversee the code and to report to the minister on the payment networks pursuant to the Payment Card Networks Act.
OSFI's mandate relates primarily to the safety and soundness of financial institutions within Canada. There has never been an instance in the 40-plus-year history of credit card processing in Canada when the guaranteed funds promise of Visa and MasterCard has not been honoured. Therefore, we respectfully submit that the content of Bill S- 201 is covered already by the powers appropriately bestowed on the FCAC.
Thank you for the opportunity to present before you today.
Sam Jawad, President, Chase Paymentech Solutions: Paymentech is a global leader in merchant acquiring. Our technology solutions allow merchants to accept electronic payments such as Interac, debit, Visa, MasterCard and American Express. It is an integral component of the electronic payments infrastructure and provides significant benefits to consumers and merchants.
[Translation]
Here in Canada, Paymentech commenced operations in 2002. Today we provide payment processing services for approximately 110,000 merchant locations and employ hundreds of people across Canada. Our customers range from large multi-national chains to single outlet locations and include some of Canada's most well-known and respected brands.
[English]
Paymentech is a proud partner with both the Canadian Federation of Independent Business and the Retail Council of Canada. As part of these partnerships, Paymentech negotiated payment processing packages directly with the CFIB and the RCC that are made available to their members. These processing packages are designed specifically to respond to the unique needs of CFIB and RCC members.
Merchants derive considerable benefits from the payments infrastructure, including, among other things, instantaneous ability to process a sale; receipt of funds, which typically happens within 24 hours; increased customer base with available credit lines; increased sales and profits; and a reduced credit underwriting cost. For consumers, electronic payments provide a convenient, reliable and secure means by which they can pay for their purchases.
The primary services that acquirers provide to merchants are rapid authorizations and settlement of transactions. When a customer presents a merchant with a payment card, Paymentech initiates the authorization of the transaction, which is completed within seconds. Paymentech then settles the transaction by providing merchants the funds owed by the consumer from the sale, typically within 24 hours.
Paymentech's industry leading technology and services allow merchants to better serve consumers with products in locations in a manner never before available to them. Online payments were introduced in the late 1990s and are now ubiquitous. Recent innovations in the last 5 to 10 years include wireless mobile terminals, which are increasingly popular in restaurants as they allow the server to take the terminal directly to the table for completion of the transaction; and unattended kiosks, such as those in movie theatres that allow consumers to purchase tickets without queuing at a service desk. As well, you might see Paymentech's equipment and contactless readers when you purchase your morning coffee.
In addition, Paymentech provides merchants with clear and transparent reporting. Merchants receive monthly statements that set out the number and volume of transactions and the effective merchant discount rate. Merchants may also utilize Paymentech's detailed online reporting 24 hours a day, 365 days per year. Merchants benefit from tremendous competition in the acquiring market. At least nine major acquirers and numerous independent sales organizations are active in the Canadian market and compete aggressively for prospective customers.
Bill S-201 would mandate OSFI to monitor and make recommendations to the Minister of Finance regarding the use of debit and credit cards in Canada. In June 2009, this committee issued a report following a substantial review of the credit and debit systems in Canada. Since the report, three noteworthy developments have taken place. First is the introduction of a voluntary code of conduct for the debit and credit card industry, which in its short existence has provided benefits and remedies not previously available to merchants. Second is the passage of the Payment Card Networks Act, which gives the minister powers to regulate the payment card networks. Third is the creation of the Task Force for the Payments System Review, which will issue a comprehensive report by the end of this year.
With all of these developments, in particular the adoption of the Code of Conduct, Paymentech believes that the provisions of Bill S-201 are not necessary and would result in an additional burden on all participants in the system with no discernible benefits for consumers and merchants.
Thank you for the opportunity to appear; I am happy to take your questions.
Jeff van Duynhoven, President, TD Merchant Services: I appreciate the opportunity to appear before the committee today on behalf of TD Merchant Services. TD Merchant Services is a business unit of TD Bank Group and has been established and trusted in the payment solutions industry for over 30 years.
As some of you may recall, I appeared before you in 2009 as part of the committee's study on credit and debit card payment systems. Today, I hope to build on my previous testimony to help inform your consideration of Bill S-201.
Card payment systems are a complex topic. I am happy to do what I can to help explain our role as a merchant acquirer within that system. Card payment systems typically involve four participants: cardholders, merchants, card issuers and acquirers. For this reason, the card payment system is referred to at times as a four-party system. In the simplest sense, as an acquirer, we provide our merchant customers with point of sale devices — the hardware that sits on the counter in the store — and we process payments on behalf of the retailer. We enable merchants to accept credit and debit card transactions for their goods and services.
Consumers want choice and flexibility in deciding how to pay for goods and services. Merchants accept debit and credit cards because it is a simple and efficient means to transact for both merchants and cardholders. Some products and services available to cardholders would either not exist in the absence of payment cards or would involve significantly higher transaction costs. Consider renting a car or purchasing concert tickets over the Internet as an example.
We have seen non-traditional merchants, such as many utility companies, move to the acceptance of credit cards, despite the availability of efficient alternate payment methods, such as electronic bill payments or pre-authorized payments from a customer's chequing account. They are accepting credit card payments because their customers want this convenience, and they see value in offering choices to their clients.
Major merchant acquirers or payment processors, including TD Merchant Services, provide a similar set of payment capabilities. TD competes daily with other acquirers on many attributes, including price, service, system capabilities, reliability and transparency. TD is the only Canadian bank that directly operates a merchant acquiring business. We believe the acquiring business is a relationship business, and we appreciate having a direct relationship with retailers and business owners across Canada. To give you a sense of that relationship, approximately nine out of ten of our merchant customers have a broader banking relationship with TD Bank.
This committee has heard testimony to date regarding pricing fairness and transparency. These issues get to the heart of the establishment of the Code of Conduct for the Credit and Debit Card Industry in Canada introduced last spring, which we lobbied for and embrace. The code is consistent with TD Merchant Services' long-standing practice of communicating openly and transparently with our customers. The code has clarified expectations for all stakeholders across the payments system. It is still early days, but we think it is working as a tool for increased transparency and accountability.
We agree with Finance Canada, the Financial Consumer Agency of Canada, OSFI and other witnesses who have appeared before this committee that the code of conduct addresses the core challenges raised by Bill S-201. Additionally, we note that the Task Force for the Payments System Review is studying the entire payment market and will bring forth recommendations later this year. We look forward to receiving these recommendations. It is clear that public policy debate is not over, and TD is engaged actively in that process.
I am aware that some organizations have complained about a lack of transparency in the payment system. From my perspective, I can say that we work hard to communicate clearly with our customers. Based on feedback that we have received, we are doing a good job. For instance, when notifying our customers about changes to the costs associated with their services, it has been our practice to use plain language and to provide clear examples to help our customers calculate the impact a change might have on their business. Beyond communicating price adjustments, we take steps to keep customers informed when they open their statements each month. TD Merchant Services statements are written in plain language so that our customers understand the fees they pay for the services they receive. We clearly identify the type of card used — for example, an infinite card or a commercial card — in English and not via the use of codes or other more obscure terminology — such as "unqualified," "nearqualified" or "mid-qualified," — that does not mean much to merchants. The code has challenged us and helped to focus our efforts. We will continue to improve our customers' experiences with us and to communicate with our clients in a fair and transparent manner because it is the right thing to do and it makes good business sense.
Thank you, Mr. Chair. I would be pleased to answer questions.
Jordan Cohen, President, Global Payments Canada GP: On behalf of Global Payments Canada GP, I thank you for the opportunity to provide some context and to answer your questions about the Canadian credit and debit card industry.
Global Payments Canada is a leading Canadian payments processor. We facilitate electronic transactions for our merchant clients, providing them with swift payment for goods and services. We employ over 400 people in Canada in offices across the country. When a merchant chooses to accept payment cards, they do so because of the significant value that is derived from electronic payments. For our merchant clients, these benefits include enabling convenient payment options for their customers; receiving swift payment for the gross value of purchases within one to two business days; ensuring that all supporting infrastructure and processes are always up to date, secure and compliant, such as supporting EMV chip and pin technology, PCI standards; providing reporting and fraud monitoring; managing charge-backs and other risk factors; and maintaining 24-7 customer support.
Global Payments is committed to our role as partner and advocate for merchant clients. We acknowledge the concerns raised about our industry and recognize that improvements can be made to address these issues. We are pleased to see the release of the code of conduct by the Minister of Finance because we support the code's goals of ensuring transparency, flexibility and choice for Canadian merchants. To that end, we are implementing changes to our processes and specifically to our merchant statements that are consistent with these objectives.
Our February month-end statements will reflect these changes and include a summary of the effective merchant discount rate by card type. We will continue to be an active participant in discussions and consultations related to the Canadian payments industry and the code of conduct specifically.
