Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 15 - Evidence - October 9, 2014
OTTAWA, Thursday, October 9, 2014
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill S-202, An Act to amend the Payment Card Networks Act (credit card acceptance fees), met this day at 10:30 a.m. to give consideration to the bill.
Senator Irving Gerstein (Chair) in the chair.
[English]
The Chair: Good morning. I call this meeting of the Standing Senate Committee on Banking, Trade and Commerce to order. Today our committee is holding its fourth meeting on Bill S-202, An Act to amend the Payment Card Networks Act (credit card acceptance fees), a bill introduced by our colleague Senator Ringuette.
Honourable senators will recall that the committee began by hearing from Senator Ringuette, the Department of Finance, the Financial Consumer Agency of Canada and the Competition Bureau of Canada. At the second meeting we heard from a number of users, the Canadian Federation of Independent Business, the Retail Council of Canada, the Ontario Federation of Anglers and Hunters, the Saskatchewan Wildlife Federation, and the BC Wildlife Federation.
Last week we heard from the two payment card networks designated in the legislation, Visa Canada Corporation and MasterCard International Incorporated.
Today we have two panels of witnesses representing merchants and consumers. I will start by introducing our first panel. From the Canadian Independent Petroleum Marketers Association, we have Tricia Anderson, President and Chief Executive Officer; and Allan MacEwen, Past Chair, Board of Directors and President of MacEwen Petroleum of Maxville, Ontario.
I'm sure the committee members will be interested to know that the members of this association account for 18.5 billion litres of sales annually — 27 per cent of all gasoline and 23 per cent of all fuel sold in Canada.
From the Consumers' Association of Canada, we have Mel Fruitman, Vice President. Welcome back, Mr. Fruitman. You've been before us on several occasions. The mandate of this association, which was founded in 1947, is to inform and educate consumers on marketplace issues, to advocate for consumers with government and industry, and to work with government and industry to solve marketplace problems. Mr. Fruitman was also vice-president of policy and administration with the Retail Council of Canada for 19 years and the owner-operator of a small chain of retail toy stores.
From the Quebec Food Retailers Association we have Pierre-Alexandre Blouin, Vice President, Public Affairs; and Isabelle Tassé, President, Outaouais Region. Ms. Tassé is the proprietor of supermarkets in Gatineau and Cantley, Quebec. This association represents the interests of some 8,000 food retailers in the province.
I will turn the floor over to Ms. Anderson, to be followed by Mr. Fruitman, then finally Mr. Blouin.
Tricia Anderson, President and Chief Executive Officer, Canadian Independent Petroleum Marketers Association: Good morning, and thank you for having us here today. As Senator Gerstein stated, I am Tricia Anderson, President and CEO of the Canadian Independent Petroleum Marketers Association, also known as CIPMA. CIPMA is a national not-for-profit trade association representing the unique interests of independent, non-refiner marketers of petroleum products. Our members are key distributors and marketers of petroleum and renewable fuels to the commercial, agricultural, industrial, wholesale and retail markets in every part of Canada.
Approximately 80 per cent of CIPMA members have retail operations. Our members are often the small and medium-sized companies that are the backbone of Canada's fuel distribution and marketing industry.
As it currently stands, a key issue for our members is that of credit card fees. Currently, credit card fees in Canada are among the highest in the world, with Canadian retailers paying between $5 billion and $7 billion a year in hidden credit card fees to banks to cover the costs of accepting credit cards.
High credit card swipe fees in Canada are a long-standing and entrenched problem that threatens the viability of businesses and increases the costs for all Canadian consumers, even those who do not use credit cards, as retailers are often pressured to charge higher prices to cover such costs.
Generally and historically, operating margins in the independent petroleum marketing sector stay within a narrow range of between 5 cents and 8 cents per litre.
Our members don't benefit from higher gas prices, but they do pay more in credit card processing fees, which are calculated on an ad valorem basis. As the cost of a tank of gasoline increases, the costs of processing credit card fees rise and margins shrink. CIPMA members report that close to 50 per cent of customers use credit cards for purchases. It is estimated that members are paying up to a third of their operating margin just to cover the cost of credit card processing in today's environment.
All other operating functions must be covered from the remaining margin, leaving little or sometimes no profitability for the businesses when all of these expenses are paid. No funds for new staff, important training or business expansion.
We also want to restate our concerns regarding the onerous burden placed on independent petroleum marketers related to the payment of credit card fees on taxes on fuel purchases. Taxes on fuel are significantly higher than taxes on other consumer products, and our members dedicate significant resources to tax collection and submission on behalf of governments. CIPMA estimates that independent petroleum marketers, our members, pay approximately $90 million on credit card fees annually. Of that incredible amount, approximately $30 million is going to cover credit card fees on the tax portion of the sale.
We recognize that the federal government took an important step in establishing a voluntary code of conduct a number of years ago for the payments industry. However, this has not been effective in addressing the continued and significant impact credit card swipe fees are having on businesses across Canada. As the Competition Bureau has pointed out, the impact of the $5 billion to $7 billion in fees is disproportionately higher on the margins of small and medium-sized businesses.
As representatives of independent businesses, we were encouraged by the commitment made by the government in the last federal budget to reduce credit card swipe fees. This was, in our view, an acknowledgment that a solution to the systemic problem of high fees, similar to what other jurisdictions have implemented, was required and forthcoming.
However, we find it disconcerting that a ''voluntary'' approach to reducing credit card fees is being proposed. We believe a regulatory framework is required to ensure fairness and transparency in swipe fees on an ongoing basis, bringing Canada in line with other countries, most of whom enjoy significantly lower swipe fees, to the benefit of merchants and consumers.
A regulatory approach in which the compliance responsibility rests with the payments industry, who have vast financial and people resources at their disposal, puts the accountability where it belongs.
Thank you for the opportunity to present our perspective today. We appreciate being consulted and communicating our challenges, concerns and proposed recommendations to the government.
Mel Fruitman, Vice President, Consumers' Association of Canada: The senator has already given you the background of the organization, so I won't repeat it, but I will start out with a very blunt statement: We are opposed to this bill.
This is a bill designed for merchants. We are perplexed that government is proposing to intervene in the credit card market in a manner that puts the interests of merchants ahead of those of consumers. We are also tired of hearing claims that both the government and retailers are acting in our — the consumers' — interest when this is not a consumer concern.
We believe that this bill is not in the best interests of consumers but that they will be net losers. This is based on a number of factors. First, financial institutions will attempt to make up for lost revenue by increasing other fees. Second, consumers will lose many of the benefits they have come to associate with their use of credit cards. And third, we do not believe that Canadian retailers are as altruistic as they make themselves out to be, and savings will not be passed on to consumers.
In their submission, retailers estimated that the cost to Canadian merchants is about $5 billion annually. It does not take an economist to realize that if a revenue stream is removed from the financial institutions, they will seek other means to replace it. Everybody who has ever tried to balance a budget knows that if your income goes down you either have to find other sources or reduce your expenditures.
The financial institutions are likely to adopt the former route by raising consumer fees both in areas unrelated to credit cards and in credit cards themselves. They may also reduce the benefits associated with their cards and tighten up on the availability of credit for marginal or less productive accounts. There is already evidence from other countries that that is what happens.
When the Retail Council of Canada appeared before you, the chair asked the direct question, ''Do you view this as a consumer issue or a merchant issue?'' At the same time, he asked if there was evidence that lower acceptance fees resulted in lower consumer prices. The first question was not really addressed, and the respondent referred to a study from the U.S., which I should note was done for the Retail Merchants' Association, that reported that 69 per cent of savings was passed on to consumers.
I do hope that senators take that information with a huge grain of salt since the conclusions were based on secondary information from an unrelated study and were based on estimates rather than any direct evidence. Our skepticism is based on recent events here at home. Does anyone around the table recall getting a reduction in retail prices following the GST cut? Did you see Canadian prices come down when our dollar reached parity with the U.S., and even for a while went higher? Of course not, and the government at that time set up bodies to investigate why that was happening. Clearly government does have concerns in this area as well.
Adding to our belief that the savings will not be passed on, when Senator Massicotte noted, ''So it will not be passed on to consumers,'' the Retail Council appeared to agree that it was unlikely, with the response, ''In some cases, it may.'' The Canadian Federation of Independent Business, CFIB, agreed, saying, ''I don't think there will be a dollar-for-dollar reduction.''
It should also be noted that, as an alternative approach, in some countries merchants have also been allowed to surcharge on credit card transactions by governments who acceded to merchant lobbying. It got so bad in Australia and the U.K. where merchants took advantage of the situation, with surcharges as high as 10 per cent in some cases, that those governments had to step in and put constraints on the practice.
