Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 5 - Evidence, April 22, 2009
OTTAWA, Wednesday, April 22, 2009
The Standing Senate Committee on Banking, Trade and Commerce met this day at 4:27 p.m. to study on the credit and debit card systems in Canada and their relative rates and fees, in particular for businesses and consumers.
Senator Michael A. Meighen (Chair) in the chair.
[English]
The Chair: I call to order this meeting of the Standing Senate Committee on Banking, Trade and Commerce.
[Translation]
Welcome to you all. This afternoon, the Standing Senate Committee on Banking, Trade and Commerce is studying the credit and debit card systems in Canada and their relative rates and fees, in particular for businesses and consumers.
[English]
This committee was charged with undertaking this inquiry after the Senate adopted the motion put forward by our colleague Senator Ringuette to study the issue.
In some sense, our witnesses this afternoon are at the heart of this study because they operate the two biggest credit card networks in the country. These networks allow Canadians to use credit cards across the nation and from almost anywhere in the world, probably with little thought given to the complex flows of information and money that take place in the background.
To begin the discussion about its role in the credit and debit card payment systems, we are pleased to have in our first hour three representatives from MasterCard Canada Inc.: Kevin Stanton, President; Diane Miquelon, Vice- President and Team Leader; and Andrea Cotroneo, Vice-President, Canada Regional Counsel.
Kevin Stanton, President, MasterCard Canada Inc.: MasterCard appreciates the committee's invitation to participate in its study of debit and credit card systems.
[Translation]
We pride ourselves on being a trusted information source for the study and on payments in general. In the course of addressing these issues, we have realized that the value and economic contribution of the payments industry are not well understood. Moreover, MasterCard Canada realizes that it must continue to demystify these highly valuable systems.
[English]
In Canada, MasterCard and other electronic payment providers facilitate over half a trillion dollars of commerce flawlessly each year, and operate in a highly competitive environment that offers a host of payment alternatives to merchants and consumers.
We believe the committee will find credit card systems are well balanced and managed to maximize their value to merchants, cardholders and the Canadian economy as a whole. We believe Canada's current regulatory framework safeguards the interests of all participants and that direct regulatory price controls will suppress innovation, reduce competition and harm consumers. Finally, MasterCard believes that the committee will find that by promoting market forces over monopoly, Canada's debit system will begin to deliver enhanced value to consumers and merchants through choice, price competition, innovation and international reach.
MasterCard operates in a highly competitive environment and works hard to earn merchant and consumer loyalty as merchants and consumers consider the payment alternatives available. These include cash, cheque, Interac, Visa, American Express, retail store cards, preauthorized debit and, most recently, unregulated web-based payments like PayPal.
This high degree of competition requires MasterCard and its financial institution customers to labour to retain and increase acceptance and usage by providing compelling and tangible benefits to merchants and consumers. As a result, while neither consumers nor merchants are required to use or accept MasterCard, an increasing number choose to do so.
For merchants, these benefits include a payment guarantee, increased sales, improved efficiency, increased safety, billions of dollars of infrastructure investment, innovation, speedier checkout and easy access to international customers.
For small business, in particular, the MasterCard system helps level the playing field. It provides lower rates than would likely result from one-on-one negotiation for access to the purchasing power of credit cardholders and intra-system competition that allows them to shop around for the best merchant processing deal available. These efficiencies are further enhanced by the collective credit-card acceptance arrangements offered by merchant associations like the Retail Council of Canada, RCC, and the Canadian Federation of Independent Business, CFIB.
For consumers, increased usage is earned through zero liability, global acceptance, grace periods, rewards and benefits, intra-system competition and chargeback protection.
Maximizing the benefits of the MasterCard system for both consumers and merchants requires that the system be economically balanced. For MasterCard, the mechanism used to balance system economics is interchange. Interchange is a fee paid by the merchant's financial institution to the cardholder's financial institution. Interchange compensates the cardholder's financial institution for the value it provides to merchants by bringing cardholders into the system and subsidizes the cost of features that attract cardholders.
Interchange is determined by MasterCard, not issuers or acquirers. Interchange makes up a part of the fee paid by a merchant for card acceptance, but ultimately that price is determined by negotiations with the acquirer. Interchange is not MasterCard revenue and consumers, most certainly, do not pay interchange.
MasterCard's only interest in setting interchange fees is to maintain system balance. If interchange is set too high, then merchants will stop accepting MasterCard and we will lose cardholders. If interchange is set too low, issuers will go uncompensated for the value they deliver through their cardholders, and the subsidies of features that attract cardholders will be diminished. This situation, in turn, reduces cardholder participation thereby reducing the value of MasterCard to merchants.
MasterCard continuously assesses the value that it delivers to merchants and, in that context, recently reduced interchange in several merchant categories. We also determined that we were at a disadvantage among affluent rewards-driven cardholders, with American Express and Visa having the majority. For that reason, we adjusted premium card interchange to ensure MasterCard issuers were positioned to attract and retain these valuable cardholders while still being priced lower than American Express. Finally, to make MasterCard more competitive in small purchase categories, we dropped rates to compete with cash and debit by eliminating minimum fees.
Overall, we moved from 3 rates to 19. Our highest interchange rate went from 2 per cent to 2.13 per cent, and our lowest effective interchange rate was reduced from 1.45 per cent to 1.21 per cent. All these adjustments were the first in seven years. Our rates remained below those of other developed markets.
Government interchange regulation is not the standard elsewhere in the world. Australia is the only country even remotely comparable to Canada that has regulated interchange. It has been a disaster for consumers and a textbook example of unintended consequences.
When the Reserve Bank of Australia, RBA, adopted price controls in 2003, it expected the savings would be passed on to consumers in the form of lower prices. Nearly six years later, there is no evidence that prices came down. Price controls did reduce interchange revenues to credit card issuers, but that reduction in revenues, in turn, forced reductions in credit card features and benefits. Interest rates, which had been subsidized by interchange revenue streams before the RBA price controls, had to be increased for issuers to operate their credit card portfolios within prudent banking guidelines. For similar reasons, grace periods had to be shortened.
Finally, RBA price controls reduced competition. Under the new economics, only issuers with sufficient scale could operate profitably leaving niche providers and new entrants with no option but to vacate the field. This consideration is an important one in Canada where new entrants and innovative issuers have led unparalleled price and feature competition.
The RBA price controls did not apply to American Express. This exclusion was inexplicable as it transferred considerable advantage to the most expansive merchant proposition in Australia. We believe that a fulsome review of credit and debit cards in Canada must include American Express.
At heart, this issue involves a commercial dispute in the private sector. It is unfortunate that lobbyists have called for government regulation as a matter of first instance before providing any recommendations directly to MasterCard. When the RCC and CFIB launched their campaigns in September, I personally invited on the same day both organizations to meet with us to discuss concerns.
When we met with the CFIB, we had a frank discussion, but CFIB made no specific requests. However, they have since made several recommendations to this committee and many of them are areas where we can work together. I have written Catherine Swift and asked for a meeting to understand better some of her recommendations with a view to working cooperatively. The meeting is set for early May, and we await a response from the RCC.
I want to address some of the commentary about our entry into debit in Canada. MasterCard understands that Interac, Canada's debit monopolist, is reforming its governance and seeking a review on the strictures on its economic proposition to allow it to respond to the realities of competition. MasterCard supports these reforms provided that Interac loses its monopoly status and becomes subject to market-driven competition from other debit providers. MasterCard believes it is well positioned to provide such competition.
While MasterCard believes Canada's current regulatory framework is sufficiently robust to ensure competition and payments, and that price controls will result in consumer harm, we believe the system always benefits from greater transparency and education. These beliefs will be the focus of our meeting with the CFIB.
We believe Canada has one of the strongest financial systems in the world. Credit cards are an important part of that system providing one of the few credit delivery mechanisms that remains reliable despite the current economic crisis.
We understand that this system is simple on its surface allowing consumers to exercise, as the senator said, purchasing power across the street and around the world, but that simplicity is underpinned by a sophisticated infrastructure that requires continuous investment, innovation and balance.
We thank you for the opportunity to participate in this process. I look forward to your questions.
The Chair: Thank you, Mr. Stanton. We appreciate the succinctness of your presentation. As you and we both know, the question period is where I think we benefit most on both sides from the exchange.