Thank you for inviting me here today and for the opportunity to provide some context and clarity on our industry.
The Chair: Mr. Cohen, for my edification, near the end of your remarks, you said: " . . . merchant discount rate by card type." In plainer English, does that mean how much it costs the merchant?
Mr. Cohen: Yes, it refers to the specific type of card.
The Chair: For example, card A might cost the merchant $1 and card B might cost 50 cents?
Mr. Cohen: Correct.
Senator Greene: Somebody goes to a store and makes a decision to use either a debit card or a credit card. When they use a debit card, Interac charges a flat fee. My understanding is that when they use a credit card, a percentage is charged. Is that right?
Mr. van Duynhoven: I am happy to answer that. Our organizations charge the fees to the merchants. I will speak for TD Merchant Services. We charge a flat fee. It is a flat fee in cents for each debit transaction.
Senator Greene: What do you charge for a credit card transaction?
Mr. van Duynhoven: There is a percentage fee. There are many different methods of charging. Typically, it is a merchant discount rate, which is a quoted rate, for those transactions.
The Chair: If I may intervene, is that the same for everybody? Is anybody different? It is a flat fee for debit and a percentage fee for credit.
Mr. Jawad: Yes.
Senator Greene: Can you explain the differences between debit and credit cards that require you to charge a percentage on the credit card?
Mr. Baumgartner: I am happy to try to answer that. Others may feel free to chip in. There are a number of differences. It is a great question because it is a confusing dynamic. The credit card networks, Visa and MasterCard, charge each of us a certain percentage. It could be 1.5 per cent or something different. It depends on the type of card that is used.
Interac does not have that same structure. The Interac fee is basically a small fee that covers the running of Interac.
In the case of the card brands, Visa and MasterCard specifically, the fee that I mentioned is typically 1.5 per cent or 1.75 per cent. The fee is called interchange. That interchange, which makes up the vast majority of our fees to our customers, goes to the issuing bank. Visa and MasterCard do not keep that fee. They charge an assessment fee on top of the interchange assessed to us, and that runs their infrastructure.
There are a couple of components to the fee charges that we get from Visa and MasterCard. With Interac, it is a very small assessment fee today.
Senator Greene: So that I might understand, is a percentage fee charged by the card companies to you?
Mr. Baumgartner: Yes.
Senator Greene: Is the assessment fee a percentage?
Mr. Baumgartner: It is a percentage fee as well with Visa and MasterCard. That is right.
Senator Greene: It is probably not a fair question to ask, but why do they charge percentage fees as opposed to flat fees?
Mr. Baumgartner: I am not sure how they establish that. In some respects, it helps on smaller transactions, such as a cup of coffee, as Mr. Jawad mentioned. Obviously, that ends up being a smaller per-item fee; but it hurts customers with larger ticket items. For example, when you buy an airline ticket, it is added to the cost. I am not sure how they set their pricing dynamic. It is applied consistently to all of us.
The Interac fee tends to be in the form of cents as opposed to a per-item fee. I suppose that could change as well.
Senator Harb: You have probably read some of the testimony from merchants who appeared before the committee. You realize that you do not have a lot of happy campers out there. Almost universally they have one complaint or another, depending on which sector we are dealing with. The fact that you came before the committee is commendable; and we thank you for that.
Is the equipment at a merchant's facility owned by you or by the merchant?
Mr. Baumgartner: It varies by customer. Some choose to own and some choose to rent from us, depending on their capital needs.
Senator Harb: You charge them a fee for processing the payment. From time to time, you mandate them to do some electronic upgrades to software, et cetera. Some merchants complained about that and said that they should not bear those costs. They think that you should take responsibility for sharing that cost. Have you heard that complaint from your merchants? If yes, what was your reaction?
Mr. Baumgartner: Probably the biggest upgrade that we have done as an industry over the last four years has been EMV, which involves a chip in credit cards. When a credit card has a chip, the machine will prompt the payor to enter a PIN instead of signing the transaction receipt.
My competitors and I were required to upgrade our infrastructure to handle those transactions and move Canada toward the rest of the world, with the exception of the United States and a few other countries that are not embracing the chip and PIN technology. That was an expensive infrastructure upgrade for all of us. For merchants who rent their terminals, the entire cost of that change was borne by us. We would not have charged a fee. Others companies may do it differently, and I cannot speak for them. Merchants who purchased their devices and chose to upgrade, although some have not done so, would have to pay for the upgrade to their devices to accommodate the chip and PIN technology. Some merchants who own devices have elected to rent from us because of that capital cost, including some larger merchants. It is a cost-of-capital decision that the merchant has to make. The majority of smaller merchants would have had devices replaced for free.
The Chair: If anybody has a different practice, we would like to know about it.
Mr. Jawad: Our practice is similar. We found that our single largest capital investment has been bringing the industry to the EMV standard and the chip standard. The Canadian dynamic around relationships with merchants is driven by rental arrangements. That helped merchants as it relates specifically to migrating from a non-chip terminal to a chip terminal. That benefitted the merchant community. Perhaps larger organizations had purchased equipment in the past and were required to make a capital injection. They had four or five years to get to the mandate. By that time, they needed to replace equipment. From our perspective, that was the biggest capital cost.
Mr. Cohen: To be clear, the mandate you asked about was made by the card networks. We were on the receiving end of that mandate. I would imagine that around this table alone, the requirement was in excess of hundreds of millions of dollars on infrastructure and terminal upgrades to comply with those mandates. The mandates were originated for the EMV chip by the credit card networks.
Senator Harb: Should they bear some of that cost?
Mr. Baumgartner: Certainly, we would be open to that. It is a great question. The industry in Canada has benefitted from it. I ran some numbers for our merchants. We compared merchants within the same industry that had chip terminals with those that did not have them. We wanted to keep it fair because we sort them by industry. We noticed that the number of disputes and charge-backs, as we say in the industry, were down by more than a factor of two with those that have the EMV infrastructure. Fewer people are saying, "That was not me." When you enter a PIN, we know it is you. We have fewer disputes and less fraud.
As fraud in the system decreases, it benefits everyone, including and especially the merchants because they are the ones who have to train their people to use them. Hopefully it will benefit them in the long run.
Senator Harb: You have all adopted the voluntary code of conduct, right? Has anyone not adopted it yet?
Would there be any problem if, for example, this voluntary code of conduct were to become mandatory? Then the merchant's mind would be put at ease, that everyone is following the same rules. Competition is great, and you have provided us with your views, which is great. You have given us the opportunity to choose where we want to go.
Would you be opposed to the idea that the code of conduct should be mandatory?
Mr. van Duynhoven: I will answer that. Many different codes already exist. As an example, a debit card code of conduct that protects cardholders has been long-standing. Other examples of codes of conduct exist and have worked. The minister was fairly clear when the code of conduct was first issued in saying it was voluntary, but if the industry chooses not to follow those practices, the minister has the ability, with the Payment Card Networks Act, to make those particular changes mandatory.
Given the industry's working history with things like the debit card code of conduct, I certainly think that it is premature to consider anything mandatory. As I said in my opening remarks, it is early days but it seems to be working and to be affecting the changes. A further change at this point in time would not be necessary.
Mr. Baumgartner: The Minister of Finance has established the Task Force for the Payments System Review, which I sit on. It makes sense to wait until the task force recommendations come through.
At the end of the day, if the present voluntary code of conduct, in its current form, were made mandatory, I think as a practical matter, it would not have an impact on any of the organizations here. If it gave more confidence to the merchant community, and ultimately Canadian payments systems, we certainly would not be opposed to it.
Mr. Jawad: On the comment made earlier about the code having worked, it has been proven to work. The code process and core mechanics came into play and resolved two complaints that were launched. In that regard, we think it is working.
Mr. Cohen: I simply agree with Mr. Baumgartner's comments that the code is being, at this point, accepted as mandatory and that, while we should wait and see what the payments task force brings forward, if the voluntary element were dropped and brought more confidence to the industry that would be a good thing for the industry. We are certainly treating the code as mandatory.
The Chair: I understood you to say you had no choice in terms of the new chip technology and so you had to invest. Do the merchants have a choice when you go to them and say, "We have this wonderful new machine that you can take to the table of your restaurant, there is no signing, it is easy, but it will cost you X"? If I were a restaurant, could I say to you, "That is a good idea, but I cannot afford it right now and I am happy with the present system"?
Mr. Jawad: In our experience, our actions to provide them with new technology that is more secure and reliable was welcomed. There was no change in the price, relative to the cost of the terminal. In fact, if we look historically at the cost of the equipment, I would suggest it has come down over the years. It is a highly competitive market, and that aspect of our business is highly sensitive.