We are surprised that retailers now to want to treat merchant fees differently from other costs. For many years, Canadians have suggested that customers who wish to pay cash and not avail themselves of the credit card offering should be given a discount equal to that fee. The response was always the same: The merchant fee is simply one of the many costs of doing business and should not be treated in isolation. A customer cannot selectively say, ''I do not wish to use that cost element and want a discount.''
Also, if merchants now wish to open the door to government interference in the running of their business by legislating how much their suppliers can charge for their services, it would seem appropriate to also legislate how much retailers can charge for their goods and/or to put a ceiling on their margins.
One final thought: We like the suggestion made by Senator Massicotte that the bill should be amended to make sure that the federal government oversees it, to make sure the cost savings go down and benefit consumers. In fact, we would vary that slightly and recommend that the bill be amended to include a section that requires a reduction in prices. In order to ensure that takes place, we would like to see it stated in the bill, something along the lines of basic selling price less the access fee or swipe fee reduction of 1.7 per cent, or whatever number it actually is, equals the selling price to the consumer.
Thank you for your time, and I will be happy to answer questions.
[Translation]
Pierre-Alexandre Blouin, Vice President, Public Affairs, Association des détaillants en alimentation du Québec: Thank you for the opportunity to share with you our concerns.
The transaction fee issue is one we have been working on since 2008. For us, the issue has the greatest impact on our businesses' bottom lines.
The Association des détaillants en alimentation du Québec, or ADA, represents 8,000 retailers. We are the voice of owner-operated food retailers. Often referred to as mom-and-pop shops, these businesses are present in every region of the country. We represent retailers all over Quebec, but these same people can be found all over the country as well.
We support Bill S-202 because it is important to establish a tariff of credit card acceptance fees for retailers. We support the proposal to set the rate at 0.5 per cent of the transaction value. Moreover, we do not object to the idea that charities and government institutions pay preferential fees. Beyond this, we would obviously like the lowest fees possible. But since we do not have the expertise to define fair fees, outside comparing fees with other jurisdictions that have already regulated the matter — whether in Europe or in Oceania, in such countries as Australia and New Zealand — we believe an oversight framework needs to be put in place. That is why we support the proposal to make the minister responsible for supervision, examination and inquiry, as provided in clause 13.
Without a thorough process, as proposed by Bill S-202, and supervision of the payment giants, how can we make sure that Canadian businesses do not constantly lag behind increasingly unfavourable new business practices? It is clear to us that not all retailers are equal in their dealings with the payment giants. The Government of Canada cannot leave independent retailers and other small businesses to fend for themselves.
Moreover, without an independent, thorough and transparent cost analysis, how can we ensure that fees remain fair over time and not unduly benefit retailers? Because that could happen.
Let us talk about a fair fee. What is it? Europe legislated 0.3 per cent and Australia, 0.5 per cent. In determining their fees, each of these jurisdictions conducted an independent, thorough and transparent analysis of the real costs of their payment system. The ADA simply does not see how Canada cannot conduct such an analysis and review the rates from time to time, as Bill S-202 proposes. Beyond a necessary decrease in fees, which are among the highest in the world, what Canadian retailers want is to receive services on par with their cost. In the increasingly competitive world of retail, retailers are calling for fair fees for today and even more so for the future.
It is important to note that the voluntary approach currently in place in Canada requires retailers alone to identify and report questionable practices, but requires no accountability from banks. It is easy to understand why a voluntary approach, or even a possible temporary drop in the fees retailers are charged, sits well with the banking industry. Canadian retailers pay more than $5 billion a year in fees for accepting credit card payments. This is a major barrier to business development and community involvement. Freeing retailers from this enormous financial burden would be a great way to stimulate regional economies. Last April, the European Union's Committee on Economic and Monetary Affairs capped the fee for accepting payments. Eventually, merchant fees must not exceed 0.3 per cent of the total amount of the bill.
Debit card payment fees are set at 0.07 or 0.02 per cent, whichever is lower. We believe that an independent cost analysis of the Canadian system is more pertinent than ever in order to set up a payment system that is based on real costs here in Canada. We have provided a series of videos illustrating different examples. You will probably notice that the videos were made close to two years ago. Since then, the rates have changed and the numbers as far as transaction types go have shifted in favour of credit. The videos also show the emergence of new payment models, such as mobile payments, which are not actually an innovation in the payment system but merely the migration of the credit fee structure and payment model to another device. This is a major concern for us and is the reason why my colleague Isabelle Tassé is joining me today. She owns two businesses and can answer any questions you have about the rates in greater detail.
In conclusion, we support Bill S-202, as well as an independent cost analysis of the system. We understand the concerns voiced by the bill's opponents, but that is no reason to turn a blind eye to the current situation, which puts retailers and consumers at a disadvantage. Thank you.
[English]
The Chair: Before I turn to my list of senators who have questions, Mr. Fruitman, in my introduction of you, I indicated that your association was founded in 1947 and that its purpose is to inform and educate consumers on marketplace issues. Could you tell us a little more about the Consumers' Association of Canada briefly? Do you have members? Do you have associates? I see you are the vice-president. Is there a president? Tell us just briefly how you get the information that you have reflected in this presentation you have made. Do you poll people?
Mr. Fruitman: As you indicated, senator, our organization is over 65 years old. It has evolved over time, as of course society and financial situations have evolved. We are a volunteer organization with a board of directors. We do not receive any government funding; we used to.
The Chair: How many people would be on your board?
Mr. Fruitman: Eight from across the country. We have a number of people who support the organization very nominally by making contributions to us. When appropriate and we when we manage to find some funds necessary to do some polling we will do so, otherwise we are based on whatever information we can glean from primary and secondary sources. In reference to this particular topic, we find enough information, with respect to what has happened in the past and in other jurisdictions, to be able to express the fear I have expressed on behalf of consumers.
The Chair: Is there a concept of membership? Or is it —
Mr. Fruitman: Not anymore. There used to be.
The Chair: But there isn't today.
Mr. Fruitman: There is not anymore. As we say, we have 33 million constituents.
The Chair: You have eight directors. Are there other officers of the organization?
Mr. Fruitman: No, there are not.
The Chair: There isn't a president?
Mr. Fruitman: Yes, but they are all drawn from the board. I am a vice-president. There is a secretary-treasurer as well.
The Chair: There is a president.
Mr. Fruitman: Yes. I thought I said that.
Senator Hervieux-Payette: Thank you for helping us, and those supporting, thanks to you as well. Would you agree that if there were some guidelines, regulations or government monitoring, savings would be passed to the consumer? That's my first question. My second question is would you also agree that the nearly 50,000 small businesses that are operating — those in the food industry, as that is who I have met — in terms of profit, the money they make, are in fact working a lot of hours with very little pay?
Mr. Fruitman: I'll deal with your second point first. I have no quarrel with that statement. Our position is on behalf of what the effect will be on consumers. There are people here who are available to defend the concerns of those people you mentioned. The first point, I think you left the question hanging a bit.
Senator Hervieux-Payette: Monitoring it and making sure that the benefit is going mainly to consumers.
Mr. Fruitman: As I had indicated in my presentation, we think it should be added to the bill, not separate from the bill. If the bill did include something along the lines that forced the savings to be passed on to consumers, then our position would obviously be different. It would remove the fear that it will not be passed on to consumers and that it will to wind up costing consumers more.
Senator Hervieux-Payette: In fact, if we were bringing an amendment, your association would be willing to support on behalf of consumers?
Mr. Fruitman: On behalf of consumers, of course, assuming the amendment would have the desired result, yes.
Senator Hervieux-Payette: I think it's quite clear.
[Translation]
Mr. Blouin or Ms. Tassé, could one of you give me a general sense of the people you represent? Are they large organizations with a lot of employees? Or are we talking about small- to medium-sized businesses?
Mr. Blouin: We represent supermarkets, corner stores, as well as specialized retailers such as greengrocers, butcher shops, grocery stores and convenience stores. Ms. Tassé owns a supermarket and a convenience store. She could, no doubt, describe her business for you.
Isabelle Tassé, President, Outaouais Region, Association des détaillants en alimentation du Québec: In Gatineau, I own a Provigo grocery store that has about 55 employees, and in Cantley, I have an independent store with a gas station with 18 employees.
Senator Hervieux-Payette: What is the average profit margin for food retailers?
Ms. Tassé: Right now, I would say the net margin is between -0.5 per cent and 1 per cent. That is more or less our reality right now.