Honourable senators, I will only say this once. We have 11 senators present today, which underlines and underscores the interest in the subject. We have 40 minutes with Mr. Stanton and his colleagues. If you do the math, you will realize we have a short time to ask the questions and elicit their responses. Some honourable senators might consider holding their questions for the next session. Those who wish to ask questions of Mr. Stanton and his colleagues, keep in mind the time constraints under which we are operating.
Senator Harb: Mr. Stanton, I was pleased to hear that you will meet with both the Retail Council of Canada and the Canadian Federation of Independent Business. We have been calling for these meetings and were told previously that these organizations were having difficulty setting up meetings.
We know that one group of people will pay: either consumers, retailers or the credit card companies. It is the role of the committee to ensure fairness in the system such that any resolution is fair to all parties involved. One group sent me a letter, which is the basis of my questions to you. The letter states that MasterCard and Visa are classified into 12 different categories and each category carries a different discount rate. It is next to impossible for merchants to know what rate they will be charged when accepting a card. I am interested in hearing the other side of that story.
Credit cards are in transition to chip technology that will likely reduce fraud because consumers will have to enter a personal identification number, PIN, to authorize a transaction. While this technology should reduce the costs of the system, the opposite seems to be happening in that merchant discount rates have increased, and the cost of chip- enabled machines is significantly higher than that of the older machines.
Your comments on those two statements will be appreciated and will allow me to respond to a constituent who is eager to hear the other side of the story. He is one of the affected merchants.
Mr. Stanton: Thank you for the comment, senator. One of the benefits of this process is that it urges people to talk; and so you are right in that respect.
I will give you an answer but I have to put it in the context that we do not determine end-user pricing so I do not know the details of that particular merchant's pricing. Improving real-time merchant understanding of rates is an area that we can work on, in particular with the CFIB.
The government recently called for improved disclosure and financial literacy. The conversations of the CFIB will help us to understand the operational environment. In our case, we have gone from three simple rates to 19 rates. One of the unexpected outcomes is managing that reality for merchants, in particular, smaller merchants.
Several incentives are in place in the marketplace for chip technology. MasterCard has chosen to use business case arrangements with individual merchants. That area is another one we can talk to the CFIB about because their merchants are in a specific situation. However, the dynamics that go into setting interchange remain the same in a chip environment as in a non-chip environment: Are we doing what we need to do to maximize the number of merchants and cardholders using our network. Taking into account the competitive realities, chip has not happened yet, and so we have not taken action in that respect. When chip does take place, we will consider it in the context of the overall economic value that we deliver to merchants, and our competitiveness against all other payments.
Senator Oliver: In your remarks, you mentioned the Reserve Bank of Australia, which adopted price controls in 2003. The CRA International, which is a global consulting firm that was authorized to study and examine the effects of regulation on the payment system of the Reserve Bank of Australia, made some findings. I will tell you two of their findings and ask you to comment on how they might apply in Canada if we had a regulated system.
On average, the annual fees for standard four-party credit cards increased by 22 per cent between 2001 and 2004, while annual fees for reward cards increased by 47 per cent to 77 per cent. As a result, cardholders in Australia are paying $480 million in additional fees for credit cards each year. In the meantime, the value of rewards points for four- party cards has declined by approximately 23 per cent.
What effect would similar regulations have in Canada, in particular in terms of reward points cards?
Mr. Stanton: The question is important for Canada because Canadians are sophisticated consumers of card rewards programs. Three sources of revenue go into managing a card portfolio: interest, fees and interchange. Revenue is limited to those sources.
Canada can be proud of having the soundest banking system in the world. I sit around the table with regional presidents from around the world. From my perspective, the system truly is the soundest because banks are managed prudently. Australia has similar dynamics and health in its banking system. Prudence demands that banks operate within certain margins and liquidity, and if interchange goes down, they must either increase fees or reduce rewards and increase interest rates to remain prudent. We could expect that dynamic to happen here.
While that situation is harmful to consumers, especially Canadians who enjoy these cards, according to statistics that show 80 per cent of Canadians value their rewards, in a two-sided market like newspapers or credit cards, both sides must be happy with the arrangement. At the end of the day, in Australia we saw not only a reduction of these rewards but also some movement to American Express, which did not fall under that arrangement. On a transaction- by-transaction basis, costs for merchants were increased.
[Translation]
Senator Hervieux-Payette: One of the questions in the study prepared by our research service mentions that, in 2007, you made a profit of $1 billion. They tell us that, in 2008, you had revenue of $4.2 billion and a net loss of $253 million. Who pays for the fraud? Do the financial institutions pay or do you? Are your losses simply bad debts? Where do the losses come from in your system?
[English]
Mr. Stanton: There are two kinds of losses within our system. One is credit losses for bad debt, which is borne by the issuers. We recognize that cost for fraud and non-payment when determining an interchange calculation. At the end of the day, it is important to remember that in this financial crisis, not a single merchant has gone unpaid, notwithstanding the fact that banks have failed. That risk is backstopped by MasterCard. Issuers backstop risks associated with their cardholders, and MasterCard backstops risk associated with failed institutions. The system works the same way on the merchant side. Acquirers backstop the risk of loss with merchants and we backstop the risk of loss associated with failed acquirers. In that equation, not one merchant has ever gone unpaid, which is one of the strengths of our system.
[Translation]
Senator Hervieux-Payette: Who does the credit checking in order for a credit card to be issued? Are credit cards that offer no benefits easy to put on the market? What is the ratio of those offering all kinds of benefits like points and gifts to the free, no-fee cards that just provide credit?
[English]
Mr. Stanton: Fundamentally, there are debit cards that offer that proposition where nothing but the transaction is offered; no bells and whistles and no ability to borrow.
In the credit card world, many offerings are available in Canada. Users of credit cards prefer rewards, but stripped down propositions are available. For a borrower on credit cards, and we do not recommend credit cards for long-term debt, 65 low interest rate cards are available. That feature is the most important one for borrowers.
Senator Greene: I am an average consumer with a bunch of cards and a debit card, and I like my debit card so much that I hardly ever carry cash.
If MasterCard or Visa enters the debit field, what benefits beyond the benefits I already have with my own debit card will I achieve?
Also, can you comment on the fact that, it seems to me, our financial system in Canada is healthier because we have kept financial functions separate? The U.S. has gotten into a lot of trouble through a blending of functions, and Chinese walls have effectively evaporated.
By asking to enter the debit card field, are you asking to invade a financial area that is not really yours?
Mr. Stanton: We consider our financial area for MasterCard to be payments. We want to be the choice of payment that merchants and consumers choose whenever a choice is to be made.
To answer your question, the consumer benefit principally associated with MasterCard's debit proposition — which is in the market already and is called Maestro, a PIN-based, real-time debit program like Interac — is that consumers can use the card around the world. Maestro is the most widely accepted PIN-based online debit proposition in the world. If you like to use debit, as you said you do, you can use it in France the next time you go.
The great news is that there is benefit on the merchant side as well. Here is something that RCC understands. Maestro used to be priced at the same flat fee as Interac until recently. It has no interchange. As of this week, Maestro is now cheaper. Interac was half a cent to the issuer and the acquirer, and that remains the case with Maestro. Interac is now .8 cents to the issuer and acquirer. Maestro and Interac are perfect examples of a competitive dynamic, one that we plan to take advantage of for the benefit of merchants. They are a good example of competition.
Regarding separation of functions, Maestro operates on a completely separate network. MasterCard has two networks. One is called Global Clearing Management System, GCMS, which works like MasterCard works. Another one is called the MasterCard Debit Network. Those two things are kept completely separate. Within a bank, the transactions are plugged into separate systems. I believe we maintain the separation you refer to.
Senator Massicotte: We are trying to understand the system as best we can. You said earlier, and your brief makes clear, that the interchange fees are set by you for those who use your card, but you do not receive that compensation. It goes directly to the issuing financial institution. However, the issuing institution as well as the processor pays your fees.
At what level are those fees? Are those fees set, no matter who the issuer institution is, and are the fees the same worldwide? Tell us about your fee levels.
Mr. Stanton: Regarding the structure of our fees, there are fees to the issuer, the cardholder's bank and the acquirer. It is miniscule compared to interchange.
Senator Massicotte: What percentage is that?
Mr. Stanton: On the merchant side, it is six basis points, and we are trying not to speak in terms of basis points. It is less than a percentage. It is small.
Senator Massicotte: Is that fee the total fee you charge to the financial institution as well as to the processor?