I would suggest that merchants certainly benefited from new equipment, more secure and new technology, and I suggest that the price was lower.
Fern Glowinsky, Senior Vice-President, General Counsel and Corporate Secretary, Moneris Solutions: Another point to add is that there is also a liability shift with chip, so merchants are benefiting from having a chip terminal. In the event they have a transaction where someone says "It was not me," and they do not have the chip technology in their merchant location, they will ultimately bear that liability, which historically has lain with the issuers.
Aside from it being an upgrade and more technology and, in some cases, better for merchants' customers, there is also that financial impact, which is an upside for them to convert.
Senator Oliver: All of my questions relate to Bill S-201, An Act to amend the Office of the Superintendent of Financial Institutions Act. Many of the comments today have talked about debit and credit cards, but I want to try to get, ultimately, to the main issue, which is Bill S-201.
Most of my questions come from the TD presentation, but I think the questions are generic enough that everyone can respond.
TD says that additionally they note that the payments system task force review is actively studying the entire payments market. I would like to know if you made a formal presentation to them. If so, could you table with this committee a copy of the presentation? That is my first question.
Second, you said you use plain language to provide clear examples. I was a lawyer for 32 years; I am used to reading difficult language. I find the language on most cards very difficult. I was wondering if you could table that language with this committee so we can see for ourselves.
Third, I would like to know what changes you made in your structures after the Minster of Finance's code came out.
Finally, you say you want to address the court challenges in Bill S-201. In the Moneris presentation, they say:
With respect to Bill S-201, it is our view that the Financial Consumer Agency of Canada is an appropriate body, as chosen by the Minister, to oversee the code and report to the Minister on the payment networks pursuant to the Payment Card Networks Act.
Do you mean we should vote against Bill S-201 because it is redundant?
Mr. van Duynhoven: I jotted your questions down so hopefully I will be able to answer them one by one.
With respect to our submissions to the task force, I am not 100 per cent sure. TD is represented on the task force. I do not sit directly on the task force. I do not believe we have made a direct submission to the task force, but as part of the Canadian Bankers Association, there was a submission. We will check and make it available. It would be a matter of public record.
With respect to the second point on plain language, I did talk about transparency on plain language. I would be happy to provide the committee with both copies of our statements. The code of conduct was referenced.
Senator Oliver: To make it easier for consumers.
Mr. van Duynhoven: I am speaking about merchants. My customers are merchants. They are trying to understand their costs of acceptance. We would be happy to provide copies of letters that we distribute to customers so they can understand what the costs are, for example, as well as our monthly statements. Mr. Cohen had mentioned the effective rate. That is a change that was mandated by the code of conduct.
We implemented that change in our statements well in advance of the mandated date. Our change went into effect last November. Our customers have been receiving this effective rate summary, which takes all of the costs to accept, for example, a Visa credit card. All of those costs are aggregated. You divide that by the total volume that the merchant has provided to arrive at an effective discount rate.
It stops the one price for this and a second price for that, and it amalgamates all of those costs.
We think it is an effective tool for merchants to truly understand the cost of acceptance. You will see that on the statements we provide to the committee.
With respect to the changes mandated as a result of the code of conduct, one was the effective rate summary on our statement. The only other change we had to make was changing the notice period. Previously, our contracts promised a minimum of 30 days' notice for pricing changes. That had to change to 90 days as mandated by the code of conduct.
The code of conduct also mandated that customers can exit their contracts free of penalties in that 90-day period. For us, that was not a change because we had already embedded that within our contracts. If we gave a customer a price increase, we would allow them out of their contract without a penalty. We saw that as good business practice.
Senator Oliver: And Bill S-201?
Mr. van Duynhoven: Yes. As others have testified before this committee, it is covered already by FCAC. FCAC is in the best position to judge. The Payment Card Networks Act does provide the minister effective oversight if any changes need to be made.
The Chair: Any other witnesses wish to comment?
Mr. Cohen: I will comment on the final element, Bill S-201. I think it is important for you to understand that for a payments processor, the networks are the judges and juries. They set the regulations. They have the right to impose fines on us. They have a great deal of power over our activities. We cannot participate in the system unless we are complying with the regulations of Visa, MasterCard, and Interac.
To the extent that the code of conduct is embedded in the regulations of these networks, we must abide by it regardless of who is the overseer of the system, be it the FCAC or OSFI. For us, it is in the regs; there is no further discussion about it; we must abide by those regs.
Mr. Jawad: What Mr. Cohen is referring to is that the rules under the code of conduct have been embedded in the networks' operating regulations.
As part of these operating regulations the networks provide participants like us acquirers, we are obligated to follow the nine points of the code of conduct and to ensure all our practices adhere to the code of conduct. If we do not, there are fines and penalties, up to and including termination of our arrangement to participate in that system.
The Chair: The networks you are referring to are Visa, MasterCard and Interac. Correct?
Mr. Jawad: Correct.
The Chair: And the code of conduct is embedded in their regulations?
Mr. Jawad: Yes, it is, sir.
The Chair: And if you are bad boys and girls, they come down on you and fine you?
Mr. Jawad: That is correct.
Mr. Baumgartner: Just to give you a perspective, when we started Moneris 10 years ago, we had one person in our compliance group. Ms. Glowinsky is accountable for our compliance group as well as other things. Today, we have 13. The compliance burden has grown over the 10 years we have been in business.
Senator Oliver: And S-201, my final question?
Mr. Baumgartner: It is our recommendation that FCAC is the right body to manage it. We believe OSFI is focused on safety and soundness, and this could be an unnecessary distraction.
Senator Ringuette: The first item I would like to address is my surprise at your statement at the start to the effect that you were engaged in heavy lobbying with the Minister of Finance during the time of our study on the credit card issue. That statement says a lot to me and some of my colleagues.
My other observation is that all four of you are affiliates of financial institutions. Mr. Cohen, you are not?
Mr. Cohen: No.
Senator Ringuette: Who is your owner?
Mr. Cohen: Our owner is Global Payments Inc., which is a publicly traded company. It is not owned, controlled or connected to a financial institution.
Senator Ringuette: I stand corrected. Seventy-five per cent of you are then. I guess 75 per cent of you also participated in the payment task force. Mr. Cohen, you do not participate?
Mr. Cohen: We were not invited.
Senator Ringuette: Were the other three invited?
Mr. Jawad: We were not an active participant. We were invited to one committee meeting at which one of our staff attended.
Mr. Cohen: I'm sorry. We were invited to a single meeting, too, but not as part of the force.
Mr. van Duynhoven: TD Bank Group is an active participant.
Senator Ringuette: How much do they pay to participate?
Mr. van Duynhoven: I do not know. There was a fee established to fund the cost of the committee for all members at the time it was established. I do not know what that fee was.
Senator Ringuette: The participants had to pay many, many hundreds of thousands for the task force. Is Moneris a participant?
Mr. Baumgartner: Yes, we are.
Senator Ringuette: Did you pay to participate?
Mr. Baumgartner: Yes.
Senator Ringuette: How much did you pay to participate?
Mr. Baumgartner: I believe it was $40,000.
The Chair: I am not clear. Were you invited and then the question of payment came up, or could anyone get in by paying the requisite fee?
Mr. Baumgartner: No. We were invited specifically. I believe we were the only standalone acquirer. TD is also represented, but they have other parts of their bank as well. The Retail Council, the CFIB and some merchants are represented as well. It is a diverse group that includes forward-looking technology companies, such as telecommunication companies. In my experience, the ideas being generated there are in the best interests of Canada. The person heading it up has done a phenomenal job of leveraging the talent to come up with something better for Canada.
Senator Ringuette: With regard to the language, let us establish our understanding in that regard. Would you say that you operate in digital currency?
Mr. Baumgartner: In respect of our transactions being electronic, I suppose it would be fair to characterize it that way, yes.
Senator Ringuette: Do you all agree that you are operating in digital currency?
Mr. Jawad: It is a definition, I suppose. I have not heard that definition before, but if that is —
Senator Ringuette: The definition was put to this committee by Visa. I guess you are subject to their rules, so you would be subject to their definitions as well.
Mr. Jawad: It is a definition. We process transactions and we process payments. They are real payments, real dollars, but if someone wants to refer to these dollars as digital currency, they have the right to do so.
Mr. van Duynhoven: Yes. The transactions travel electronically, so I would agree in the context that it is digital currency.
Mr. Cohen: I would simply call it electronic transaction processing. We happen to be passing value electronically.
Senator Ringuette: When we talk about currency in Canada, we also talk about the federal government's responsibility to regulate. The federal government is responsible for regulating currency, whether it is paper or digital. That is a definition that you will see in the Constitution of Canada.