Senator Hervieux-Payette: In light of that, would you agree with giving the majority of that margin to consumers and a smaller portion to retailers?
Are you hoping that merchants, who have to accept credit card payments for very small transactions, will receive fair treatment, so that they, too, can take a small share of the pie? For instance, what would you say if we were to go from the rate of 3 per cent to 0.5 per cent, of which 0.1 per cent or 0.05 per cent would go to the merchant and the rest would go to the consumer?
Mr. Blouin: I think your question to my colleague speaks volumes. We are talking about businesses whose average profitability is between -0.5 per cent and 0.5 per cent. That is not much. Whatever we can pass on to the consumer to remain competitive, we do. We put on special offers; we sell goods at significant discounts. If you look at the flyers, you will see that we sell some items at 1980s prices, despite inflation. Yes, certain products are more expensive because the factors of production are more expensive, but generally speaking, we tend to pass on as much as possible to the consumer because if we are not competitive, we go out of business.
Can the same be said of the payment system? No, quite the opposite. The payment option that prevails is the one that is the least efficient, the one that is the most expensive, the one that is most widely used in the market, the one that offers the most reward points and the one that generates the least savings in the rest of the chain.
Senator Hervieux-Payette: Ms. Tassé, can I infer that you are much more at ease with the fees when I pay with my debit card versus my credit card?
Ms. Tassé: Indeed. I looked at the numbers, and even though 56 per cent of my transactions are debit card payments and 21 per cent, credit card payments, the credit card fees cost me 27 times more. So, in one month, for $400,000 in debit card transactions, it cost me $86, and for $170,000 in credit card transactions, it cost me $2,600.
Senator Hervieux-Payette: Okay. Already, then, we have somewhat of a balance that could allow for a certain degree of fairness in the system, where both parties could benefit equally from savings if we were to make an amendment to my colleague's bill. I am sure she would be open to such a proposal.
Thank you for your presentation.
[English]
Senator Black: Thank you very much to you all for those very strong presentations.
By way of overview, before I get to my questions, you know, because you've reviewed the evidence we have heard here to date, we have anecdotal evidence that if we were to suggest the reduction in the acceptance fees, consumers would not necessarily benefit. That's the evidence that we have heard. Indeed, Mr. Fruitman has underlined that concept today. That's what I'm working with here now. I want to explore that a little bit if we can, please.
Mr. Blouin, if I can refer you to your evidence and the paragraph that starts with ''Canadian retailers pay more than $5 billion a year in fees,'' you make a very interesting statement. This is a major barrier to business development and community involvement. Freeing retailers from this enormous financial burden would be a great way to stimulate regional economies. You've made three interesting assertions there. Can you give us any evidence that that would be the case or indeed is the case?
[Translation]
Mr. Blouin: That is always the case. If you look at the fabric of independently owned business, food retailers in particular, right across the country — obviously, I am more familiar with Quebec, but we have a good relationship with our Canadian counterparts — you will see the number of local jobs generated and the number of purchases made from local suppliers.
Owner-operated retailers are vital to Canada's economy. If the government does not create the conditions necessary to protect those businesses, the only merchants left will be corporate retailers following corporate models and corporate policies. Great, if that is the model the government wants to establish in Canada, but I would say this: independent retailers have a clear spinoff effect. When they make investments, renovate their stores and so forth, their communities reap the direct benefits; it is inherent.
[English]
Senator Black: So your evidence would be that if the acceptance fees were less, the merchant would have more money in the cash register to spend on other goods and services.
Mr. Blouin: Exactly.
Senator Black: And some of that extra money in the cash register may or may not reduce prices to consumers?
[Translation]
Mr. Blouin: We believe it will have a direct effect. Transaction fees are currently higher than our profit margin. We invite you to connect the dots, to perform whatever calculations you like. We are willing to open up our books, and we have been saying that since the study began in 2008. We are seeing that people do not want us to open up our books. We do not understand why. The point is to build a more transparent model based on real costs. We do not understand why people are against that. We might be wrong, so we invite you to prove us wrong. We know exactly what our books show at the end of every month. We see the number of credit card transactions going up every month, and there is no end in sight. We are going to have to close our doors. These fees represent our fastest rising spending item, faster than minimum wage, faster than any other business-related expense.
[English]
Senator Black: Thank you very much for that. When you say ''set up a payment system that is based on real costs,'' how would you suggest that we or the Government of Canada would get at the real costs? What is the process or procedure you would suggest to do that?
[Translation]
Mr. Blouin: I am no expert, but our understanding from our counterparts in other countries where this process has been undertaken is that the analysis is entrusted to a credible and independent organization. It looks at the books, examining what the associated costs are and where the money is going. For instance, if we look at our fees, say we are paying 2 per cent, what percentage really goes towards covering the cost of the electronic transaction, what percentage is used to cover the cost of loyalty programs and what percentage goes towards covering banks' advertising costs. In the end, the jurisdictions that have done this analysis have found that rates as low as 0.05 per cent or 0.3 per cent still afford the banking sector a profit. That is the question we want to explore. We realize that Canada is a huge country, but how can an electronic transaction cost more here than it does in Australia?
[English]
Senator Black: You would suggest that the government hire outside experts to advise them on this?
[Translation]
Mr. Blouin: It is up to you to determine who the right organization is. We do not want to be biased and suggest an organization that you would not accept.
Senator Massicotte: Thank you for joining us; your input is very important. Your experience is something we need to know about.
I am going to tell you what I am thinking and I want to hear what you have to say in response. It would be very difficult, even if the bill were amended, to ensure that all the savings were passed on to the consumer. It is a market that changes a lot. I appreciate that retailers have been under tremendous pressure in recent years and that their profit margins have shrunk. It would be hard to verify that.
Consumers have a large array of choice: there are numerous credit cards. Consumers are not well-informed. But there are websites that list all the credit cards and post all the fees, and even the papers could publish what those fees are. Some cards have low fees, some have low interest rates. The problem arises on the retailer's end. It seems that 40 per cent of people do not accept credit cards. Those are the little guys. And the major retailers have no choice. That is the problem; even the Competition Bureau clearly said so. I am a firm believer in the market; it moves freely and that is very important. Before we regulate the market, we need to be very careful. Every measure to that end has had unintended negative consequences and has not been successful. We saw that in Australia. We need to exercise extreme caution before we start manipulating the market because it does not work.
So what is the answer? The first step is to try to encourage competition and to ensure that the merchant has more choice. The government has already allowed merchants to offer discounts to those who pay using cash. That provides some flexibility at least.
However, that was not enough. It was not a solution. Perhaps we should not only allow discounts in the case of consumers who pay with cash, but also allow retailers to impose a surcharge on those who pay with a credit card, through legislation perhaps? Should we let retailers refuse to accept certain credit cards? For instance, should we allow them to refuse cards where the fees hover around 0.04 per cent? Would that help? Is that something we should try before attempting to manipulate the market, which is always tricky?
[English]
Allan MacEwen, Past Chair, Board of Directors, Canadian Independent Petroleum Marketers Association: We'd like to discount for cash, but we're very confident that it would be unsuccessful because the percentage usage of credit cards is so high that we don't think we'd have the desired effect. Our cash sales would be at a lower level, so we would be reducing our profit on that, whenever there is a profit. We're also very confident that, in the marketplace, the competition would jump on our cash price and reduce their credit price at the same time.
Senator Massicotte: Same thing with a surcharge?
Mr. MacEwen: Yes, I'm afraid so. We feel very strongly about it. Part of the issue here is that we're competing with Suncor, Imperial Oil and Shell. They're not paying the interchange fees that we're paying. Our average cost, with all the surcharges, is 1.88 per cent, and we don't know what they're paying, but the large refiners are definitely paying a lot less than we pay, and they've got other margins to fall back on.
[Translation]
Mr. Blouin: I am somewhat surprised that a surcharge is being proposed. Earlier, there was more concern over consumers ending up with the bill. With a surcharge, consumers will automatically foot the bill.
I think we are part of a flawed system. We have to be able to ask ourselves whether we are really considering the big picture. Are we analyzing all the costs? Who is paying for what? Where does the money go? Where is the cash flow headed? I think those questions need to be asked.
Are we in favor of the surcharge? Earlier, I was saying that we represent owner-retailers. If the Walmart in the neighbouring town decides to advertise, we will not surcharge our consumers, as Isabelle Tassé's store does. You see the type of effect that will have on the market. It is clear that our sector's competitive nature has to be taken into account. We are constantly bringing up the fact that our sector is extremely competitive. The same cannot be said for payment methods. There is no competition in that area. The Canadian low-cost, effective and safe Interac model is in decline, as credit cards are gradually taking over its market. Do we want a variety of options in terms of payment methods, or rather a system like the one we currently have with Visa and MasterCard, which will eventually overcome our Canadian Interac payment model?