Mr. Stanton: On the merchant side, yes.
Senator Massicotte: I thought you were paid by the processor as well as the financial institution.
Mr. Stanton: We are. I am sorry. I referred to the merchant side of the business versus the cardholder side. The merchant side includes the acquirer. Therefore, that is our pricing to acquirers.
Senator Massicotte: Therefore, the fee is six basis points. Is that the fee in Canada?
Mr. Stanton: That is Canada. All pricing for MasterCard is set specifically in the country by management in the country.
Senator Massicotte: Do you see much variance in different countries in the world?
Mr. Stanton: Yes, lots.
Senator Massicotte: The issue is that you set the interchange fees. You do not receive those fees, but one could argue that maybe your compensation is directly related to how generous those interchange fees are. Could that be the case? Is there any relationship in the world where the higher the interchange fee is, the more MasterCard is paid for its services?
Mr. Stanton: No, the only interest MasterCard has in setting the interchange fees is to increase usage of the system. We will be paid fewer fees if we overload one side of the system or underload another side. For example, if we chose to adopt American Express level of interchange rates, we would likely see merchants fall out of the system, which means we would see less revenue overall because we need both sides of the equation.
The things are disconnected. We have to manage the system correctly so that the balance is there because the minute it goes out of balance, we lose either cardholders or merchants, and we do not see any of the six basis points.
Senator Massicotte: The word "merchants" here means the retailers; is that right?
Mr. Stanton: Yes.
Senator Massicotte: The comment they would make is that they feel as if they are not in a good negotiating position. In other words, these agreements are forced upon them. They have no choice but to accept Visa or MasterCard if they want to survive, and Visa and MasterCard force them to accept all Visa and MasterCard cards. They cannot be selective, and probably do not wish to be.
What percentage of retailers, in your mind, has refused the MasterCard? In other words, is the refusal miniscule, or do many people say that your fees are too high and they do not want to accept MasterCard?
Mr. Stanton: We have 600,000 merchants. Well over 1 million other entities that take payments from consumers in Canada do not accept MasterCard. In some sense, we can say the vast majority of merchants — not retailers — do not accept MasterCard because the value proposition is not there for them.
Our research shows that cardholders have a high level of tolerance in Canada, when a merchant does not accept the card, to continue with the sale using some other form of payment.
As I said in my statement, we do not consider how we are faring only against Visa. We also have to figure how we are faring against debit, cash and all these things because we are trying to expand usage of the network.
Senator Massicotte: Merchants say otherwise.
If there is significant negotiating power, take Wal-Mart for instance, does Wal-Mart pay the same interchange fee and do you receive the same fees from Wal-Mart as the corner grocery store?
Mr. Stanton: I have to talk about Canada only, but that is all you should care about. Their bargaining power is such that their ability and expressed willingness to drop MasterCard does influence our calibrations of interchange.
Senator Massicotte: It did some time ago, if I remember correctly, in the United States.
Mr. Stanton: Yes.
Senator Massicotte: Do they receive a special rate, or do they pay the same thing as everybody else?
Mr. Stanton: They do not receive a special rate in Canada, but there is a rate that suits their needs. It is not a special rate. The rate is available to others in their position.
Senator Massicotte: If the other retailers can come together and negotiate a better deal, they can probably pay a lower fee to you at the interchange.
Mr. Stanton: Yes, and one of the things I want to talk about with the CFIB is exactly that dynamic because I think there has been an under-leveraging of their position.
Senator Ringuette: Thank you, Mr. Stanton, for reminding the members of the committee of the situation in Australia. I have provided the members of the committee with the first Australian study and the second study, the review completed last year, which reconfirms that capping interchange fees was a good thing for all its citizens, businesses and consumers.
A witness appeared before the committee that you know well, Catherine Swift. During her testimony on April 1, she said:
It was interesting to talk to business groups in the U.S. Their advice was, and I am surprised at how stark it was, do not let the credit card companies into the debit market. I did not anticipate they would be that stark: If you know what is good for you, do not go there.
How would you respond to this quotation about your participation in the debit market in the U.S.?
Mr. Stanton: Thank you very much for an opportunity to respond to that quote.
First, it is an American company that either does not know Canada, the debit system in Canada or what MasterCard has done in Canada. Maestro is less expensive than Interac for merchants, it works exactly the same, it provides more cardholders, and it is "up" more often. I do not understand the logic behind urging maintenance of a monopoly by a business organization.
However, an organization called the Small Business and Entrepreneurship Council in the United States recently offered a view that regulation of payments of that sort harms small businesses for two reasons. The organization sees tremendous benefit from the expansion of the markets their members can operate in; and they believe strongly, as the CFIB has said in the past, that markets operating appropriately produce the best results.
Senator Ringuette: Are the Maestro debit card fees in the U.S. based on a percentage of the sale or on a transaction basis?
Mr. Stanton: I believe Maestro uses a flat fee as we do in Canada because the pricing model is fairly consistent throughout the world. However, I want to ensure I am correct, so we will follow up on that question.
Senator Ringuette: I am surprised because you were with MasterCard in the U.S. a few years ago before moving to Canada and you do not know the fee basis in the U.S. for Maestro debit cards?
Mr. Stanton: I had a different role when I was there.
Senator Ringuette: Still, you should know. You are within the same company.
Mr. Stanton: Senator, I said I believe the fees are flat, but I need to confirm it. I have been in Canada for almost seven years and I want to ensure that I am still right.
Senator Ringuette: The evidence I have suggests that your fees are on a percentage base in the U.S. However, when you confirm the information, can you please send it to this committee? We would be happy to have the information from you.
Mr. Stanton: Yes.
The Chair: Do you have a comment?
Mr. Stanton: Yes, I do. Senator, I believe the originator of that quote refers to MasterCard debit, which operates like Visa debit. The cards operate like MasterCard and Visa around the world, which is at a percentage fee. That is not what we have launched in Canada. Maestro exists in the U.S. and all over the world. It is a popular form of debit in Europe, for example.
Senator Ringuette: Therefore, you know that MasterCard debit is on a percentage fee?
Mr. Stanton: In the U.S., MasterCard debit is on a percentage fee. Maestro is not.
Senator Ringuette: Then we have the answer. You do not have to follow up.
I want to ask you a question in regard to this new chip technology. For example, can the chip in my Visa credit card also include a debit route? Can I have two routes on the same card?
Mr. Stanton: I do not know. You might want to ask Visa about the capabilities of their cards.
Senator Ringuette: I assume the same technology is the same as MasterCard because they use the same merchant machines.
Mr. Stanton: There are two parts to my answer. First, research has been done, but there is no particular demand for that proposition in Canada. I do not know if anyone is planning it.
Senator Ringuette: I am asking if it is possible that your chip technology will have double routing.
Mr. Stanton: The second part of my answer is that it is possible, but it does not affect pricing because pricing is determined by the network, the brand that it travels down. For example, for a MasterCard credit card offering MasterCard credit, pricing will be at MasterCard credit rates. If that same chip enabled a Maestro transaction, the rate will be the flat fee rate that Maestro talks about. It really does not affect the price dynamic.
Senator Ringuette: I have one further question.
The Chair: A short one, please.
Senator Ringuette: I will wait for the next round.
Senator Goldstein: Thank you, Mr. Stanton and your colleagues for helping us understand as much as we are able about the system and its mechanics.
It does not matter to the people sitting around this table a great deal whether we are paying 1 per cent or 2 per cent more for whatever we buy in Canada because we can afford to do it. Our concern is about people who are not necessarily able to afford the price and cost of what you call "competition." I will ask you three questions about that competition.
First, I am unable to understand how the consumer will benefit from supposed competition by changing the debit card to a percentage-based cost rather than a fee-based cost. Since you are already in the debit market, I cannot understand your statement that competition will somehow be better for the consumer when the only thing I can see in the competition is increased cost to the consumer.
Second, the concern that many of us have around the table is about the people who do not have credit cards or who do not wish to have credit cards, but mostly people who do not have credit cards because they cannot obtain credit. Nevertheless, they pay for the premium benefits and for the cardholders using credit cards because the merchants necessarily build into their price the cost of the credit cards. That cost then is spread equally amongst every consumer, regardless of whether that consumer uses credit cards.
The result is that if I buy an item at $19.95 with my credit card, the next person who comes with cash also pays $19.95. However, built into that person's price of $19.95 and in my price of $19.95 is a 2-per-cent or 2.5-per-cent fee that the merchant must recover. I find that situation problematic.