When we refer to Bill S-201, we are not talking about the code of conduct that you have lobbied for because you were fearful of Bill S-201; let us be honest around this table. You probably paid a lot of lobbyists for many months to lobby for that, but you forgot an essential aspect in your code of conduct, that you lobbied and paid huge money for it. You missed the central thing, which were the fees. Bill S-201 has nothing to do with the code of conduct and everything to do with reasonable fees. I am kind of sad that clause 1 of the bill has not been understood.
However, let us move on. You say that Visa and MasterCard charge an assessment fee to all of you that is percentage based. It is an assessment fee that is on a percentage, and the rest of the percentage fee goes to the financial institution that you deal with. Is that right?
Mr. Baumgartner: It sounds directionally correct, but I want to clarify one thing. It does not go to our owners in the case of TD or ourselves or any of the other companies here. The other percentage we are referring to, which is interchange, goes to whichever bank issued the card used at the point of sale.
Senator Ringuette: That fee is also fixed by Visa and MasterCard.
Mr. Baumgartner: It is established by Visa and MasterCard. That is right.
Senator Ringuette: Through negotiations with your parent company.
Mr. Baumgartner: No, they do that independently. They changed their governance quite awhile ago to avoid a conflict of interest that you are probably alluding to.
Both Visa and MasterCard are now public companies. They have removed the ability for the banks themselves to set interchange fees, and they do that independently.
Senator Ringuette: So Visa and MasterCard set the interchange fee.
Mr. Baumgartner: Yes.
Senator Ringuette: That includes their assessment fee.
Mr. Baumgartner: That is correct.
Senator Ringuette: How do they decide what banks will accept as their fees?
Mr. Baumgartner: I suppose ultimately that is a question better answered by them.
Senator Ringuette: They said they do not fix any fees or regulations. Also, they do not sign any contracts that fix fees or regulations with merchants. You will remember they told us that at the committee.
Mr. Baumgartner: That is accurate. The merchants would sign contracts with the companies represented in this room, and then Visa and MasterCard do establish, as you pointed out, the interchange as well as the assessment levels that are charged to us. Those fees are the vast majority of our costs ultimately to our merchants.
Senator Ringuette: They are all the same for each one of you?
Mr. Baumgartner: We are each charged, to my knowledge, the same assessment fees as well as the same interchange fees. That is correct.
Senator Ringuette: I have a letter here. I will start with the first line. It is a letter from one of you, and it says, "The largest cost associated with the processing of credit card payments is the fee charged by Visa and MasterCard (known as payment brands)." In your language, Visa and MasterCard are "payment brands."
Funny, both Visa and MasterCard, the two payment brands that are currently heading to the competition tribunal, have changed the name of their fees from "interchange fees" to "interchange differential fees." I am sure one of you must know which letter I am referring to.
Senator Greene: I am wondering if we can have a copy of that letter.
The Chair: What is this cat and mouse game about? Do you not want to identify the author of the letter?
Senator Ringuette: I did not want to put any of these gentlemen on the spot, but if you insist, I will.
The Chair: I certainly do. If you are reading from a letter, I think everyone is entitled to know whose letter it is.
Senator Ringuette: It is a public letter. It is a letter that went out publicly along with a formal complaint about the code of conduct to Moneris Solutions, and it is based on a letter that Moneris Solutions sent to its customer, the merchant, advising that Visa and MasterCard's interchange fees have changed and are now referred to as "interchange differential fees." Are you able to clarify the difference between —
The Chair: Can we know whose letter it is, please?
Senator Ringuette: It is a letter from Moneris.
The Chair: Dated?
Senator Ringuette: It is dated December 30, 2010. It is a public letter that was issued by the Canadian Federation of Independent Business when they made a complaint about the code of conduct.
The Chair: Why be so secretive about it? It is a public document. What is the secrecy?
Ms. Glowinsky: Senator Ringuette, I gather you are aware that complaint has been withdrawn.
Senator Ringuette: I know the complaint has been withdrawn, but it was made because it was a legitimate complaint to the code.
The Chair: Which has been settled.
Senator Ringuette: Which has been settled.
Ms. Glowinsky: Which is evidence of the fact that the code is working quite well.
Senator Ringuette: This is the second complaint with regard to the code in three months. The first was with regard to MasterCard and some of the technology that was provided at the merchant's place of business that was rerouting through the Interac channel and it was the MasterCard —
Ms. Glowinsky: It was the CIBC Visa debit card.
Senator Ringuette: Yes. That was a no-no in the code.
Ms. Glowinsky: I think that was also fully resolved.
Senator Ringuette: Was that in your rules when you installed that equipment?
Mr. Baumgartner: The issue related to all the acquirers in the room and the way the product was rolled out. The complaint was lodged. We found Visa very aggressive in trying to deal with the complaint. Any of the fees — I am pretty sure this is true with all of us — that may have been charged to any of the merchants for any of those transactions have since been reimbursed to the merchant and the technology has been put in place by the entire payment system to shut off those transactions.
It was another good example of how well the code actually functioned, because when the complaint was lodged the payments community was able to rally around the issue, look at it and deal with it in an effective and quick way. I suspect it cost us hundreds of thousands of dollars, collectively perhaps millions of dollars, to resolve it in return for rebating maybe $5,000 of fees.
Ms. Glowinsky: Our rebate to our customers was $1,200 for all of those transactions, so it was minimal in terms of paying merchants back.
Senator Ringuette: It kind of begs the question that if Visa and MasterCard have embedded the code in their rules and you have to obey the rules, are the rules well understood?
Mr. Baumgartner: You are raising good points. The interpretation of the code is sort of where we are now. We all implemented the code and there is room for interpretation. I would suspect that is what happened with the last issue to which you referred.
From my perspective, the industry is dealing with these issues as they come up very aggressively. No one seems to be sparing any expense to make sure the issues are resolved. At the end of the day, the whole process — and I think you were probably partly accountable for this — has brought us closer to the merchant community in terms of being able to understand their needs. The card brands or payment companies, however we refer to them now, have recognized that and I think that is in part due to some of the work you have done.
Senator Ringuette: I understand that your line of business is caught between a rock and a hard place. You are dictated by Visa and MasterCard, the rules of the game and the fees to play in the game. You have to go to your retailers and say "these are the rules." There is no negotiation at all.
Bill S-201 deals specifically with the fees that one has to pay to be in the game, and you are in the electronic currency game and currency is regulated and is the responsibility of the federal government.
Going back to the said letter, when we had our study we looked at the interchange fees that were astronomical. This letter says that both Visa and MasterCard, at the same time, are changing the name of their fees from "interchange" to "interchange differential." How can the merchant know if it is an increase or not? How can the merchant trust this letter when it says, "It should not impact on your overall fees"? The letter does not say what the fees will be. It talks about "non-qualifying fees" and "qualifying fees." Talk about using understandable language.
Senator Hervieux-Payette: I do not even know what interchange differential fees means compared to interchange fee, assessment fee and then the payment brands. Maybe if we knew what we were talking about we could understand and also explain to other people. There are also qualified fees. You probably use this jargon day to day, like lawyers, but we do not understand it as lay people.
Mr. van Duynhoven: As I said in my opening markets, TD Merchant Services, all of us are charged consistent fees. We are charged interchange and assessments from both Visa and MasterCard. How we then package those services and fees, embed those fees in our packages that we deliver to our merchant customers is independent. As I said, we compete on service, system reliability, pricing and transparency. TD Merchant Services, as I said in my opening remarks, does not use "unqualified," "near qualified," "non-qualifying" with regard to fees because, just as you are confused by those terms, we believe merchants are confused.
Senator Oliver has requested copies of the statements, and perhaps my colleagues can share copies of their statements and the letters we produce. I think you will see from them that we call a card what it is. If it is an infinite card, a commercial card or a premium MasterCard, that is how we describe it. We do not use that terminology because merchants do not understand them.
That is our approach to the market. I think you will see when you see our statement that it is complex, there are many different fees and that it is difficult, but we try to present it in the best possible light for our merchants.
In our case, we actually consulted with the Retail Council of Canada, CFIB and the FCAC looking for input in modifying our statement as mandated by the code of conduct to ensure that they understood and that we arrived at a fair representation for the merchants.
Senator Hervieux-Payette: Let us say you continue to use "interchange fee" and "assessment fee." You have your own fee for your operation and that is what people are paying? You must charge something for yourselves. I guess this is what you use to operate.
Mr. van Duynhoven: Right, and I believe Mr. Baumgartner said in his opening remarks that the interchange fees make up the bulk, the vast majority of the fees we charge to merchants. The difference between the interchange fee, the assessments and what we charge the merchants is what we make to run our operation and that is much smaller in percentage terms than the interchange fees.
Senator Ringuette: Yes, but the merchant already pays for the equipment and the online system, either by direct purchase or by rental. They pay that to you.