Senator Massicotte: I understand that there is a tremendous amount of competition in your sector, but we do not feel much pity for you. The capitalist system is working well because of the competition. The problems begin when competition is lacking. That is when the government would get involved. Perhaps, in the case of Visa and MasterCard, the Competition Bureau may say that competition is lacking. From a political standpoint, the concern is that you may be interested in taking a portion of those savings if the bill is passed. That is fine if the market determines that the competition dictates this outcome, but we must ensure that the main goal of maintaining competition is being achieved.
It is difficult to make legislation to try to determine where the profit will go. Have any other stakeholders said that the capitalist system is not working well? We will see what will happen in Europe. Is there another way, aside from legislation, to deal with the fees retailers have to pay?
[English]
Are there other solutions, other ways we can get there without trying to legislate the market response of these fees, which usually does not work out well?
Mr. MacEwen: It's a very difficult situation. As a consumer, sure, I have a credit card. I like the points and the odd so-called free air travel. I'm not sure what the end solution is, but the in current situation where we deal, when it comes to the supplier of credit cards, we really have no competition. If they came to us and said, ''We're going to jack up your fees by another percentage,'' we don't have any choice but to accept it.
Part of the issue is not just the banks, but the consumers are hooked on these points, which is what drives the cost up. If the consumer won't get points next year, they're not going to be happy, either.
Senator Massicotte: We talk a lot about Visa and MasterCard because that's the payment system, but you realize that 70 per cent or 80 per cent of the costs of the merchant fees goes to the banks? One could argue there's some competition there, certainly competition with the number of credit cards. There's a lot of choice. The consumer is not informed, but there's a lot of choice.
Are we doing all this to try to get at the 30 base points Visa and MasterCard are charging? Why not concentrate on the bank side? One could argue maybe there's adequate competition there. It only tells you it's a flux situation, and any time you try to legislate an intended response in the marketplace, it doesn't work and there are all kinds of negative consequences once you legislate with great hesitancy. If we find a solution to get there, we should probably work with that before we get there.
[Translation]
Mr. Blouin: When you decide to buy a home, you have it inspected.
Today, I am telling you that the payment system should be analyzed transparently. We can then determine who is profiting from a dominant position — the retailers, the banks or the credit card companies — and whether consumers are shortchanged in the process. I am sure that the Australian conservative government's first option was not to draft regulations and implement a regulatory process. They had to conduct an independent analysis and, based on the results, they felt it was necessary to implement regulations, which have been adapted over time. Regulations are never static. There are always other options.
I appreciate the fact that Bill S-202 gives the minister the authority to make amendments to both the regulations and the fee amounts. So we are entirely favourable to the bill.
Senator Maltais: Mr. Fruitman, you indicated in your brief that you represent 33 million consumers. Did I understand that correctly?
[English]
Mr. Fruitman: Yes, 33 million constituents — in other words, the entire population of Canada, some of whom support us financially.
[Translation]
Senator Maltais: When was the last general meeting held for those 33 million consumers?
[English]
Mr. Fruitman: Sorry, we have not had a meeting of 33 million consumers.
[Translation]
Senator Maltais: What gives you the moral authority to oppose this bill?
[English]
Mr. Fruitman: I'm not sure I quite understand why you're talking about moral authority.
[Translation]
Senator Maltais: I will rephrase my question. Whenever a budget is announced — either on a provincial or on a federal level — journalists love to seek out one of your representatives who are against part of the budget. I have never heard a representative of your organization say that they agreed with banks collecting $5 billion if the bill was passed. As you said earlier, banks will collect that money one way or another, as they will not accept losing it. How will they do that? How can a consumer protection agency like yours disagree with $5 billion in fees coming back to all consumers, given that distributors are entrepreneurs? We should call them by their true name. They are business owners. Be they restaurant owners, grocers, convenience store owners, tire dealers, service station operators or other, they are all business owners. Why is the Consumers' Association of Canada against $5 billion going back to those small business owners who will redistribute that money to the consumers in one way or another — either by hiring additional staff, renovating or in other ways? They will surely find a way to reinvest that money in society. That is what I find confusing about your association. Can you explain this to me?
[English]
Mr. Fruitman: That I can answer. We do not feel, based on experience with other situations here in Canada and in other countries, that that $5 billion will be returned to consumers.
I have here an article from The Economist dated last week that says — Mr. Durbin is referring to the American situation — it has cost the banks $6.6 billion to $8 billion annually and retailers seem to have pocketed most of the windfall just as they did when interchange fees were cut in Australia. It goes on to say that banks have tried to make up for the lost revenue with higher charges for other things, including monthly fees for debit cards, et cetera.
Our position is based on the fact that we are not trying to deny anybody from earning a living, simply that our belief and our fear is this bill, if enacted, will result in a cost to consumers, not in a savings to consumers, which seems to be the stated reason for the bill. It's that simple.
[Translation]
Senator Maltais: If the banks — the credit card issuers — decided to recover the $5 billion, it would be the legislator's duty to put an end to that. I do believe that your article about the U.S. makes sense, but we are talking about Canada here, about direct consumers and SMEs. SMEs are consumers, as well. They do not all plant their tomatoes. They have to buy them at grocery stores or from producers. They are also consumers. If the banks decided to recover that money, first of all, they would be blackmailing the government and, second of all, if that was the case, the legislator could make an amendment.
[English]
Mr. Fruitman: Sorry, again, our concern isn't only on the banking institute side of it. As I've said several times now, our fear is that they will raise fees to cover their lost costs, take advantage of the situation. But at the same time, we don't believe that the retailers will pass through the savings. The retailers, in their own information, tried to make you believe that 70 per cent would be passed through to consumers. That was based on a study that had absolutely nothing to do with this kind of situation, so it was false to start with.
Other indications are that indeed retailers have maintained it. I even quote from the Electronic Payments Coalition, referring to the president and CEO of the Independent Community Bankers of America, obviously a biased group, but still: ''When Congress interferes in a fight between two industries over who pays what, it is almost always consumers who lose. . . . consumers foot the bill, while retailers keep their windfall.
A study done out of the University of Chicago points to the same thing.
[Translation]
Senator Maltais: I will stop you there because in Edmundston, New Brunswick, the Chamber of Commerce obtained a rate of 3 per cent, and no bank has declared bankruptcy so far. As the president of the Consumers' Association of Canada, are you aware of this?
[English]
Mr. Fruitman: I made no reference to any banks going bankrupt. I'm sorry, senator. I'm not sure what your point is.
Senator Tkachuk: Welcome and thank you. I have a lot of sympathy for credit card fees on taxes as far as the retail sale of gasoline, but to me, the last thing I want to see is a bunch of bureaucrats running around the country to make sure that the 1 per cent or the 2 per cent is being given back to consumers. I don't think we want to see government intervention in the marketplace.
I'd like to ask you, the people who use their credit cards, is your fight with the banks, or is your fight with Visa and MasterCard, which have a very small fee for transactions? It's the banks who issue the credit cards. It's not Visa and MasterCard who issue the credit cards; it's the banks. What happens when you talk to your bankers? What do they say? Why are you not talking to the banks about this?
Mr. MacEwen: You get zero response. We do not interact directly with the banks for credit card fees. It's with Global and Moneris. I believe they are controlled by the banks, largely. It's an oligopoly, very clearly. There is no negotiating power. For us to go to the bank, and we've done that, it's a non-starter.
Senator Tkachuk: For all the information we have heard in testimony, the big cost of the rate charged by Visa and MasterCard goes to the issuer of the credit card, which is the Royal Bank, CIBC, Toronto Dominion, all those people. So it is the banks.
As far as I can tell, the credit card cost is a cost of doing business. It's like any other of your input costs you would get. In your case, in the restaurant, it's the cost of beef or the cost of the vegetables that you buy, the cost of rent, the high taxes you may pay, property taxes, the taxes themselves, income and business tax. All of those are input costs, just like this. There's a fee for the credit card, but that's part of your input costs, is it not, in both cases?
Mr. MacEwen: In a way, yes.
Senator Tkachuk: It is or it isn't.
[Translation]
Mr. Blouin: I will use the tomato example provided by your colleague, Senator Maltais. When tomatoes are no longer to our satisfaction — be it in terms of quality or price — we purchase them from another market competitor.