Third, Visa actively promotes consumer knowledge in the United States. I will pass to you an advertisement that appeared on a number of occasions in The New York Times these past few weeks. Visa indicates that they are providing free resources through ongoing partnerships with educators and state governments. These resources include teachers' guides and other items to help people understand the cost of credit and, specifically, the cost of credit cards. I understand that Visa and MasterCard are not offering that program in Canada. I want to know why.
Mr. Stanton: I may not have been clear before but by way of clarification, our debit proposition in Canada has a flat fee and it is cheaper than Interac's flat fee.
Senator Goldstein: Are you looking for a percentage?
Mr. Stanton: No; the debit proposition is Maestro. MasterCard debit does not exist in Canada. The second question was probably the most complicated, so I will answer that one last if you do not mind.
Costs of credit and education have been central to many of our public affairs programs. We have worked closely with two organizations, principally the Credit Counselling Services of Toronto, which is a credible organization. We have someone on that board, and we receive a great deal of information from them. We disseminate some of the best materials on the wise use of credit. They go beyond credit cards. They make the statement that credit-card borrowing is not always the wisest way to borrow in certain circumstances. We even caution against using credit cards in all instances.
In Canada, we are proudest of our work with the Financial Consumer Agency of Canada, FCAC, on the plain language credit card disclosure and application. That kind of work, which I described in the written submission, needs to be done on the merchant side as well. We have launched an initiative for that purpose to help small merchants to understand the cost-benefit analysis that they need to perform to decide whether accepting credit cards is the right thing to do from a profitability standpoint.
Your middle question was the most complicated so please bear with me. There are many situations in economic systems and businesses where customers subsidize the activities of other customers. The simplest example I can think of is a company that has an Internet business and a similar company that has a brick and mortar presence. The latter company pays rent but does not offer different prices to the people who take the cheaper route of using the Internet. As well, people who go into the store to conduct business do not receive a discount for the fact that they are not responsible for the infrastructure investment associated with running a website.
However, we recognize that it is important for merchants to be able to manage their costs. For that reason, which is by way of correction to earlier testimony, MasterCard allows cash discounts that can take into account that dynamic and eliminate it. To be clear, we allow cash discounts to be advertised.
Senator Goldstein: Does Visa allow them to be advertised?
Mr. Stanton: I have to defer to Visa because we do not discuss such subjects and I am not familiar with their rules.
Senator Ringuette: I have a point of clarification. I understand that you allow cash discounts, but does your technology, that is, Moneris and Chase Paymentech, allow them?
Mr. Stanton: No technology is required. If someone is paying cash, the merchant simply says the purchase is 5 per cent less. Yes, if consumers are paying in cash.
Senator Ringuette: I am talking about the physical requirements for the merchant.
Mr. Stanton: This discount happens today and there is no additional technology other than a calculator beside the register.
Andrea Cotroneo, Vice-President, Canada Regional Counsel, MasterCard Canada Inc.: I wish to add a short comment to Mr. Stanton's statement about consumer education. One great focus of our consumer education campaigns in Canada is fraud awareness, on both the merchant and consumer sides. We work with the media, law enforcement, consumers and all our customers on fraud awareness.
Senator Goldstein: Do you work with high schools?
Mr. Stanton: Senator, I believe we do. I know of a program but I want to confirm it with my public affairs people before I comment.
Senator Goldstein: Can you please let us know?
Mr. Stanton: Yes, we will do that.
The Chair: As well, provide us with the extent of the program and how many schools are involved.
Mr. Stanton: If we have a program, I would guess that it is through the credit counselling agency because the balance is a delicate one. We do not want to promote inadvertently credit card use by teenagers. However, I will confirm what we have.
Senator Moore: I have a few questions so maybe I will ask some of them with this panel, and the others with the second panel.
Are you aware that President Obama will meet with executives from the credit card issuers tomorrow?
Mr. Stanton: Yes, I am aware.
Senator Moore: Key regulations are to take effect in the United States in July 2009. I want to go through several of those regulations with you to learn whether they apply to you in Canada.
You said that the provisions are set nationally, as opposed to internationally. Is that correct?
Mr. Stanton: That is correct.
Senator Moore: Do you consider a consumer's bad credit from other loans, and change the credit-card interest rate for that credit card?
Do you treat payments as late, unless the consumer has a reasonable time to make them? The U.S. will require a minimum of three weeks. What is your payment time?
A consumer can have two or three cards with your company. Do you allocate minimum payments to the balances of the cards with the highest rates?
Do you raise the interest rates from the opening rate without notice unless the rate is an introductory one or an increase is disclosed in advance? The U.S. will require a 45-day advance notice. What is your policy?
Do you permit double-cycle billing, whereby you calculate the interest based on a prior month's balance in addition to the current month's balance, even though the prior month has been paid off, albeit late?
I also want to ask you something about universities. I am from Nova Scotia, where we have 10 wonderful universities. The payment of tuition fees and other education costs by credit cards costs the universities a great deal of money. This last year, payment by credit card cost Dalhousie University over $1 million. My alma mater, St. Mary's, is looking at this issue seriously, but I am not sure what the cost has been to them. As a company, have you considered this issue, or is it a matter of all the universities in the country coming together to try to leverage their position? It bothers me that for something as precious as a university education, this kind of fee must be absorbed by our learning institutions.
Mr. Stanton: I will begin with your last question, senator, because it applies to our business most directly. We have observed that universities across Canada have been ceasing acceptance of credit cards because the cost-benefit analysis of the equation is not working for them. That act indicates to me that we need to recalibrate our system to see if there is a way to capture that merchant back into the system.
Yes, it is highly proprietary through details that I cannot reveal but I can tell you that we understand the concern. We do not like it when universities do not accept our cards so we are working hard on a program to bring them back into the fold. That proposition will be an economic one.
The good news about universities is that they do not need to leverage their collective bargaining strength because if one university in Canada falls off the MasterCard radar screen, the situation is a bad problem.
Other universities operate in their own ways. My daughter will go to McGill University next year, and I do not know if I can pay with MasterCard. If I do not have a good reason from a commercial standpoint, then I have a good reason from a personal standpoint.
On the other question, you are talking about regulations that relate to issuer practices. MasterCard is not in this area.
Senator Moore: Are you the partner with the issuer?
Mr. Stanton: No, we manage the transaction, establish standards of behaviour and market the proposition, but we do not issue credit. Credit is issued by banks in Canada. I cannot answer specifically but I am highly aware of the credit practices across Canada. They have not come into the same kind of practice that has given rise to the U.S. government's consideration of these regulations.
Again, I am familiar with the feature practices of the MasterCard banks, so I cannot speak for the Visa banks. However, this body certainly has a great deal of moral suasion in this country. When we think an issuer practice is contrary to MasterCard's interests, while we cannot tell them what to do because they are an end user and it is inappropriate for us to coordinate price in any way, we occasionally have conversations about it. We apply moral suasion, but that is all we can apply.
Senator Moore: To whom?
Mr. Stanton: The issuer.
Senator Moore: Can it be a bank?
Mr. Stanton: These practices are not prevalent in Canada.
Senator Gerstein: Mr. Stanton, can you comment on what correlation you view exists between the reward features on a credit card and a cardholder's usage of the card?
Mr. Stanton: Eighty per cent of the cardholders in Canada, generally speaking, will try to consolidate spending to that card. As a result, they tend to spend minimally 40 per cent more than an ordinary credit card user at a merchant, and they tend to spend three and a half times more frequently, and more frequently at the same merchants. There is a real value proposition to a merchant in making sure the merchant has access to that kind of cardholder.
That dynamic can be as dramatic as 130 per cent, depending on the type of merchant. That dynamic is not as prevalent in some merchant categories where people buy what they buy. They buy as much gas as they buy. They might buy more than they would have with cash, but they do not buy two tanks instead of one.
With supermarkets, for example, while the cart will be expanded on some level, it is not as dramatic as other merchant categories. For that reason, we decided that the value proposition dynamic had to be reflected in a more complex pricing schedule, and that is why we dropped the interchange rates in the supermarket category. We dropped interchange rates in the petroleum category because that enhanced sales dynamic is not as powerful.
Senator Gerstein: Does that imply that a merchant may benefit from the fact that the merchant experiences increased sales from a premium card, notwithstanding the fact that the merchant pays a higher cost for it?