Mr. van Duynhoven: Right. Again, TD Merchant Services rents out terminals, many of our merchants rent the terminal and some elect to purchase those. We offer a four-hour, on-site service anywhere in Canada. Within four hours we will arrive to fix that. We have a network of over 250 service technicians. There are multiple costs and risks that exist because a merchant is a delayed delivery merchant. Think of ordering an airline ticket or furniture for delivery. If that airline or furniture builder goes out of business in that time frame, the cardholder goes back to their issuer and says, "I didn't get my goods, I didn't get my flight, charge back that transaction." Those are all costs we bear and that factor into that margin we make over and above interchange and assessment fees.
Mr. Jawad: The concept of pricing and disclosure is the core of our competitive landscape here. It has become part of the competitive differentiator, if you will, when we engage merchants in doing business with us. We vie for clear disclosure. We look for more appropriate and aggressive pricing. That has helped the merchant community over time.
The code of conduct has assisted in adding a lot more clarity and transparency to the extent that merchants, through the code of conduct, can now see an effective merchant discount rate. Senator Ringuette asked earlier how they would know how their fees are progressing and whether they are going up or down. The code requires an effective merchant discount calculation. Every merchant at the end of the month will get, for each brand — Visa, MasterCard or Interac — an effective merchant discount rate that is net of all of their transactions and the costs they paid relative to that brand.
The Chair: When you say per card, is that Visa, MasterCard or Interac card, or is it the different cards within each of those categories?
Mr. Jawad: Both of those. We do it as a collective for the brand, and, in addition to that, we further break down each and every card type and the costs associated with that card and the number of transactions and total volume. It is extremely transparent, and I think it will certainly help merchants decipher their acceptance costs.
I would like to make one other comment, and it is just a statement around the heavy lobbying that is potentially perceived by at least us or others. I will speak on behalf of Paymentech. We did not pay one cent in lobbying. We did not lobby. We were asked by the Department of Finance and FCAC to provide an opinion on the code. We engaged with them, I would say, a handful of times, and we provided an opinion, and that was the end of the matter. In fact, we engaged more with the retail groups, with the Canadian Federation of Independent Business. We also do business with hotel associations and local restaurant associations. We engaged more with those groups to get their opinion on our practices and ensure we are in line. We definitely did not lobby. It is not something we commonly do.
Mr. Baumgartner: I would add that our organization does not pay for lobbyists, and we certainly did not in this instance either.
I would also add, and I think this is true for most of us, that we all have businesses in the United States. I do not know if Mr. van Duynhoven's organization does or not. Canada has been much more aggressive and responsive in terms of this specific issue with respect to disclosure than has the United States. This is an area where probably, in large part due to this group, we have taken a lead in terms of transparency and disclosure. It is an evolving process and one that you all, in particular, have a lot to be proud of.
The Chair: I am not sure if flattery will get you anywhere, but we certainly appreciate it.
Senator Ringuette: Gentlemen, I must comment that the fact that your business entails no risk is a very well kept secret. I do not know any business that has no risk attached to it.
The Chair: Can we get an interaction?
Mr. Baumgartner: Could you elaborate in terms of no risk?
Senator Ringuette: You said you are taking risks and you charge fees for the risks you are taking. That is fair game. However, I know of no business that does not have risk factors associated with doing business.
Mr. Baumgartner: Some of the risks are a bit different than perhaps a traditional business risk. You are right that they do vary. Probably the best example is the airline industry. Whoever is processing for an airline like Air Canada may at any one time have over a half billion dollars of risk, liability, if Air Canada were to stop flying.
Senator Ringuette: Yes, but you charge them an additional fee for that.
Mr. Baumgartner: Well, that is up to the individual acquirer.
Senator Ringuette: There is an additional fee for a hotel reservation if the cardholder is not present when they make the reservation and they process the payment and so forth.
Mr. Baumgartner: If you dispute an Internet transaction as a cardholder, you almost always win. If our customer is not there to withstand the dispute, we as organizations collectively end up eating that dispute. More and more commerce is done over the Internet, so our risk profile as a company has gone up.
The other dynamic I would add is with respect to digital security. We collectively are a constant target for hackers, so we spend a lot of money keeping the bad guys out of our systems, and our customers end up having to do the same thing.
Senator Ringuette: Yes, we have heard the alarming numbers.
Mr. Baumgartner: The breach risk is phenomenal. You may have heard of T.J. Maxx, for example, where hundreds of millions of dollars of cards and risk was assessed and ultimately taken out of the system by bad people. The amount of infrastructure that we as a collective payment system, not just us but Visa, MasterCard, merchants, et cetera, have to expend in keeping the bad people out and not getting access to crucial, secure data is fundamentally important and something we are not willing to sacrifice.
Senator Ringuette: Can we go back to my question and Senator Hervieux-Payette's question with regard to fees? What is the difference between the interchange fee and this new Visa and MasterCard interchange differential fee?
Ms. Glowinsky: Perhaps I could respond. The interchange differential fee is a name of a fee that we are charging, we being Moneris, and other of our competitors are charging it as well. It is not the name of a payment brand fee. Payment brands charge us, as we have all been saying, interchange. The interchange differential fee is a way of charging a merchant the difference between the lowest cost interchange and the actual interchange at which a transaction clears.
For example, we have talked about different kinds of cards. There are consumer standard cards, and then there are premium infinite cards, such as the World Card from MasterCard. Those cards carry a much higher interchange rate. Charging the interchange differential fee charges the merchant a base rate, which is the lowest interchange rate, and then the difference between that rate and the interchange rate at which the transaction clears. It is a cost recovery model, with the increased complexity in terms of the interchange rate.
Visa and MasterCard historically in Canada had very few rates. Over the last years, they have gone up. If you do all the permutations and combinations, it is in the hundreds. Our ability to recover our actual interchange costs has become more complex. Therefore, we have had to adjust the way we price our merchants. That is what the interchange differential fee is, and that is what is described in the letter.
The Chair: That must be the last question, because you are first and only on the second round. Senator Banks has been waiting patiently. We are happy to have him with us today.
Senator Banks: Patiently and with great interest. I am not normally a member of this committee. I am substituting for a senator who is away on committee business, so I get to ask the stupid questions.
Let us assume that I have what I think you referred to as a preferred card, platinum or whatever it might be, as opposed to a basic card. I will ask the question that I think the guy riding home on the 5 o'clock bus would ask. Does the merchant pay more for accepting one or the other of those cards, and why? You described earlier that your system verifies before the thing goes through that, yes, this has been authorized for payment, whether it is a platinum card or a plain ordinary bottom line card. It is authorized. Why is there a difference in the cost to the merchant?
Mr. Baumgartner: That is a great question. It is not a stupid question. The answer is, it depends. Each merchant that we sign up, and I think the same is true of everyone else here, is negotiated individually. It is an individual discussion with the merchant.
They may be with one of the competitors and say they are interested in checking out your price. They may say they do not want all these different prices, they do not understand it and they want one simple price. If that is the case, we may say, "Fine, your price is this." We try to take a snapshot of what we think the mix of those different cards is.
What has evolved, as Ms. Glowinsky was alluding to, over the last eight years or so, is an increase in the number of different types of transactions for which we can be charged. For premium card transactions, for example, the rate charged by Visa and MasterCard is higher.
Senator Banks: Why?
Mr. Baumgartner: Ultimately we are trying to go after a more affluent market. The one company that has not been mentioned yet is American Express. American Express is a great company. They have a great product set. One of the products they have introduced that you may be familiar with is the Air Canada Aeroplan Card. It is a great product and lots of good benefits, et cetera. They also have a competitive commercial product. I do not know if you all have government T & E cards.
Senator Banks: We all do.
Mr. Baumgartner: Is it American Express?
Senator Banks: Yes.
Mr. Baumgartner: Every time you use that card, it is costing the merchant more, on average, than Visa or MasterCard. It is a great product, and they offer a great service.
Visa and MasterCard, over the last few years, have said they want to compete in that business. They had ignored it for quite a while. They introduced a premium card for commercial cards, in order to compete against American Express for that business.
When they negotiate with, for example, the federal government in trying to sell their card, as opposed to American Express, they are trying to negotiate based on overall fees as well as functionality. If their fees are not competitive with American Express, in that case, whoever negotiates for the government will say, "We are not interested in that; we get a better deal with American Express." Ultimately, the more American Express cards there are in the marketplace, on average — not always — the more it will cost merchants.
Visa and MasterCard have said that is a highly prized segment of the market we want to go after. We will offer cards that will compete effectively against that product, so we need to offer things like rewards. I am not sure if any of you have cards that have rewards associated with them or any kinds of points. Those are the types of cards that get lumped into this premium category. The number of those cards has gone up over the last few years, and the merchants are paying more as a result of that issue.