When it comes to transaction fees, there is no less expensive alternative. The only other options are more expensive. This is not a proper free market system. It is a bidding war of ever increasing fees. On the left, you have a high rate, and on the right, you have a high rate. Which one to choose? Our problem is the fact that we have no negotiating power with the banks.
You are right; we have tried to approach the banks to discuss this matter, but the system is so complex. They both receive and issue transactions. So their margin of profit is on both sides of the transaction. They criticize Visa and MasterCard, saying it is their fault, but the whole banking system creates that inflation.
[English]
Senator Tkachuk: So you're asking the government to control a cost. When you lease a place and you have a particular property you like, you're basically stuck with that cost, or else you move. That's your choice. It's much like with a Visa card. If you don't like the cost, then you just say, ''I only accept cash payments.'' You do accept cash payments. You don't reduce the cost for consumers, so you're making a little more money on the cash payments than you are on the Visa and MasterCard. Your average cost can't be 2 per cent or 3 per cent of your sales, because one third of your costs would be taken up by cash business. I don't see why you would want the government to come in there and control and mandate a particular cost of a supply that you are buying of your own volition. It's part of the cost of doing business. When you organize your business plan, don't you take that into consideration?
[Translation]
Mr. Blouin: If I may give you another example, I want to tell you about one of the three short videos, which focuses on Michel Dépatie, a retailer who owns a Metro store in Laval. The video talks about credit card transaction costs of $150,000. This year, the owner anticipates that those transaction costs will be from $210,000 to $220,000. Credit cards are used in only 30 per cent or 31 per cent of all store transactions.
What we are saying is that the market is evolving at a rate that is no longer sustainable. The $5 billion we have been talking about for a while is paid by the consumer, and not the banks. The consumer pays for that through the prices of the products they buy. The amount will increase every year and, if the issue is not resolved, the banking sector will end up benefiting from that $5 billion taken from consumers.
That is why groups of companies, which are not used to asking for regulations to be implemented, are coming to tell you that they no longer have the ability to negotiate in a free market. That is the current reality.
[English]
Senator Tkachuk: I understand that, but you see the difficulty that we face. At the same time, in both of your industries, you have noticed that there has been a dramatic decrease in the interest rate you pay at the bank, no question, over the last 10 years. Right now, interest rates are probably at historic lows. I'm not confident that those savings are being passed on to the consumer. Surely the cost of your banking, as far as interest rates are concerned, has dropped dramatically. Obviously, when you go to the bank to build your restaurant, your capital costs would go down. All of those fees have gone down, and maybe Visa and MasterCard fees have remained the same. In reality, I'm not sure if your total input costs are any less or any more now than they were say 10 years ago.
Ms. Anderson: I would agree that there are a number of different inputs that go into the price of the product that my members sell. Our sector is extremely competitive. They live in pluses and minuses in a number of different sectors.
I feel quite strongly that, in our sector in particular, where the price is on a 25-foot pylon where everybody can see it, there's extreme competition. In fact, it's been the history of the sector that any reductions in terms of the overall cost platform have been competed away, often to the disadvantage of the independent marketer. I think Allan can comment on that particularly in the Ottawa area, where it has been so extremely competitive.
I do believe that in the environment many of our merchants are dealing with, which is very broad in terms of the number of participants, we would see a reduction, and we have been seeing extreme competitiveness. It's very different, as Pierre-Alexandre was commenting on, than dealing with either the four banks or two credit card companies. Small and medium-sized businesses across Canada are very much engaged in strong competition at the local level. As I said, our sector in particular, contrary to what many think, is extremely competitive, as evidenced by very prominent pricing signals and a market in which consumers will drive four kilometres in the middle of the night to save a dollar.
The Chair: Thank you. I'm going to ask Ms. Tassé to wind this one up, please.
[Translation]
Ms. Tassé: The fact that credit card use is increasing, as are the fees for retailers, could hurt the business model used by small business owners.
If credit card fees were regulated, perhaps we could remain competitive and potentially stay in business, as well.
[English]
Senator Ringuette: First of all, I'd like to say thank you for being here. I'd like to say I'm surprised that some of our members around this table, who were present when we did a six-month study of the interchange fee, still don't understand that the interchange fee is set by Visa and MasterCard, and then they negotiate profit sharing with the banks. That was certainly well-known when we did our six-month study.
Another issue that is still surprising to me is that, 14 years ago, Australia put some caps for maximum rates on interchange fees. They've reviewed them twice. The first time they did it, they reduced it from 0.95 to 0.5. They've reviewed it since, and they've kept it at that same rate.
After 10 years, the European Commission, after different countries being in court challenges with Visa and MasterCard, said enough is enough, and they're now imposing a 0.3 per cent interchange fee.
My question is this: Are we, as Canadians, more tolerant to abuses like that than Australians, New Zealanders and the European Commission? Even our own Competition Tribunal said clearly that this issue required regulation.
That said, I feel very sympathetic to the independent petroleum industry because it is true that you are being squeezed, both by a percentage rate from provincial and federal tax on the cost of a litre of gas and also, on a percentage rate, by interchange fees. Your manoeuvring space is almost non-existent. You have indicated that it is a tax on tax. However, I would like you to comment on your comment, ''We find it disconcerting that a voluntary approach to reduce credit card fees is being proposed.'' Could you elaborate, please?
Ms. Anderson: We just believe that this is a long-standing and entrenched problem and that a voluntary code, which we see as putting the onus on the individual payees to raise the flag regarding any issues and to put precious resources into proving a point that there is an injustice, is not the fair way to approach it and will not result in any systemic change for the long-term benefits of both merchants and consumers.
Senator Ringuette: Thank you.
Mr. Fruitman, in 2011, did you receive funding from Visa Canada in order to produce a research paper?
Mr. Fruitman: Quite possibly. I'm not specifically aware of it.
Senator Ringuette: In an article here, you said that, yes, you did, and Visa Canada has confirmed that contribution.
I've seen another very interesting comment from you. That dates from August 7, 2013, and it is part of a press release from the Department of Finance Canada. The headline is ''Harper Government to Monitor Savings through New Tariff Relief for Canadian Consumers.'' The president, Mr. Cran, is quoted as saying, ''The Consumers' Association of Canada supports the Government's efforts to reduce tariffs and lower costs for consumers.''
If your association believed that a reduction in tariffs for the retail industry, which was the issue of concern in that omnibus budget, would, as you stated to the government, lower costs for consumers, how would that differ from lowering interchange fees and the result of lowering costs to consumers?
Mr. Fruitman: I think that's a very specific situation in which we are dealing with tariffs on particular products. We are talking about more than 1 per cent or 2 per cent. We would be talking perhaps as high as 10, 15 or 20 per cent or more on certain products. Again, it was, in that case, a one-sided concern. I'll clarify it; you're frowning. That was a cost of the merchandise that we felt, hopefully, would be passed along to consumers if, indeed, tariffs were removed and that cost element was reduced to retailers.
We are, perhaps, less sanguine that this smaller percentage will be passed along to consumers, and it is a much broader base of charges. Also, we are concerned, in this instance, that there is an offset here with the banking industry, which will try to recover a cost. That was not the case with respect to tariffs.
Senator Ringuette: Your argument here is for consumers, if I'm not mistaken.
Mr. Fruitman: Yes.
Senator Ringuette: The average reduction in tariff for the retail merchandise was in the vicinity of 2.5 per cent.
Where is the difference with regard to probable reduction in consumer cost of tariff reduction and interchange fees? I say that because I also have, in front of me, a document that shows that, as a result of those tariff reductions, there has been, in the cost to consumers, a reduction. I remember because I was at the committee when we were looking at all these tariffs and so forth.
There was a special interest in hockey equipment, and here we have that, for a Bauer helmet with a cage, there was reduction in the consumer price of $3. Shoulder pads, $5. Elbow pads, $5.
The Chair: Could I ask you to pose the question?
Senator Ringuette: I already did, and unfortunately the issue here is that, if the government reduces tariffs in order to reduce the price to consumers, there is no evidence that a reduction in interchange fees would not cause a reduction in consumer prices.
The Chair: That's the question for Mr. Fruitman to comment on, please.
Mr. Fruitman: Again, I'm not sure there's a question there, but, as I stated, these situations are indeed quite different. In one case, you are talking about a much larger percentage on a very limited number of items, versus a small percentage that is basically universal. In the situation of the tariffs, it is much easier to monitor if, indeed, those savings were to pass through, and I don't know how much of the percentage of tariff savings was passed through to consumers. In some cases, I think they found it very difficult to identify whether it was. There were some obvious cases where that saving was at least in part passed through.