Mr. Stanton: Yes, exactly; we found that more and more cardholders were considering more expensive brands, such as American Express, in order to have the kind of rich rewards they want.
Canadians are sophisticated consumers of these rewards. They are not prestige- oriented. In some markets, the colour of the card matters. Canadians make educated choices in choosing the card that suits them the best. The feature is the redeemability, and they show a high propensity to switch when the reward programs suits their purposes, and that drives the consolidation behaviour.
The good news in Canada is that two thirds of Canadians pay off their entire balance every month, which is a behaviour they do not see in the United States. That is another way Canada is different from the U.S.
Senator Massicotte: You talked about your standards of behaviour and your moral suasion. Do your standards of behaviour allow a positive answer to Senator Moore's questions? Is the payment applied to the outstanding balance with the highest interest rate? Is that practice part of your standards of behaviour?
Mr. Stanton: No, that is pricing. It does not exist in Canada, so we have not had an opportunity. There have been instances in the past where we have found behaviours in the market, for example, how call centre treatment was counter to our brand, and disputed transactions counter to our brand promise. We had conversations because we have to make sure that the brand experience is uniform and reliable. It so happens in Canada these practices are not prevalent, so we have never had one.
Senator Massicotte: Do you have a standard of behaviour in Canada?
Mr. Stanton: We have our rules, but outside of the rules, we can have conversations, and we do.
Senator Massicotte: Can we have a copy of your rules?
Mr. Stanton: Absolutely, you can.
Senator Goldstein: Would you agree with a regulation to require merchants to post in a prominent place at the cash register a notice indicating to consumers that they can receive a discount of "X" if they pay cash?
Mr. Stanton: Our rules allow that now. Perhaps education that they can do that might be the most appropriate route because nothing prohibits them from doing that.
Senator Goldstein: Nobody will educate them. You will not. We will not.
Mr. Stanton: That is one of the things we can talk to the CFIB about. If you think a regulation addresses the issue, since it is allowed, I have no foundation for objection.
The Chair: Your chief competitor published a schedule of its interchange fee. Why do you not?
Mr. Stanton: We pioneered the publishing of our interchange rates. We were the first to publish the rate two years ago. We still have a site merchants can go to, and when they answer some questions, we give them a customized version of the interchange rates that specifically apply to them. We found merchants are confused by seeing 19 rates, 16 of which do not apply to them. We give a customized report, and from our standpoint, that report allows them to shop around with actual knowledge of their situation for the best acquirer deal.
The Chair: Do you have different rates for different industries, like groceries?
Mr. Stanton: Yes, exactly.
The Chair: Thank you very much, and thank you to your two colleagues. We appreciate your cooperation, and we have benefited from your testimony.
[Translation]
We continue our discussion on credit cards and payment systems.
[English]
Our second witness tonight is Tim Wilson, Head of Visa Canada.
I neglected to introduce myself at the beginning of the meeting. My name is Michael Meighen. I am a senator from Ontario and I have the honour of chairing this committee. My deputy chair is Senator Yoine Goldstein from Quebec.
Mr. Wilson, we appreciate your appearance here tonight. Please proceed with your opening statement.
Tim Wilson, Head, Visa Canada: Honourable senators, I appreciate the opportunity to appear before this committee today. Visa has operated in Canada for more than 40 years. The fundamental role is to facilitate transactions between consumers and businesses. Visa is not a bank. We are a network — a network that connects 1.7 billion payments cards, 30 million merchants and 16,400 financial institutions in 170 countries in multiple currencies securely and reliably every second of every day.
In making these connections, Visa helps create value for all system participants. Cardholders receive a more convenient, secure and widely accepted way to make payments. They can buy goods by telephone, mail order or over the Internet. Through Visa and Visa-issuing institutions, they can receive timely access to unsecured credit and protection against fraud and goods not received, should a merchant cease operation.
Retailers benefit from the speed, efficiency and reliability that only electronic payments can bring. They also receive guaranteed payment and can quickly extend credit directly to their own customers. Looking broadly, over the past two decades, electronic payments have contributed $122 billion to the Canadian economy, which represents 20 per cent of the GDP growth over that period.
Today, electronic payments have become an integral part of our society. The value Visa delivers is directly linked to the number of financial institutions, consumers and retailers that participate within our system. To encourage participation and increase value for those involved, we need to ensure that the economics of the system are balanced appropriately between financial institutions that issue cards to consumers and financial institutions that encourage retailers to accept those cards.
To help achieve this balance, we use a mechanism called interchange, which is the small amount of money transferred from one financial institution to another each time a Visa product is used. When set correctly, interchange helps encourage financial institutions to use and invest in the network, which results in new security protections and payment innovation that benefit both consumers and merchants.
With that context in place, I wanted to address a few specific points about interchange and about acceptance costs. For merchants, there is a cost to accept Visa cards, just as there is a cost to accept cash, cheques and other forms of payment. Retailers pay a merchant discount rate negotiated business to business with an acquiring bank. They are billed for those services by the acquirer.
In 2008, Visa introduced a change to its interchange structure that resulted in some transactions attracting a higher rate while others attracted a lower rate. This change was the first significant one introduced to our interchange structure in more than 30 years. We provided the market with more than one year's notice that change was coming. Since that time, we have introduced no other changes to our credit interchange structure.
I mentioned that some rates went up and some rates went down. The overall effect of the change was neutral for the system. Our effective interchange rate in Canada has remained relatively flat for some time at approximately 1.6 per cent.
Interchange rates for Visa Canada, as indicated in the last question asked, are transparent and are available on our website along with the operating regulations that govern how participants interact with our system.
In terms of competition, our market is not limited to credit cards. We compete for payment share with an array of existing and emerging competitors, including cash, cheques, preauthorized debit, higher cost competitors such as American Express and unregulated competitors such as PayPal.
It is within this competitive environment that Visa Canada developed a premium product, which we refer to as the Visa Infinite card. We developed Visa Infinite to compete with alternative premium card offers to encourage use and to attract more cardholders into the Visa system. These cardholders are valuable cardholders that might otherwise carry or use a competing card. Visa Infinite transactions attract an interchange rate of only 20 basis points — that is, one fifth of one per cent — higher than our other card products. This higher rate reflects the increased value that these cards provide to retailers and the increased costs that issuers must bear to issue cards because of the requirements that Visa stipulates around the features the cards offer.
Interchange fosters competition and innovation. When it comes to debit, there is currently no choice in Canada. Without interchange, financial institutions have little incentive to invest in the system. Consequently, there is little innovation — a contrast to what we have seen with credit cards in Canada and debit cards in other markets.
Visa debit builds on the utility currently offered to Canadians and works in the same way that existing cards work, but provides features and functionality not available on the current product. Like today's bank card, it will be issued by financial institutions and allow cardholders to withdraw money from a bank account at an automated bank machine or buy goods at a point of sale in Canada. Unlike today's bank card, Visa debit will also allow cardholders to use their debit card when shopping online or when travelling internationally.
In Canada, merchants will decide whether accepting Visa debit makes sense for their business. Merchants that choose not to accept Visa debit cards can do so without impacting their acceptance of other Visa products, such as Visa credit cards.
Merchant groups campaigning for the regulation of interchange want to reduce their business costs, which we understand. We respect the desire of any business to manage its expenses, but do not believe government intervention is the right solution in a functioning industry. Visa believes the best way to balance the interests of merchants and consumers is to provide them with an array of payment options in an open and competitive market.
I also want to highlight that financial institutions on either side of a Visa transaction in Canada — the issuers and acquirers — are already subject to oversight either federally or provincially. For example, that may be by the Bank Act. In addition, Visa is subject to Canada's Competition Act.
We have heard the CFIB's calls for disclosure and believe that Visa provides transparency through the publishing of its interchange rates and its operating regulations on our website. We have met with the CFIB, the Retail Council of Canada, and merchants, including those scheduled to appear before the committee tomorrow. We are committed to continuing those conversations with all our stakeholders.
The very intervention that retailers have asked for has been tried in Australia. The result has been that Australian consumers are worse off. They have seen credit card fees increase substantially, card benefits reduced and any savings realized by retailers have not been passed on to consumers. There is every reason to believe that regulation of Visa's rules or our interchange rates would subject Canadian consumers to similar unintended consequences.
I am happy to answer your questions. Thank you for your time.