They are disintermediating, potentially, American Express, which is even more expensive. In the end, the number of interchange levels and the complexity has grown, and the response to that was some of the work you have done earlier. The code of conduct is an attempt to make it simpler for merchants to understand ultimately what they were paying for.
Senator Banks: In short, if the credit card issuer is providing more bells and whistles, it is charging more to the merchant?
Mr. Baumgartner: Ultimately, that is exactly what is happening.
Senator Ringuette: And the customer.
The Chair: The merchant directly and the customer indirectly.
Senator Banks: The customer indirectly, because it is reflected in the overall costs. The people with the basic cards are also paying more for that.
The processing part of it — I am not talking about anything else, I am talking about what the traffic will bear — is there a difference between the mechanical cost of processing a debit card on the one hand and a credit card on the other? Does anyone have a greater cost of doing that piece of business?
Mr. Baumgartner: Yes, we do. Collectively, we all do, and it varies significantly.
Senator Banks: It costs more to process that credit card?
Mr. Baumgartner: Definitely.
Senator Banks: My last question is again by the guy on the five o'clock bus. I exempt Mr. Cohen from this, because I understand that you are completely free-standing. It is hard for me to understand you all saying, "It is not us who sets that rate, it is those guys." Those guys own you, I think, directly. I know you have to be able to operate as an independent business.
The Chair: By "those guys," you are referring to Visa and MasterCard?
Senator Banks: Not Visa and MasterCard, the banks who issue the Visa or MasterCard. Can you give some comfort to the guy riding home on the five o'clock bus when you say that the banks are deciding that and we just pass it on, but we do not know how it is done? I have a bit of a problem with that.
Mr. van Duynhoven: I will try to answer that. To be clear, Visa and MasterCard are the ones who establish those rates, and that is now independent of any of the banks and acquirers that are involved. That changed, as Mr. Baumgartner said, when they became public entities. The banks are not involved in the setting of interchange rates.
From our standpoint, being a bank-owned acquirer, I said that, and we are most closely aligned, because TD Merchant Services is a business name, but I am the Toronto-Dominion Bank. That is the business we operate under.
For us, I do not see any conflict because, as I said in my opening remarks, almost nine out of ten business customers who deal with me, my business line, deal with the bank. Business customers are intelligent people, and if I was even so inclined to try to take advantage of that merchant by trying to do something different, they now have the leverage to take the rest of their banking business and move that, so their loans, deposits and everything else.
We operate, as I said, very transparently, and try to communicate effectively with those merchants.
Mr. Baumgartner: The only other thing I would add, if I could, is the banks — not just the banks represented here, but Capital One, MBNA, all the banks that issue cards — have a choice between which brand they go with. They effectively have three choices. They can go with Visa, MasterCard and, more recently, the flexibility has opened up where they can issue both. A few of the financial institutions have opted to issue both.
They could also go with American Express. If they struck a partnership with American Express ultimately, from a merchant's perspective, it will end up costing the merchant a lot more. It is another option, one that has been exercised in other countries. To my knowledge, I do not believe anyone has done that yet here, but it is an option that could be looked at.
Senator Banks: We have heard a lot about transparency. Does anyone monitor and publish the rates that Visa and MasterCard set so that everyone knows who is setting it and where it is being paid to?
Mr. Jawad: That is a good question. These rates are public. We have either published them on our website or we have a link to the Visa and MasterCard websites that have the rates. I am not certain whether our website does, but they are public and we direct traffic to that site to see the rates.
In addition to that, through the additional transparency on the new disclosure statements, each merchant will see every transaction and its associated interchange rate. They will see it on the statement, as well as additional costs and their total cost. It will have all of that as well as all of these rates that are public, and they are on the different websites.
Mr. van Duynhoven: Visa and MasterCard both display all of their interchange rates applicable to the domestic market here in Canada on their websites. From a TD Merchant Services' standpoint, we also provide those rates and tools so merchants can understand how the different rates interact on our websites. You will see in the letter that I promised to deliver to this committee how we actually articulate that. We give them the website address they can go to. If they are not clear what a charge would be for one of those premium cards, as an example, we give them an example that they can take to our website and apply to that calculation to see how it works and truly understand what that cost is.
The Chair: Debit card transactions are done on a flat-fee basis. What would happen if credit cards were also obliged or came to the conclusion that it would be better to do on a flat-fee basis, and why do they not do that?
Mr. Baumgartner: That is a great question. Part of the credit card issue is that there is an implicit cost of funds that occurs with each credit card transaction. I am not sure how many of you revolve or do not revolve, but the bank is effectively giving you a 45-day free line of credit, roughly. If you did a transaction today, March 2, you went across the street and bought something with your credit card today, say you got your statement 15 days from now, on the 17th, and say you had 25 days to pay. You are effectively at 40 days of free funds on that transaction. The bank then has to sell deposits to someone else to basically fund that interest-free loan. There is an element of cost of funds that is involved in that, and that is something that does not occur with Interac. The Interac transaction, as you all know, comes out of your chequing account virtually on a real-time basis.
Mr. Jawad: I would like to add that there is an element of loss as well. There is a credit risk with those transactions. If that receivable that is owed by the consumer to the bank is not paid, that is a loss as well. Effectively, the cost that is in the system is to cover some of that cost.
Senator L. Smith: Why do the banks issues cards to kids in university? By the time their fourth year comes around, they have $7,500 credit cards that their dads have to cover.
Mr. Jawad: If you are referring to me, senator . . .
Senator L. Smith: I am referring to my kids.
Mr. Jawad: As an acquirer, I cannot speak to the banks' practices.
Senator L. Smith: You talk about the fact that you are charging all of us 22 per cent or 19.5 per cent on credit cards. You have to make your money; I understand that. I am not being critical of that. I look at the four steps of cardholders, merchants, card issuers and acquirers. Having run a professional football team, I always wondered when the CFO would come up to me every year and say, "Our transactional costs have gone up and we have to put a pass through to the user, who is the season ticket holder." What we found was that everything was based on the size of your transactions. On the smaller transactions; it was less; on the higher transactions, it was more. If you buy four season tickets at $750, it is $3,000. That transaction fee 10 years ago was a buck per game per ticket, and all of a sudden it is up to 5. We create some fancy name for the consumer, and the consumer is so confused that it is just a pass-through.
I understand the dynamics between you and the card companies, but I think the real issue is consumers themselves. This is complex. How can they understand, and what is the best way to treat them? You have to make your money, and I am sure you do, based on volumes of transactions and the complexity of the types of cards you use and the points systems, et cetera. I am listening to this, and all I am thinking about is the end user. I paid for my own tickets for 14 years. That pass-through charge at the end was a significant charge per ticket. What happens to the consumer? You are not the credit card guys.
The Chair: I did not have you on my list, Senator L. Smith. I am glad you raised the question.
Senator Greene: I would like them to comment on the question, because I think it is a very good question.
The Chair: You are quite right. I did not give them the opportunity. Are any of you football fans enough to comment on that?
Mr. Cohen: I am a football fan, so I will go first. I was a big fan of Senator Smith's when he was playing. Again, we do not have direct proximity to consumers, but we all are consumers. I think these premium cards have been proliferated by points programs. Canadians have become accustomed to these bells and whistles, and the card issuers have been layering on the costs more and more, and it perpetuates itself. I think that, in a nutshell, is a big part of this. Ultimately, the marketing programs, points, accumulation of miles, dividend cards and all kinds of other goodies that consumers have become accustomed to are feeding the behaviour and it perpetuates over time, and costs keep going up as a result.
Mr. Baumgartner: I am an Argos season ticket holder, so I will go second.
I would agree with Mr. Cohen. I think that people's addiction to these points cards, for all brands — MasterCard, Visa, American Express, et cetera — is quite strong, and those points end up costing money. The consumer ends up getting the points. The merchant ends up generally paying for the points. Whether or not that ends up going back to the consumer in the form of higher prices, I suppose it is hard to say. I think that in your example it may have, but ultimately it is a cost of doing business. In the end, the consumer is the one feeding the thirst for better cards, better products, more functionality, et cetera, and I think the marketplace is responding.
The Chair: Do you see any way of breaking that habit?
Mr. van Duynhoven: Merchants do have some tools available to them. As a result of this committee, the code of conduct, there has been much more scrutiny of the payments system in general, and merchants are now much more aware of their rights and abilities. Using your example of a user fee, in effect, merchants can discount for cash or other payment methods. Both of the brands, being Visa and MasterCard, have that ability to say that you are allowed to discount for other payments. If you pay with Interac, here is your price; if you pay with this, here is your price; as long as it is phrased in terms of a discount, so the user fee in terms of the credit card cost would not have to be passed on in that particular case.