I don't think we're comparing the same situations at all.
The Chair: That concludes round one. We have five minutes left for two snappy questions in round two. I see it has now reduced to zero, so we can get ourselves back on track.
On behalf of all of the members of the Banking Committee, I would like to express to you our great appreciation for your appearance today.
For our second panel, I am pleased to welcome on behalf of the committee, from the Ontario Restaurant Hotel and Motel Association, Tony Elenis, President and Chief Executive Officer. This association is the largest provincial hospitality association in Canada, with over 4,000 members representing more than 11,000 establishments.
From the Canadian Federation of Independent Grocers, we have Mr. Gary Sands, Vice President, Public Policy. This trade association represents over 4,000 independent retail grocers. Mr. Sands is also the chair of Small Business Matters, a national coalition representing Canada's small and medium-sized businesses.
I will turn the floor over to Mr. Elenis, to be followed by Mr. Sands. Mr. Elenis, the floor is yours, sir.
Tony Elenis, President and Chief Executive Officer, Ontario Restaurant Hotel and Motel Association: I am the president and CEO of the Ontario Restaurant Hotel and Motel Association, known as ORHMA. Thank you for this opportunity on this act, which is truly important and has a major impact on our membership and our industry.
With 11,000 establishments, the ORHMA is Canada's largest provincial hospitality association, representing the interests of Ontario's food service and accommodation sectors. ORHMA is dedicated to fostering a positive business environment for the industry located throughout Ontario. Over 65 per cent of our membership represents small, independent operators of restaurants, hotels and other accommodations.
Canada has one of the highest credit card acceptance fee structures in the world. The federal government must act in bringing in a merchant system policy that works fairly for all involved.
ORHMA continues to hear our members' outcries about the high credit card merchant fees and the extreme impact on their business bottom line. They see these fees as stealing way their hard-earned income. This unfairness is increasingly compounded when it is imposed on the hospitality business that struggles in Ontario to be sustainable.
The hospitality industry is a significant component of Ontario's economy and character, yet it is vulnerable to economic volatility. In recent years, the industry has experienced tremendous pressures due to a number of events and measures such as 9/11, SARS, border issues, low consumer confidence and the lack of disposable income. Perhaps Canada survived the latest global recession well, but, make no mistake about it, the hospitality industry in Ontario has changed, and not for the better.
Unprecedented economic pressures have forced the industry to become more resourceful, to do more with less. Besieged by rising labour, as well as food and energy costs, restaurant operators continually scuffle with the threat of shrinking operating margins. Since the year 2000, the accommodation sector across Ontario has operated on 50 per cent reduction in profit margins, while Ontario restaurants operate on a 2 per cent pre-tax profit margin, many even less. Yes, some business segments in certain areas of the province are starting to see an upward trend, but it's not about revenue growth anymore, it's about pressure from the expense lines impacting the bottom line.
In these tough times, the industry sees the credit card companies taking advantage of the business owner in exploiting loopholes available to them. Hospitality and other businesses are penalized by actions of the big credit card companies. These companies continue to line their pockets without any government oversight.
Several jurisdictions have looked into the impact of high credit card fees and adopted payment sector reforms. For example, a model that was implemented by the Reserve Bank of Australia in 2002 capped processing fees at 0.5 per cent of a transaction's value, which produced net welfare gains of $100 million to $150 million for Australian retailers each year.
Canada has some of the highest acceptance fees in the world. Bill S-202 will set benchmarks at 0.5 per cent for standard transactions, 0.3 per cent for government and 0 per cent for charities. With an average of 2.5 per cent, those acceptance fees today cost Canadians around $9 billion. With the legislation in place, Canadian merchants and consumers could save upwards of $7.2 billion annually.
Small and medium-sized businesses are the lifeline of Canada's economy. They drive competition and offer choice for the Canadian consumer. However, as high credit card swipes continue to diminish the profit margins of such businesses, it ultimately puts their survival at risk, which also affects job growth. We ask the Senate, and in turn Parliament, to support Bill S-202.
On behalf of ORHMA, thank you for your time and consideration. We urge you to support this bill.
Gary Sands, Vice President, Public Policy, Canadian Federation of Independent Grocers: Good morning, senators. I am the vice-president of the Canadian Federation of Independent Grocers and also a member and the chair of the Small Business Matters Coalition, other members of which have appeared before you this morning.
Thank you for your invitation to appear before this committee to speak about the impact of credit card fees on retailers. I would like to begin by briefly describing the two hats I am wearing this morning, that of the Canadian Federation of Independent Grocers, CFIG, and one on behalf of the Small Business Coalition.
CFIG began in 1962 and is a national association, representing independent and franchisee retail grocers and distributors. Our members are small and medium-size business owners who are part of the mosaic that makes up the myriad of communities across our country.
A major challenge confronting the retail grocery industry is retail consolidation. That's not an issue for this committee to deal with today, but the distortions that mergers and acquisitions are now causing in the marketplace are putting additional competitive pressures on our independent grocers. Bear in mind, too, that the margins in retail grocery, of about 1 per cent to 1.5 per cent, are very tight and lower than in other retail sectors.
In this context, you can understand how the continued payment of high credit card fees for small and medium-sized grocers is of critical importance and is squeezing margins in a way that is simply not sustainable.
The federal government took an important step and one we supported in establishing a voluntary code of conduct. It did help bring a process and structure in place that could provide support for dealing with practices or policies in the payments industry that needed to be addressed.
As we all know, I am an echo of what you have undoubtedly already heard repeatedly in saying that the code has not been able to address the continued and significant impact credit card fees are having on small businesses across Canada. As the Competition Bureau has pointed out, the impact of these fees and policies of the credit card companies is disproportionately more significant for small business.
Credit card fees are also higher in Canada, and currently there are three hands in the retailers' wallet: the card issuer, such as the bank and credit unions; the networks, such as Visa and MasterCard; and the acquirers, which are the processors who supply the network services to retailers.
If one of those players increases the fees to another, invariably it will be the retailer at the receiving end. For example, in April 2013, when Visa increased their assessment fees for processors, those in turn were passed on to retailers. While this committee is aware of the estimated aggregate amount of fees being paid by the retail community — somewhere in the range of $6 billion to $7 billion in fees, or I've heard $5 billion — it is important that we break that down and understand what it means at the store level.
For example, we came up with a perfect illustration of that from one of our member stores in the Toronto area where the split between what is paid by credit card and debit is equal. Yet that retailer pays $210,000 a year in credit card fees, as opposed to $6,000 for debit. But the customers are buying the same products, shopping in the same store and receiving the same service. This is indefensible. That gap must be closed.
That scenario is all too prevalent in all every retail sector and was the reason CFIG and many other associations came together to form our Small Business Matters Coalition. We now represent well over 90,000 businesses in Canada, and it's growing. These are businesses that don't have the leverage of Costco, for example, which recently negotiated a special arrangement with MasterCard. Our members know there is no level playing field, but a failure to bring about a meaningful reduction in fees will mean that many small businesses will no longer be able to even stay on the field.
The small businesses our coalition represents operate in a different reality than the one Visa and MasterCard enjoy. Compounding that competitive imbalance, the businesses we represent have no option to but to accept those two credit cards. Turning aside numbers of customers because they choose to pay by credit card is simply not a viable business solution, and it is disingenuous for anyone to suggest otherwise. Our coalition wants to impress on Parliament and consumers that this issue is about benefiting consumers as much as retailers.
That is why our coalition, representing over 90,000 businesses in this country, unanimously endorses a pledge, which reads as follows:
Members of the Small Business Matters Coalition, representing thousands of businesses across Canada, urge the Government of Canada to reduce credit card swipe fees and to bring fairness and transparency to the Canadian Payments Industry.
In turn, our members pledge that the reduction in credit card fees will be to the benefit of consumers and communities across Canada, through improved competitiveness, increased investment, job creation and reduced consumer prices.
This commitment is important for consumers. They must understand the direct link between fees and the ability of small businesses in their communities to remain viable. When a small business is gone, it's gone. That is not by any means a win for consumers, and it pulls away at the fabric of so many communities across this country.
Independent and small businesses are not here to ask for protection from competition. It is their reality, day in and day out. They understand and support a free competitive marketplace, but the payments industry has a much different competitive landscape than the one that the small business community walks on, and when two companies control over 92 per cent of the market, it does not facilitate a free or competitive marketplace.