Senator Callbeck: I appreciate the opportunity to ask a question. Although I am not a member of the committee, I am interested in this issue.
We have talked about fees, specifically the interchange fee today. I understand there is also a switch fee, which is sometimes called a network fee. Are there other fees? How many fees are connected with credit cards?
Mr. Wilson: I will answer that question in a couple of pieces, if I may. The system is complex, and we have a picture that shows all the participants. There are fees at many points.
Senator Callbeck: Perhaps we can shorten it because of the time factor. What is the maximum percentage that a business will pay per transaction, all fees in?
Mr. Wilson: The maximum interchange rate is 2 per cent on Visa transactions.
Senator Callbeck: Does that rate include all fees?
Mr. Wilson: That fee is the merchant discount rate, as you mentioned. I am honestly not in a position to answer that question because I do not know. The information is proprietary as a result of contractual agreements that the merchants have with the acquirer processors, and we are not privy to that data.
The Chair: When you say "the acquirer," can you give us an example?
Mr. Wilson: Moneris and TD Bank, who appeared before you a few weeks ago, are examples of acquirers that would price to merchants.
Senator Callbeck: I will ask another question on the interest that you charge on accounts. A consumer receives a bill at the end of March and sees that they owe $1,000 and have a few days to pay it. The consumer looks closely and finds that there is a charge of $200 that is not the consumer's. That individual remits a payment of $800, which leaves a balance of $200. However, they are charged interest on the full $1000 because they did not pay the account in full.
Mr. Wilson: I referred to our operating regulations in my remarks. We have a set of standards on how the participants in the Visa system interact with each other when they transact. You have described a situation that we call a chargeback — a dispute. We have specific rules and a team to deal with disputes. We provide this value to cardholders. We provide a mechanism for consumers to present the disputes to banks and for the banks to determine the issue and negotiate the dispute with the merchants.
Senator Callbeck: Why is someone charged interest on the whole $1,000 instead of on the $200 that is still outstanding?
Mr. Wilson: That question speaks to a banking or card-issuer practice. Visa does not charge interest rates. My intent is not to dodge questions but it is not a practice of ours so I cannot speak to it specifically. The banks charge the interest rates.
Senator Oliver: I am interested in disclosure, education and transparency so that ordinary Canadians always know what they are paying. If consumers know the details, then they are better able to make informed decisions about their spending.
What would be the impact on the functioning of the credit card markets if the interchange fees, which you talked about, were added to the cardholder's bill as a mandatory surcharge rather than being included implicitly in the retail price? Each month, the cardholder would receive that charge on the statement. That charge would be fully disclosed. How would that work?
Mr. Wilson: Two questions are embedded in what you are asking. The first is around disclosure and transparency, which we support. We disclose our rates and regulations on our website. As well, we are active in the community by promoting financial literacy and educating cardholders about the various charges and how the credit system works.
Senator Oliver: What do you do in terms of financial literacy?
Mr. Wilson: We have two programs. One is called Choices and Decisions, which is an educational brochure that we distribute free of charge to schools in Canada. For example, B.C. has endorsed it as an official part of the financial education curriculum. I believe that we distribute it in Nova Scotia but I will confirm that for you. It is not officially part of curriculum there.
As well, we have online resources available in five languages. The program is called Practical Money Skills. Both programs are designed to educate cardholders and consumers.
Senator Oliver: What is your view on including interchange fees in the consumer statement each month rather than hidden in the retail pricing so that consumers can see every month some of the charges that you levy?
Mr. Wilson: The interchange fee is paid between financial institutions.
Senator Oliver: I am asking whether you will have them put the fee on the monthly statement.
Mr. Wilson: That question assumes all interchange fees are passed on to consumers through higher retail prices. It is tough for us to make that connection because the interchange fee is charged to acquirers.
Senator Oliver: If retailers pay 2 per cent, not the 1.6 per cent that you say, would it not be good for people to know that fee when they receive their statements?
Mr. Wilson: You would have to assume then that the retailers would lower their prices accordingly for consumers to realize a benefit. We have not seen that happen in Australia — the one market where the government attempted to impose regulation. The interchange fee was reduced, which presumably led to a reduction in merchant expenses, but there was no corresponding drop in consumer prices. Effectively, what you are suggesting was done in Australia, and banks, to compensate for the reduction in interchange, increased the fees charged to consumers, who had to pay more at the end of the day.
Senator Oliver: The essence of my question was disclosure but I will not take more time.
Senator Massicotte: I have quick questions deserving quick answers. What is your average fee charged to the financial issuers? How many basis points do you charge, on average?
Mr. Wilson: On average to financial institutions, we charge a fraction of the interchange rate. Unfortunately, I cannot disclose that information because it is commercially sensitive Visa data.
Senator Massicotte: Is that called, "service revenues?"
Mr. Wilson: There are a couple of fees charged. Two primary sources of revenue are derived from issuers: One is a transaction fee, whereby we charge a certain amount for every transaction that they process; and the second is a charge for total dollar volume that they process over the Visa network.
Senator Massicotte: Are they called service revenues?
Mr. Stanton: Yes, they are service fees.
Senator Massicotte: I looked at your service revenues for the last three months of relative transactions. They are roughly six or seven basis points.
Mr. Wilson: Yes.
Senator Massicotte: You also have data-processing revenues. What is that revenue? That revenue includes the six or seven basis points, I presume.
Mr. Wilson: That revenue is the first revenue stream I mentioned. They are data-processing revenues from the fee we charge on a per-transaction basis.
Senator Massicotte: What is the data processing fee? Is that fee charged to the financial institutions?
Mr. Wilson: The data processing fee is charged to the issuing financial institutions. That is correct.
Senator Massicotte: That fee is another four or five basis points, I understand, if I look at the numbers in your report.
Mr. Wilson: That sounds roughly about right.
Senator Massicotte: You also charge fees for international transactions in American dollars. The last quarter is $505 million. What is that revenue?
Mr. Wilson: That fee is the additional fee we levy for cross-border transactions. A large part of the value that we add to both cardholders and issuers is we facilitate transactions when people travel internationally. The system is complex to administer because of settlement with different currencies and so forth across borders, so we levy an additional fee for that sort of thing.
Senator Massicotte: For the sake of information, while service revenues may be six or seven basis points, if I add up all three fees, they come out to 15 or 20 basis points of the total value of the transaction for all the fees you charge to merchants.
The Organisation for Economic Co-operation and Development, OECD, came out with a report not long ago, in 2006, updated April 1, 2009, that concluded that merchants do not have enough negotiating power relative to interchange rates related to MasterCard and Visa. Many countries, including in Europe, more recently, are in dispute with your firm as to your interchange rates for international transactions. The OECD report concludes that many countries should consider putting regulations in place to force a more competitive environment. They are talking about the no-surcharge rule.
I believe your merchants cannot charge extra. In other words, merchants cannot charge an additional fee if a consumer uses a credit card versus cash. I believe you prohibit that practice. You also prohibit merchants from refusing another Visa card. In other words, they must accept all Visa cards. What are your thoughts about that situation? Why are you against that freedom for your merchants?
Mr. Wilson: I have not seen that OECD report, but if you are looking at the European model, it is tough to draw conclusions about what we should do in domestic markets like Canada, based on that model. The Europeans are looking at a small number of transactions that occur between countries in Europe, and they are meant to further a specific agenda around promoting intra-Europe commerce. It is not fair to take what has happened there and draw implications for what we should do in Canada.
On your other questions about surcharging and honouring all cards, you are correct that our regulations do not allow surcharging on Visa cards, and they also require retailers to accept all Visa credit cards and prepaid cards in Canada, if they accept one type. We believe that those rules are both pro-consumer rules. They avoid the potential for customer confusion at point-of-sale. They avoid bait-and-switch tactics, like retailers saying they accept a card, and then at point-of-sale, they might say they do not accept Visa cards. The rules make prices more transparent to consumers. We believe the rules are in the interests of consumers.
In fact, on the surcharging rule, in the U.S., 12 states have explicitly banned surcharging at the state level with the recognition that the rule is pro-consumer. We do not allow surcharging on Visa cards, but we allow discounting on cash. Part of the reason for allowing discounting versus surcharging is that there is a natural limit on discounts. Discounts can go only so low, but there is no limit on surcharging.
Senator Massicotte: OECD recommends that countries look at the ability to surcharge.