Second, merchants are able to steer transactions. There is nothing prohibiting them from communicating with the cardholder to say, "Do you recognize that the cost for me to accept this credit card is 1.7 per cent of the transaction?" They are allowed to communicate that. In fact, CFIB have actively planned a campaign to go out there and get merchants to communicate to cardholders as part of an education, financial literacy, if you will, to say what the true cost of these acceptances is. There are those methods for merchants to deal with some of those costs and perhaps educate their own consumers in that regard.
Mr. Jawad: I want to echo Mr. van Duynhoven's comments that merchants have a platform now by which they can possibly reduce their costs for acceptance. I certainly do not want to downplay the cost of business of accepting cards, but there has been an inherent benefit of accepting cards. It depends on the type of the business, the size of the business, and the nature of the business. Generally, it provided payment certainty. It removed issues with NSF cheques from the system, and removed the need, in some cases, for cash. Again, it depends on the business. This is a general statement around the benefit of cards, certainly not downplaying the cost potential of cards, but there also have been some benefits.
On the flipside of that, as Mr. van Duynhoven commented, merchants today have a platform and an opportunity to steer to lower-cost options, through either debit or discounting.
Senator Hervieux-Payette: Do I understand that there are nine companies doing what you are doing in your sector? You are each competing with eight other companies, installing the equipment and of course dealing with banks and Visa and MasterCard. That is the competition in Canada. In fact, it is more than the banks that we have in terms of Canadian homemade banks.
Mr. Jawad: Yes. There are non-acquirers and there are independent sales organizations that offer these services in addition to that.
I would like to make one comment on the vibrant competitive landscape in Canada. This is a generalization, not specific to us or to perhaps any of the gentlemen at the table here. On average, year to year, we see between 15 and 25 per cent of our merchants move from our portfolio to do business with other organizations. That does not happen without competition. We see it, and this is the business model that we operate in. To the extent that we see that and that is the experience, we compete on the basis of disclosure, price, technology and service.
Senator Hervieux-Payette: I want to get a little technical. I used to be with SNC Group, a large engineering firm, and I want to know about the process of what you are doing.
The equipment you install uses both credit cards and debit cards. That allows merchants to be connected with every bank that issues those cards, whether it is in Canada or elsewhere in the world. This is all done over phone lines or the T1s installed throughout every country.
When MasterCard and Visa are being used, where is the transaction being dealt with? Where is the train yard where all the trains arrive and things are redistributed? Who are the MasterCard and Visa people dealing with in terms of the information and electronic money that you transmit? How does the network follow? Does it go to them and then back to the bank? Where are they located?
Mr. Baumgartner: In the case of our organization, our equipment is a tandem, a great big expensive computer that switches the transaction and recognizes the type of card that comes in. If you have a Visa card, it should start with a 4 and MasterCard should start with a 5. We recognize that it starts with a 4 or a 5, and we send those transactions from our core facility in downtown Toronto to Visa or MasterCard, depending on the card.
I believe in the case of Visa, those transactions go either to McLean, Virginia or somewhere in France. I apologize; I do not know if it is still there. MasterCard, I believe, is either Kansas City or St. Louis. They have redundant facilities, obviously, to ensure the transaction goes through.
They then look at the next five digits on your card. Those six digits comprise what is called the bank identification number, which tells them to send it to that particular issuing bank. If you had a card let us say from Desjardins, they have a similar infrastructure to what we have and they would switch that transaction, the amount, the cardholder information, merchant's name, et cetera, to Desjardins, who would then look at your credit profile and say, "Yes, you have the ability to buy and you have been a good paying customer," et cetera. They would then assign an approval code to that, and the transaction would flow back the exact same way. It would come back to Visa or MasterCard, come back into our infrastructure and then we would present it back to the point of sale where we hopefully give you an approval code.
Senator Hervieux-Payette: I have to correct you. Desjardins transactions in Canada are dealt with in Canada. They are the only credit card and financial institution that has their own system. If I use my Desjardins card in Paris, of course it will go through the United States or perhaps France. That is what we were told by them.
Mr. van Duynhoven: I think this is probably the case for all of us, but certainly for TD, our data centre is here in Canada, so we process all of our transactions. We do everything for ourselves, much like Desjardins. As you can imagine in the case of information technology, you want to be very clear who has the responsibility for transporting the data from Point A to Point B and then on to Point C.
We have the responsibility when it is in our data centre. We then pass that information, still within the physical premises of our data centre, to an either Visa or MasterCard server, and that is now Visa's or MasterCard's responsibility. They then own that data — it is a Visa access point or a MasterCard access point — and then they route that transaction.
I think for Desjardins, it would be much the same because Visa and MasterCard have to route that information organizationally, and it is tolerant to ensure there are multiple paths for the data so you get that answer back. Desjardins is perhaps within Canada, if that is what they have claimed, but Visa and MasterCard data —
Senator Hervieux-Payette: I know the company that developed the process because it is a Montreal company.
Ms. Glowinsky: As a point of clarification, a Desjardins issued card at a Desjardins acquired merchant probably follows the scenario that has been described, because it is their own issued card at a merchant they do the processing for. They would probably not send that transaction to Visa because that is a closed loop; in-house, if you will. However, if it was a Desjardins card at let us say a Moneris merchant or anyone else at the table, it would go through the routing that Mr. Baumgartner described.
Mr. Baumgartner: They are a relatively small acquirer, so most of their transactions, I would guesstimate, would be going through the same process I walked through earlier, except for their own transactions.
Senator Hervieux-Payette: We will clarify that because that is not what we understood when they made their presentation. We had the information technology expert on video conference and we asked him these questions.
When it comes to using the fancy equipment you have, do you have a lot of choice? Are there many manufacturers of the equipment? The equipment you use is very sophisticated.
Mr. Baumgartner: There is definitely choice. There are three fairly large terminal manufacturers that exist, but there are dozens of others as well. We definitely have a choice. We have relationships with the three major ones, and we recently added a fourth one.
Senator Hervieux-Payette: Where is the procurement done?
Mr. Baumgartner: Generally in each case, the procurement is done by acquirer. We would negotiate with those suppliers and have a business discussion in terms of features, functionality and cost. One of the things we look at, of course, is security, and we would arrive at a decision based on the combination of those factors and then procure.
Senator Hervieux-Payette: Is it bought by Canadian suppliers, American suppliers, Indian or Chinese suppliers?
Mr. Baumgartner: That is a great question. Generally, the companies are global. Our biggest supplier is French, but they make them all over the place. They seem to be made more and more in China, as well as in Brazil where they may have a facility. One of the companies is based in the U.S., and one is based in China. More and more companies are getting into the business.
As the world of payments evolve, more and more countries are becoming interested in payments and, therefore, more around more terminal manufacturers are sprouting up. It is our obligation to ensure that whoever we go with is sustainable, financially viable and has the best security. I think these gentlemen would look at it in the same way.
Senator Hervieux-Payette: I guess maintenance is an issue as well because you need to ensure they are working 24 hours a day.
Mr. van Duynhoven: What Mr. Baumgartner was focusing on is the point-of-sale device, the hardware that sits on the counter. It is important to recognize, depending where you are going with the question, that there are multiple discrete decisions we make. There are wireless devices. For example, the cabs here in Ottawa have wireless devices. Each of us has the discrete choice to say, "Do we run that over the Telus network, Bell or Rogers?" There is that choice. Then there is the choice for network connectivity. "Do we use Bell, Telus or run MPLS networks?"
There are a number of pieces. It is not just the point-of-sale device. That is the one the merchant sees definitely, but there are a number of other discrete decisions.
Senator Hervieux-Payette: Regarding cost, you have your interchange differential fees your staff, equipment — rented or sold — et cetera. At the end of the day, that is what the merchant pays for.
Mr. Baumgartner, I would like to deal with the point that you average out when someone does not want to take the basic card with the lowest fee. If they want everything under one fee, of course the consumer pays.
If I get that basic card and the merchant has a Moneris machine and does not want to have the series of fees that you offer for fancy cards or low ones, I will pay somewhere between the two. That means there is no interest in buying the lowest one because it is not giving me the lowest cost of processing my card.
When you sell, I have a suspicion that maybe your margins are higher on the higher fees than on the lower fees. You told us there are almost 100 types of fees for the merchant, depending on the size of the sector, et cetera. Of course, it is complicated for people to understand.
Could you simplify so that people are aware when they go to the restaurant and the gas station that if they have the basic card, they pay the basic fee? Is that not feasible?
Mr. Baumgartner: It certainly is. In fact, when we negotiate with merchants, each one is done individually and they are offered a choice. They can have the more complex pricing or the simplified pricing. Most end up doing something in between, where the hundred different interchange buckets that you mentioned are grouped into different buckets. Most opt for that third option, to get to exactly to what you are alluding.