There is only one inescapable conclusion that can be drawn, and it is that Canada must move in the direction that other jurisdictions have and reduce fees. If Bill S-202 has helped to once again bring this issue to the forefront of the public agenda, then on behalf of the small business community, we extend our appreciation.
[Translation]
Senator Hervieux-Payette: Welcome to the committee. You also say that non-profit organizations do not pay any fees, and neither do municipal governments, I assume. Even institutions such as universities have to pay those fees because many students use a credit card to pay for their school fees. So that costs a great deal of money. Currently, the rate used ranges from 0.3 per cent to 0.5 per cent. Do you like that rate?
[English]
Mr. Sands: The 0.5? Yes, we do. I should back up and say first of all that if the rates in other jurisdictions are set at 0.3 or 0.5, then whatever the rate is here in Canada, everybody should be prepared to have an awfully good explanation to the thousands and thousands of retailers across this country as to why they need to be different or higher in Canada. What's different?
I can speak for my sector; I don't want to say I'm speaking on behalf of the small business coalition, but we have lost thousands of independent retail grocers from Canada and that is from the Department of Agriculture's own figures. We need to stop that decline because everybody is going to lose. If we don't move at the level that the other jurisdictions have, we're going to have a problem.
Mr. Elenis: In the hospitality industry in Ontario we've lost over 22 million international visitors since 9/11. It has been catastrophic for small business right across Ontario, and yes, we believe 0.5 is the right number. It will contribute close to half a billion dollars to the bottom line of the hospitality industry in our province.
[Translation]
Senator Hervieux-Payette: Do you think the consumer or the service provider will benefit from that?
[English]
Mr. Sands: I'm glad that question came up, but I was dying to jump in when it was coming up with the previous panel. We believe, and it's reflected in the pledge that we made, that every single cent of reduction in the fees is going to be to the benefit of consumers. We can have a discussion. I'll speak for some of the other members. If we can end up having more money to invest and renovate our stores, hire more people in the community and reduce prices, we think that's a win for the community.
Would it all go to reducing the prices? No, some of it might go, as I said, to investing in your store, your business. A business has to be able to do that to stay on the playing field. Those are the benefits we see accruing.
The difference we have with the Consumers' Association of Canada is they seem to have difficulty connecting with the dots there. The ability of the independent, small-business owner to stay in business, they don't see that as a benefit somehow for consumers, and we hope this committee would disagree very strongly with that assumption.
[Translation]
Senator Hervieux-Payette: We assume that all witnesses who appear before our committee are acting in good faith. However, when our discussion turns to finances and money, special interests generally trump public interests.
We are concerned with public interest, and you are concerned with your members' interest. That is why I was suggesting earlier that, if the rate was reduced by 0.5 per cent, a cap should be placed on the amount retailers can keep. That way, we could ensure that part of the revenue will really go to the consumers.
You are saying no. You are not confirming that these savings will benefit consumers and that, automatically, any improvement over the current situation will remain strictly in consumers' hands. That standard should be established in advance when it comes to equality among all retailers. At that point, after consultation — as consultation was mentioned in the discussions with the previous panel — we would see how the savings would be distributed among consumers and retailers.
If no standard was established, it could be impossible to strike a balance and ensure proper competition in terms of various factors. Regarding an independent study of the file, of which I would approve, we would have to ensure that the savings are distributed fairly. Do you agree with that approach?
[English]
Mr. Elenis: Senator, when we're talking about price increases, there are so many factors with price increases that are taken into consideration. Absolutely, the consumer will benefit from it. As my colleague said, investment alone in the establishments will benefit the consumer in better service, in better quality product and in preventing future price increases if it's not done at the same time.
Again, speaking of the hospitality industry, the hotels only recently, this year, reached the average rate that they experienced in the year 2000. That's what has happened in many sectors. Food service has a very tight elastic band in pricing. You go up 5 cents for a cup of coffee and you lose customers. Price increase is not top of mind for food service, and the only reason they're doing it is to survive. Absolutely, any support of the bottom line will help minimize any price increases in the future, which more or less agrees with your question.
Senator Tkachuk: I'm going to ask a number of questions. I don't want you to get the impression that I'm in favour of the banks and not in favour of independent business. I grew up in a household where my father was an independent businessman. We were in the retail gas business. I know how tough it is and have lots of experience in it, but I do want to address the issue of controlling costs by a government fiat to say this is what the cost is going to be because, from the work that we've done here, we know that the cost of that fee that you're paying at the retail level is made up of the network fee, the Visa and MasterCard fee and the bank fee, which is the largest portion of this.
So from the consumer point of view, the cost of that credit card is going to remain the same. If they're not getting it from the retailer, they're going to be charging it at the other end. They're going to be charging it by fees from the bank or direct fees from my account to the bank itself.
I want you to comment on that, and then I'm going to ask a couple of follow-up questions on this matter.
Mr. Elenis: Thank you, senator. My answer to that is with over 92 per cent penetration in the market, it requires a low degree of real competition out there. That's how it exists. It's no more casual out there. It's a creditor world. I think it's the government's role to ensure there's fairness where it's a duopoly; it's two institutions that are doing this. When that happens, as you know, the Competition Bureau looks at it and says, ''Hold it; this is not the way it should be.'' Absolutely, they cannot do anything without a government framework behind it, and it needs to be looked at by experts right through the network, the interchange fees from the source to the consumer, and it should be broken down.
Back in 2008, there used to be a simple fee and everyone understood it. Not anymore. We are in the business and we have a hard time understanding it.
Mr. Sands: I think where I have to disagree with your premise is — understand what the association represents. We're small and medium-sized businesses. We believe in the free marketplace. We're not in favour of heavy government intervention, but the reality in the industry is that it's not a free and competitive marketplace. That's the problem with your premise. You have two companies that control that. The government threw up its hands in horror at the lack of competition in the wireless industry, and yet the competition is less in the payments industry and nothing is happening. So we struggle to understand that.
In the session with the earlier panel you talked about negotiating with the banks. I'd love to have you come to one of our association meetings, and I'll keep the car running for you while you run in and tell them that they have the leverage to negotiate with the banks the same as Costco, Loblaws, Walmart or Sobeys. It would be a short meeting. We just don't have that leverage. We don't have that ability. The deal with Costco a couple of weeks ago is a perfect example of that.
Senator Tkachuk: I agree with you that you don't have that leverage, but small independent grocers have had to overcome Costco and Walmart. They have competitive advantages and they buy a large volume of product; therefore, they often get it cheaper than independent grocers do. That makes it more difficult. They can negotiate leases better because they're getting a large amount of space. They have all kinds of areas where they have the competitive advantage over a small retailer, of which this is just a small part.
Mr. Sands: A small part?
Senator Tkachuk: Yes, I think it is a small part. Why do you want us to interfere in this part of the process and not in the other parts of the process?
Mr. Sands: Because there's no free competitive landscape. As you said again in the previous panel, we'll pay more for tomatoes and certain products. We know how we have to stay in business, and that is to offer different products, buying more local products, for example, offering more services in the community, hiring more people in the community than a chain would. But the things that the chains can do in the marketplace to reduce their costs, which are not available to the independents, we're not here for you to solve those problems, the ones you just itemized, but we don't have the option to negotiate a new Visa card or MasterCard. Our customers have to accept it. It's just not viable to say to customers, ''We're not accepting your credit card.'' We can decide not to carry that brand of tomatoes if they're higher than usual or higher than a competitor's price, but we don't have the option to be able to deal with this with the normal rules of the competitive marketplace working.
They aren't working and that's the problem. When they don't work, that's when you require government to take a role. If you're saying they don't have a role in this —
Senator Tkachuk: I'm not saying that.
Mr. Sands: I'm saying hypothetically, if you were to take that position, then you'd also have to go to the Conservative caucus and say, ''We're wrong on the wireless industry. We shouldn't be intervening in that area, either.'' The competition in that area is a little more varied than in the payments industry. We're dealing with two companies and we have no leverage.
Mr. Elenis: There are few positions that know cost control better than a restaurateur.
Senator Tkachuk: I took training. I've had a long life.
Mr. Elenis: When you have an expense that you're not able to control and you're at the liberty of whoever it is, the network, it's the pity of the system, and I think that's where government needs to step in.
Senator Tkachuk: The debit card was a positive thing in that it reduced the costs. People are using debit cards rather than the credit card. They use the plastic card rather than cash.
Is the credit card used because people want credit or people want points or because they find it convenient? Surely, a debit card is just as convenient as the credit card if you've got money in the bank, so why are you using your credit card?
Mr. Elenis: All three of those reasons, I would say.