What is the interchange rate in Europe or other countries compared to Canada, where it averages out to 1.75 per cent, total merchant rate? What is the rate in other countries in Europe, for example?
Mr. Wilson: I am not familiar with Europe, so I cannot comment on those countries. Our interchange rate in Canada is 1.6 per cent. South of the border, acceptance rates are probably closer to about 2 per cent, and south of the border represents about 60 per cent to 70 per cent of transactions in the Visa system.
Senator Goldstein: Is it fair to say that the interchange rate is below 1 per cent in both Denmark and France? I am taking that information from your submission.
Mr. Wilson: Our submission estimated merchant acceptance costs, and our graph shows that some countries have lower acceptance costs than Canada. Canada, on this graph, is about the middle of the pack; substantially lower than a number of other countries.
Senator Goldstein: It is also substantially higher than a number of others.
Mr. Wilson: It is higher than a number of others.
Senator Goldstein: You said in your excellent submission that the "Visa Infinite transactions attract an interchange rate that is only one fifth of a one cent ( 0.2%) higher than other card products, reflecting the increased costs to issue the cards, and the increased value they provide to acquiring financial institutions and their retailer customers."
Can you help me understand what increased value the cards provide to financial institutions?
Mr. Wilson: Do you mean issuing financial institutions?
Senator Goldstein: I am quoting from your submission.
Mr. Wilson: I will start with merchants. To merchants, the cardholders create value because these customers spend the most and drive the most value.
Senator Goldstein: You are talking about Visa Infinite, which attracts a higher charge, giving some benefit to the merchant. If I come in with a Visa Infinite card and a simple Visa card in my hand, and I choose to use the Visa Infinite as opposed to the Visa simple, what specific benefit does the merchant receive from the fact I use the Visa Infinite?
Mr. Wilson: It is a great question, and I can relay to you a conversation that I had with one of our largest issuers the other day. Their internal data show that since they have converted a number of their cardholders from regular cards to Infinite cards, which have enhanced features and functionality, they have seen a 5-per-cent uptick in the spending of those cardholders. They spend more on the cards.
Senator Goldstein: All you are saying is that Visa created a card that gives Visa a competitive advantage.
Mr. Wilson: One of the reasons we launched the card was to compete effectively with American Express, which is a higher cost alternative. They are our competition.
Senator Goldstein: Are you suggesting that the Visa debit card will continue to have a flat rate as opposed to a percentage rate?
Mr. Wilson: We have disclosed the Visa debit rates on our website, along with our credit interchange. The rate structure will be hybrid. We recognize that debit is a different market than credit. On credit, we have a pure variable rate; for debit we will have a rate that is a combination of fixed cents plus a percentage fee.
Senator Goldstein: Right now, Interac does not have a percentage fee.
Mr. Wilson: When we talk about interchange, I do not believe Interac has any interchange at all.
Senator Goldstein: I understand that. However, from the consumer's perspective, having a debit card means there is a fixed, per-transaction rate as opposed to a percentage transaction rate. From the merchant's perspective, that rate is less expensive for the merchant than a straight credit card, which attracts a percentage rate, the interchange rate. Is that correct?
Mr. Wilson: That rate would be a function of the merchant discount rate, MDR, they negotiated with their acquirer. Again, I do not know about Interac-specific pricing. I am not privy to that proprietary data.
Senator Goldstein: Let me assert that Interac, at the moment, charges only a fixed transaction sum and no percentage. If that is true, and assume that I am not misleading you, can you help me understand how either the consumer or the merchant will be better off with a card that calls itself a "debit card" but which also has, on top of the flat cost, a percentage cost?
Mr. Wilson: I will start by answering the question of why we have a variable fee structure. The reason is that the higher-ticket transaction, for example, a $100 transaction, has greater value for a retailer and greater risk for an issuer. When we consider setting the rates, a fixed amount in cents would be a high percentage rate for a retailer who sold a good for $5. It would be a low percentage of the ticket item for a retailer that sold something for $100.
We try to even out the price that acquirers pay on behalf of the retailers across all ticket sizes. A variable rate is necessary to even out that price. Higher tickets also attract greater risk of fraud and higher volumes of customer service calls for issuers. Hence, we have the need to maintain that price at an equal level across all ticket sizes.
In terms of value, we like to look at the incremental value we bring. As I mentioned in my opening remarks, without interchange in the current debit system, there has not been as much innovation as we have seen in credit cards or with debit in other markets. We think interchange is necessary for a properly functioning debit market. It allows us to bring incremental innovation and value to consumers and retailers. We can bring increased functionality for consumers. Currently, in Canada, consumers can use their debit card online only in limited ways. With a Visa debit card, they can buy goods online, by mail order or by telephone.
The Chair: May I interrupt to ask a supplementary question?
You say that because of the limited fees in Canada's debit card system, there has been little innovation.
Mr. Wilson: Yes.
The Chair: How do you explain that Canadians use debit cards more per capita than any other country in the world with the possible exception of Sweden? Does that mean Canadians do they not care about innovation?
Mr. Wilson: That is a great question and one we think about. There is no question that Interac has been a successful product in Canada. The banks have done a great job putting that card into consumers' hands and promoting usage. However, we think that in the payments landscape, consumer needs are starting to change significantly. The product has served us well to this point but we need new functionality and competition in the marketplace.
E-commerce is a great example, which is the most rapidly growing area of commerce. It is growing by about 20 per cent per year in Canada. Consumers cannot really use their card online, except at select retailers.
Senator Ringuette: I have a document dated April 1, 2009 from the state of North Carolina. It describes the debit charges from Visa, MasterCard, AmEx, Discover and the New York Cash Exchange. I assume you told us the truth in that your debit card in Canada would have both an interchange percentage and an interchange fixed fee. That is what I see here in this document. I also see the same in regard to MasterCard in the U.S.
For example, the document gives typical fees for a $500 transaction. The Visa interchange percentage fee would be 1.43 per cent, which represent $7.15. The interchange dollar fee is a 5-cent fixed rate. Assessment percentage would be an additional 46 cents. Assessment fee would be another 2 cents. There is also a switch fee.
Visa is not there yet, although I think I have seen that you will add switch fees and brand fees as of July in the U.S. Those fees are two additional fees. No wonder Mr. Obama is furious.
There is also an STMS fee, which is another 4 cents. In total, Visa debit card merchant fees for that $500 purchase are $7.72. MasterCard fees are $8.39.
Do you want to do the same thing in Canada? Is that why retailers in the U.S. were crying to ensure that Canadian retailers and merchants were not subject to the same pricing from your companies in the U.S.?
Mr. Wilson: I think it is dangerous to make assumptions about what would happen in Canada based on experiences in the U.S. We have a different debit product. We have a competitive landscape that is different and we have pricing that is different. It is disclosed on our website, as I mentioned.
We set interchange on a country level. We recognize that in Canada currently, we are competing against a zero interchange product. We have set our interchange rates accordingly. Interchange rates on Visa debit in Canada are substantially lower than in the U.S. market.
For gas or groceries, merchants pay 16 basis points for a $500 transaction at Loblaws with our debit product.
The Chair: Are you suggesting that it is a good thing in the competitive landscape and that you support a zero interchange competitor, Interac?
Mr. Wilson: I cannot comment on Interac's plans.
The Chair: I am not asking you to comment on Interac plans. Currently, Interac charges zero. You said it is a different competitive environment and that you set your rates in accordance. If that environment were maintained, would that be a good thing for the consumer?
It may not be good for Visa, but it would be a good thing for the consumer and the merchant.
Mr. Wilson: I have mentioned that I think zero interchange is unsustainable in the long term in the payments landscape.
The Chair: Is that because we lack innovation as a result?
Mr. Wilson: Interchange is necessary to stimulate innovation and investment.
The Chair: Would the proposed switch fees not stimulate them?
Mr. Wilson: I am not familiar with the switch fees.
The Chair: I think the Competition Bureau already allows the charging of a 0.8 per cent switch fee.
Mr. Wilson: I believe the switch fee is charged by Interac. There is still no interchange under the Interac system, which would be revenue to the issuers paid by the acquirers. I believe that situation will limit the amount of investment and innovation in the market. We think a moderate interchange is important.
Senator Goldstein: How do you define moderate?
Mr. Wilson: For example, our rates for gas and groceries in Canada are 15 basis points, 0.15 per cent plus 5 cents.