Senator Hervieux-Payette: I am curious about the technical processing. Are we talking about minutes or hours? When I use my card and the whole loop is completed, how long does that take?
Mr. Baumgartner: It averages about two seconds to get a transaction through, depending on the type of merchant configuration. More and more terminal transactions, probably in the 70 per cent range, come through the Internet. I do not know if you have ever noticed the difference in speed at a terminal. If it is an Internet transaction, it goes quickly. If you have ever heard the terminal dialing, it will go over the phone lines, and that is a slower transaction. Those could be 15 seconds. The speed varies, but more and more are Internet.
In terms of the settlement itself, the vast majority of the transactions are settled that night, so tonight we would put money in the merchant's account for today's credit based on today's transaction. That practice is different from the U.S., where the average is 48 to 72 hours.
Senator Hervieux-Payette: That is what I heard.
Who pays for all the gifts, bells and whistles on our cards? Who puts that in their expenses? Is it the bank, you or Visa? Who pays for those?
Who loses when someone does not pay? Do you lose something, or does the bank lose something?
Mr. Baumgartner: If someone does not ever pay his or her bill, the bank that issues the card ends up having the write-off. Their write-offs will range from 5 to 10 per cent of the balances, depending on the economy. I do not know if you have noticed, but as the economy softened in 2008-09, credit card losses by issuers went way up. They are starting to come back down. In some cases, they have crept down by 20 to 30 per cent. They are still above where they were, but they have come down.
Senator Hervieux-Payette: Who pays for the gifts, such as points and rebates?
Mr. Baumgartner: Ultimately, it is the merchant. As the cost of acceptance has gone up, ultimately, the merchant is bearing the increased cost. The cardholders are generally getting the benefit because they are getting additional features and functions. Ultimately, the merchant is paying the cost.
I would like to go back to your earlier comment. For our organization, since we started the company in 2001, our first full audited year, the difference between what we charge our merchants and what we pay in interchange and assessments, which is what our margin is called, has gone down by 21 per cent. We just compared 2001 to our last quarter, so it has gone down a lot. That is due largely to competition because the competition went from a sort of a bank-owned acquiring market to a much more diverse market with many more players.
I was walking over here with someone who mentioned he was getting more inquiries in the last few months from competitors than he has in a long time. There is more and more competition for what we do in the market. The nine that you mentioned are certainly there, but there are also small organizations that piggyback on some of the acquirers to be able to offer some of their services as well. The competition has increased.
Senator Hervieux-Payette: Out of curiosity, why does Costco use American Express if it is supposed to be a place where we have some savings and we have the most expensive credit card? That is the only card they accept. Do they have better interchange and assessment fees?
Mr. Baumgartner: That is a good question. Different merchants have different relationships with card brands. American Express might have said, "Look, we value you as a customer." Costco is obviously a great place to shop, and American Express has probably negotiated a transaction arrangement with Costco to say, "If you take our cards, here is something in it." It was a commercial terms type deal where Costco has elected not to accept MasterCard and Visa. They do take debit, and they have elected to take American Express. It is purely a business decision on their part through, I think, a healthy negotiation.
Senator Hervieux-Payette: We buy a lot when we go there.
Mr. Baumgartner: Yes, we do. It is a great place to shop.
The Chair: I do not think anyone this evening mentioned a charge for accepting a particular credit card this evening. I have noticed in taxis, for example, often if you want to pay by credit card, there is a charge. Do you have any involvement in merchants doing that or not doing that?
Mr. van Duynhoven: The card networks, as we said earlier, have operating regulations that they set. Both Visa and MasterCard do not allow what is commonly referred to as "surcharging." Interac does allow surcharging in its operating regulations, but they are very clear that in the case where surcharging does take place, there must be a terminal dialogue. The point of sale device must prompt the consumer to say there is a 25-cent or a dollar, whatever the number is, surcharge on there. They have to accept that and proceed with the transaction. They have very specific words.
The Chair: You do not have any involvement one way or the other as processors.
Mr. van Duynhoven: We do not as processors, other than to ensure merchants comply with the operating regulations. In the City of Ottawa, I think a bylaw allows that. I think that is the way the rules are written by Visa and MasterCard. Unless it is allowed by law, that is the case.
Senator Ringuette: What is the name of the acquirers' association?
Mr. Baumgartner: The Electronic Transactions Association.
Senator Ringuette: Are there nine in the association?
Mr. Baumgartner: I used to be president of it many years ago. There are hundreds and hundreds of members. It is a worldwide organization.
Senator Ringuette: Do you have one in Canada?
Mr. van Duynhoven: We are not part of one in Canada, no.
Senator Ringuette: I was invited last year to speak to one of those associations.
Mr. van Duynhoven: We are not a member of one.
Mr. Jawad: We are not a member of one. I am aware that two or three years ago there was an attempt to create an association. We had no interest in being part of it.
Senator Ringuette: It would have been a historical moment.
I want to come back to the issue that Senator Hervieux-Payette raised, which is the point that both customer and consumer information dealing through your channels with Visa and MasterCard is relayed through terminals in the U.S. It therefore bypasses Canadian privacy legislation.
If you look carefully at Bill S-201, it not only deals with the issue of fees but the issue of privacy. Proposed paragraph 7.2(1) says: ". . .the fees and charges relating to such cards and the privacy of the users of such cards. . . ." Right now, all the information about Canadian consumers, their credit card numbers and the merchants resides on a U.S. terminal and is not subject to Canadian privacy laws. You can understand why it is very important to support Bill S-201 for your clients. That is a reminder to the 64 million credit card holders out there.
Have you all introduced this new differential fee to take into consideration the slate of 200 and more fees from Visa and MasterCard? Have you all adhered to this new language of differential fees?
Mr. Cohen: We have not.
Mr. van Duynhoven: We have, but not for all customers.
Senator Ringuette: You have talked together and have decided —
Mr. van Duynhoven: No, we definitely have not talked.
Senator Ringuette: Who decided that this would be a differential fee? Would it be Visa and MasterCard?
Mr. van Duynhoven: As I said in my opening remarks, some of my competitors use other terminology, like "unqualified" or "near qualified." To my knowledge, we independently came up with the terminology called "interchange differential" because we thought it was more explanatory than "unqualified transaction." I cannot speak to how it is done.
Senator Ringuette: Moneris, independently and out of the blue, have you also decided on the same terminology for the same purpose?
Mr. Baumgartner: From our perspective, the costs and the new methodology, which most of the industry has adopted, aligned our cost structure with our revenue structure.
Senator Ringuette: How did you decide to name this "differential"? TD decided independently to name this new fee "differential." Mr. Jawad, do you have a differential designation, as well?
Mr. Jawad: We have a pricing structure that may be defined as differential. We do not refer to it as such. We have had that pricing structure for a couple of years, or perhaps a little less. Do not quote me exactly. The pricing structure has proved very competitive for us. It has been clear to customers and merchants.
In addition to that, we have had this pricing structure with the CFIB and the RCC. In consultation with them, we put that pricing structure in place. This is not something new for us.
Mr. Baumgartner: I suppose it is like gas stations where you have unleaded and premium. A number of oil and gas companies use similar terminology.
Senator Banks: You might have already answered this but I did not get it. If I am a merchant, I sign an agreement with one of you. Does that agreement permit me to put up a sign that says to my customer "If you charge this to an American Express card, it costs me three per cent more, so I will add that onto this bill." If you come up and buy this thing from me for 50 bucks and give me a $50 bill, I am happy. However, if you charge it on your card, I will get $47 or whatever the difference is. In my agreement with you, am I permitted to do that?
Mr. Jawad: I will take a crack at the answer. Today, the code speaks to discounting and steering. You discount for cash or debit, or steer customers to a debit product. It does not speak to merchants posting an additional fee for using those cards. I think it is referred to it as surcharging.
Senator Banks: Can I do that?
Mr. Jawad: The practice is not allowed today. The surcharging rule is a network rule, and this matter today is in front of the Competition Tribunal.
Senator Banks: Therefore, my agreement with you precludes me from doing that, does it?
Mr. Cohen: The agreements cause the merchant to comply with network regulations and the network regulations in turn would generally preclude that behaviour. It is not us in particular; it is the compliance with the network.
Senator Banks: The merchant is contractually disallowed from doing that?
Mr. Cohen: Yes.
The Chair: I thank all senators for their patience, and I want to thank Mr. Cohen, Mr. van Duynhoven, Mr. Jawad, Mr. Baumgartner and Ms. Glowinsky. We have had a good exchange. We are grateful for your attendance here. I know you have other things to do in your life. It has been interesting, to say the least.
(The committee adjourned.)