Mr. Sands: I think we have to point out that — and I can only speak on behalf of what our members tell us — Interac, the debit, cannot compete with the bells and whistles, the points, et cetera, that the credit card companies offer.
Senator Tkachuk: The banks.
Mr. Sands: Well, those are internal negotiations that take place within the payments industry. We're not at that table when the pie is carved up. We only know the pie stays like this, and we keep having to dole out extra portions.
What we're also seeing is an erosion of the cash and the debit market in favour of credit cards, and that again is because more bells and whistles and more bonus points are being offered to the consumer, and that's where the consumer will therefore migrate. In their view, they're getting it for free.
Senator Tkachuk: You should discount for cash. I pay cash.
Mr. Elenis: Other countries in Europe and Australia are making reforms for the better. Canada is the second largest user of debit cards after Sweden, so it shows you that we are trying to drive that more so in our businesses.
Mr. Sands: As an association, we oppose surcharging and we oppose discounting. I don't know how much you're proposing we discount when your margin is 1 per cent. Again, you can run that by the meeting I'd love to have you at.
Senator Tkachuk: But is it 1 per cent? Because you pay the Visa card at 1 per cent.
Mr. Sands: But our —
The Chair: Mr. Sands, I'm going to ask for our next question, please, from Senator Ringuette.
Senator Ringuette: I appreciate that you are here to show members of this committee the struggles you go through on a daily basis and for quite a number of years. I've been pushing this issue for six years. This issue was in front of the Competition Tribunal, and even while it was in front of the Competition Tribunal, Visa and MasterCard increased their rates by 30 per cent. They have 92 per cent of the market. They're kings.
Mr. Elenis, you said that ORHMA has 1,100 establishments?
Mr. Elenis: Eleven thousand establishments made up of 4,000 members, yes.
Senator Ringuette: Four thousand members. How many employees would you have in that group?
Mr. Elenis: There are 400,000 employees in the hospitality industry in Ontario. I haven't defined how many employees are in that group.
Senator Ringuette: That's a lot of people working and depending on your industry for their daily livelihood. I think that increases the importance of your being here and wanting to achieve what we are trying to achieve.
Mr. Elenis: Forty-five per cent of all youth work in the hospitality industry.
Senator Ringuette: And they're the highest unemployed group of Canadians right now. Thank you.
Mr. Sands, you indicated that the small business coalition represents 90,000 small businesses in Canada.
Mr. Sands: It's now 94 something.
Senator Ringuette: Ninety-four thousand businesses. So how many employees would that represent? How many family incomes would that represent?
Mr. Sands: That's a very good question. I can go back and get that information from each member of the coalition. I accept responsibility for not having that figure here today, but I did go back and ask each association to provide me with a written number of how many members their associations represent.
Senator Ringuette: That's important because people need to understand the scope and the amplitude of the problem here.
Mr. Sands, your organization, the Small Business Matters Coalition that you represent, issued a press release on August 5, 2014 — I have a copy here — indicating, as you indicated in your presentation, the pledge of your 90,000 independent businesses to consumers with regard to cards.
I also have in front of me here, which you have also made public, a letter to the Minister of Finance, Mr. Joe Oliver, which you sent at the same time that you issued that press release —
Mr. Sands: Yes.
Senator Ringuette: — indicating also the scope of the situation and the pledge of those 90,000 businesses to Canadian consumers. Have you received an answer from the minister to that August 5 letter?
Mr. Sands: No.
Senator Ringuette: Have you had a meeting with the minister since then?
Mr. Sands: No. I want, though, to be fair about this. We have met with the minister's office and with the department. The meetings were very productive and constructive. I don't want to make it seem that they're not receptive to hearing our views. I've always had the feeling that they're listening to us. I think we have a philosophical difference with respect to the voluntary approach, but that being said, they've been very open and engaged with us in terms of listening to us.
Senator Ringuette: A member of the previous panel was also a small business, a gasoline retailer.
Mr. Sands: Yes, Tricia Anderson.
Senator Ringuette: Yes. They mentioned this rumour we're hearing about of a voluntary 10 per cent reduction, which would take your 3 per cent and lower it to 2.7 per cent, and how that would not be acceptable, either; it would only be window dressing.
What is the feeling from either of your associations on that?
Mr. Elenis: I don't trust a voluntary reduction with something as serious and critical as we're talking about here. The 10 per cent will bring rates down, but it reminds me of specific businesses that bring the rate down in order to steal business from someone else, and then the following year they bring the rates back up.
Senator Ringuette: Yes.
Mr. Sands: In our association, we do not support the voluntary approach because we know what the realities of our industry are. Also, our members feel very strongly and have asked me to convey that if the rate is not meaningful and is set higher than what exists in other jurisdictions, we would like a really good explanation as to why that is so.
Senator Ringuette: Last week, our committee had before it Visa and MasterCard. I put forth the Australian, New Zealand and EU situations to them, and they kind of indicated, ''Oh, it's Visa Europe; it's not Visa Canada.'' They seemed to indicate that they operate differently over there, and that's why they have no other choice but to accept government regulation.
Mr. Elenis, I'm sure that in the hospitality industry you have opportunity to meet with other hospitality operators in other jurisdictions. How do you feel about that?
Mr. Elenis: When we say that Visa in Europe is different than Visa in the U.S., it reminds me of buying tomatoes from Italy and bringing them over here, and if you can tell the difference between the tomatoes, unless you make a nice pasta sauce and it tastes different, it's very similar. I think it's just a lousy excuse, personally, and not justified.
[Translation]
Senator Rivard: I know that time is running out. I understand that MasterCard and Visa account for about 90 per cent to 95 per cent of the market and that, in sectors as competitive as food and oil products, retailers cannot accept cards such as American Express and Diners Club, since profit margins are too low.
For once, I will not address the witnesses, but rather the sponsor of the bill, Senator Ringuette.
Why would you not include in Bill S-202 — but perhaps she does not want to answer.
[English]
The Chair: Are you willing to answer a question, Senator Ringuette?
Senator Ringuette: I don't mind.
[Translation]
Senator Rivard: Senator Ringuette, why did you not include American Express and Diners Club in the bill? I understand that their share of the market is fairly small, but why provide only for Visa and MasterCard?
[English]
Senator Ringuette: It's an easy question to answer but a long one.
[Translation]
Senator Rivard: Perhaps at the next meeting, Mr. Chair.
[English]
The Chair: I think we should ask questions of the witnesses and not of other members of the committee.
[Translation]
Senator Rivard: This question is for the witnesses. Do you have any opinions on this issue?
[English]
The Chair: Do you have an opinion on this? If not, I'm going to move to Senator Tkachuk.
Senator Tkachuk: I have a follow-up question on your organizations. I know the Federation of Independent Business has negotiated with Chase and Visa and has negotiated a rate for their client base. Have you tried doing that with your organizations to try to get a rate by volume?
Mr. Elenis: Yes we have, with a provider. It's what we do to support bottom lines with many programs, including the credit card merchant rate, absolutely. Concerning the item of the fees that the credit card companies impose, they are passed on by the providers. Regardless of what kind of system or leverage you might negotiate with the provider, the credit card fee is still there and is passed on to the consumer. It might be a bit lower or it might not, but it's so convoluted and embedded in it that a huge amount still goes to the cost of it.
Senator Tkachuk: I'm still not quite sure what you mean by that.
Mr. Elenis: The interchange fee —
Senator Tkachuk: That is a very small portion of the fee you pay. Most of it is the bank fee.
Mr. Elenis: I guess it depends on what language you use to describe that fee. Many call it the fee which is the larger portion. Some call it the discount fee, which is combined. Here we are talking and we have used different words. Imagine the operator out there.
Senator Tkachuk: Exactly. It's a way to mess us up, yes.
Mr. Elenis: It's still passed on to the merchant.
Mr. Sands: As an association, our name is a bit of a misnomer because we also represent the franchisees. Even if we negotiated, the rate that our franchisee members would get through their franchisor would be different, so we've avoided even trying to negotiate.
On a couple of issues — not on this one, but in the past few years — where we've tried to negotiate on different things, whether it's insurance or energy rates, et cetera, we've found that we just haven't been able to compete.
Mr. Elenis: The negotiation between the provider we're using and ORHMA are the best rates in Canada, even larger than the national associations. We try to do everything we can to bring down prosperity for our members.
Senator Tkachuk: I understand. Thank you.
The Chair: Thank you to our witnesses. That concludes our questions.
On behalf of the Senate Banking Committee, I'd like to express our grateful thanks to you for being with us today. You've been very helpful in our deliberations.
(The committee adjourned.)