Senator Ringuette: In regard to innovation, you must spend a lot of money and you must also have patents. Is that correct?
Mr. Wilson: We do. We have a number of patents. We try to patent all the innovations we develop. Patents are an important intellectual property for us.
Senator Ringuette: Do you have a patent on the chip card?
Mr. Wilson: We have developed a technology that supports chips. I am not familiar with the exact patent rights we have on the technology, but we have a proprietary chip technology.
Senator Ringuette: For the time being, I have a Visa with a chip. I also have a debit card with a chip. Both are from the same institution. We can look at them under a microscope and the chip is exactly the same. Therefore, I have the same chip security measure on my debit card that I have on my Visa card.
Mr. Wilson: The debit card chip utilizes Visa's technology. To launch that product in Canada, Interac had to borrow some of the technology that Visa has developed and that the banks are using.
Senator Ringuette: Is the chip a bank chip or a Visa chip?
Mr. Wilson: The banks put the chip in the card, and the technology is driven by a Visa technology standard.
Senator Ringuette: You have given the technology to the bank.
Mr. Wilson: They implement the technology.
The Chair: Visa lends the technology to the banks.
Senator Ringuette: Will you still lend it to Interac when you put a debit card on the market?
Mr. Wilson: We have no intention of changing that practice.
Senator Ringuette: That is excellent. We heard something about dual routing in respect of chip cards. It is your chip and you can use the technology to its best advantage so will you dual-route chips? For example, if you put a Visa debit card on the market, the first thing a consumer might see after swiping the card is the question: Do you want to use a Visa debit? Will the chip that you control be able to provide that choice?
Mr. Wilson: We believe in consumer choice.
Senator Ringuette: I am asking you a technology question that you, as Head of Visa Canada, should be able to answer. Will this chip be used to double-route on debit?
Mr. Wilson: I will start with a clarification around the technology. Visa owns the underlying technology and holds the rights to the standard. The information on the chip in respect of cardholder names and PINs belongs to the bank. We cannot decide to put that information on the chip. That decision has to be a bank decision. For a debit product, we are promoting consumer choice. The banks are thinking about it and we are talking about a proposition that includes both Visa and Interac on the chip, and that will present consumers with a choice at the point-of-sale. Consumers will be able to select either Interac or Visa for their transaction.
Senator Ringuette: This information is important for the committee. You say that you have negotiated with the Canadian banking institutions that issue your Visa card and that use your chip technology that on their debit card, there will be a double exposure for their Interac and for your Visa.
Mr. Wilson: Banks have the option of issuing a Visa card.
Senator Ringuette: Have you already negotiated that use?
Mr. Wilson: No, I do not think we have done that. Banks have the option of issuing a Visa-only debit card or they have the option of co-badging, which means putting Interac and Visa on the same debit card, which allows consumers choice at point-of-sale. That decision will be a bank decision.
Senator Moore: Mr. Wilson, were you here earlier when I asked questions of the witnesses from MasterCard?
Mr. Wilson: Yes.
Senator Moore: I will give you a copy of the article that appeared in yesterday's Wall Street Journal with regard to regulations and ask you to respond to the clerk of the committee as to whether these things impact your company, and how you propose to deal with them. Is that acceptable?
Mr. Wilson: Yes.
Senator Moore: Have you considered the situation currently facing our universities? Has your company considered that some universities are cancelling the acceptance of credit cards for tuition payments?
Mr. Wilson: We have considered that situation, and we acknowledge that some universities have made the decision not to accept credit cards. We are constantly re-evaluating our interchange structure. One factor we take into account is market feedback on rates, which we have heard. We take that feedback into account when thinking about any interchange changes.
Senator Moore: Are you considering a special rate for post-secondary education?
Mr. Wilson: At the moment, we are not thinking of that. It is not an item on the agenda for Visa.
Senator Moore: Is it not substantial enough?
Mr. Wilson: It is an important sector for us, and it has the potential to become even more important. It will be one of the sectors that we look at going forward.
The Chair: It has its advantages.
Senator Raine: I like to put things in simple terms. One thing I understand is my debit card. I put my money in my bank and I receive a debit card. I go to a merchant, plug in my card, and the money flows immediately from my bank account to the merchant's account. It is simple. We do not need to deal with the interchange system because the money is in my bank, and it goes directly to the merchant.
That card has a lot of attraction for people who are not interested in overextending with credit. I fail to understand what the interchange will bring to the debit system. My money goes from my bank to a body up there in the air somewhere and then to the merchant instantaneously. However, because it goes to that body, money disappears from the process to pay for a whole bunch of things that I might not want. I agree that if you are planning to travel to Europe and purchase some of the wonderful things that are available, it might be a good idea to have a special debit card, but for everyday transactions, the system we have with no fees or a fixed fee and no percentage works well. I do not understand why we would change it.
Mr. Wilson: That experience for you as a consumer will be no different with a Visa debit card than it is with your current bank card. The money will still come out of your bank account and flow to the merchant, again between the acquiring financial institution and the issuing financial institution.
Senator Raine: It does not make a difference for me but for my brother, who is the retailer and is paying 15 cents per transaction, it will make a difference because he will pay a percentage. The layer of cost will be paid by the retailer.
Mr. Wilson: In Canada, an important point is that merchants will also have choice about whether to accept Visa debit. It is possible that if they accept Visa debit, it will cost them more because of the interchange. However, if merchants do not believe there is value in Visa debit cards, they can choose not to accept them. As well, consumers can choose to use Visa debit or not to use it.
Senator Greene: If merchants accept Visa, they do not have to accept Visa debit?
Mr. Wilson: That is correct. Deciding not to accept a Visa debit card will not impact their acceptance of other Visa products.
Senator Greene: You do not envision a time frame limiting that choice?
Mr. Wilson: We are adopting that principal for the Canadian market.
Senator Raine: I know that things change, and it is important to keep up. There are good reasons why a special debit card that offers choices should be available. I want to see the "no frills" model of debit card remain available and be promoted by whoever wants to promote it as a good, efficient way of debit purchasing. I am a little worried that to sell the more expensive card, you will offer various loyalty programs and travel promotions, which add a great cost to the system.
Mr. Wilson: Ultimately, there will not be costs if merchants decide not to accept the cards or consumers pick Interac at the point of sale with every transaction. The launch and use of Visa debit and the associated costs will be driven by both consumer and merchant choice to use that product.
Senator Raine: With respect to the acquirers, who owns those companies?
Mr. Wilson: Ownership varies widely. In some cases, it is Canadian banks. In other cases, they are separate, publicly traded companies.
Senator Raine: There are many non-arm's length things happening in this whole system.
Mr. Wilson: The system is complex, with a number of different parties with different ownership structures involved.
The important point to note is that financial institutions are on either side of the Visa transaction directly, and those financial institutions are Canadian. They are regulated by provisions in, for example, the Bank Act, and they are monitored by groups like the Financial Consumer Agency of Canada and the Canadian Banking Association.
The Chair: You referred to merchant acceptance and consumer acceptance. If you have consumer acceptance, will the merchant not have to accept? If 20 customers walk into my store and say, "You do not take Visa card X," and I say no, because it is expensive, I will lose sales, your campaign will go after the consumers. Hence, it would seem to me, that is why I am inundated with 45 cards a month in the mail system. I am not necessarily being critical, but is it not, in fact, a marketing matter?
Mr. Wilson: If I am a merchant, I probably want to do what makes my consumers happy, but there are merchants in Canada that have decided not to accept Visa products. Tim Horton's, Costco and No Frills are great examples of larger merchants. Mr. Stanton mentioned other statistics of around a million other merchants in Canada that do not accept cards, so merchants have made that choice.
Senator Greene: You talk about consumer choice, and you hold up that choice as an ideal to strive for. There are many industries, of course, in which a government limits consumer choice. For example, I am from Nova Scotia, and I am not allowed to buy beer and wine in a supermarket.
I believe in consumer choice very much. Do you see any areas in this credit card and debit card issue where maximum consumer choice is not a good thing?
Mr. Wilson: I am a firm believer in consumer choice. I believe that it benefits everyone.
The Chair: Thank you, Mr. Wilson. Senators, thank you very much for being so cooperative and keeping your questions short and concise.
We have benefited from your testimony, Mr. Wilson. We appreciate your taking the time to come before us. This issue is complex, as you have said, and we wish you well. Thank you for your time.
(The committee adjourned.)