Finance Committee on May 12th, 2009

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

The consumer has a view that these new premium cards are good for them. I want to hear from Madam Brisebois, Catherine, and others on what it really means for consumers in the long run if these distortions are allowed to work their way through the system.

[David Wilkes]

Mr. McTeague, perhaps I could answer that question as well from a grocery perspective.

In our business we've seen premium cards increase. While we've seen overall credit cards increase from approximately 6% to 10%, within that 10%, premium cards now represent over half of those purchases, and they started almost at zero.

The impact of that to those in the grocery business, which has a very thin margin of business of 1% to 2%, is that the cost associated with those is being paid by everybody. Whether you're paying with cash, debit card, or a lower-cost credit card, the increasing and constantly spiralling cost of premium cards have nowhere to go but into the cost of the food for everybody, because we can't distinguish.

Mr. McTeague, the impact is that food prices are higher for everybody.

[The Co-Chair, Conservative, Michael Chong]

Thank you, Mr. Wilkes. Thank you, Mr. McTeague.

Monsieur Laforest, you have the floor.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

Thank you, Mr. Chairman.

Good afternoon and welcome to all the witnesses.

First I have a few comments, and then some questions. First of all, I want to congratulate all the members of this coalition and those of the Canadian Federation of Independent Business. In fact, I believe you have sent a common message which is much easier for us to understand because you've previously worked on it and you have agreed on certain priorities.

Since we began looking into this matter, we have learned a lot, although I don't think we've learned everything. We're learning more every day about the credit card payment system, that there are issuers, among others. We knew that banks were involved, acquirers as well, which is a new term for me. With consumers and obviously the credit card companies, the merchant is doing business with a system involving five players. When you see that, you say to yourself it makes no sense that this isn't regulated.

This credit card payment system has been in existence for a number of years. However, I'm convinced that very few people in Quebec or Canada know it's not regulated. In my view, a majority of people imagine that a system as complex as this has regulations that, in some way, sets some major parameters; however, that is not the case.

The effort you are making will enable us to understand, first, that there's something nearly anarchic in this matter. You're making recommendations that I think are very interesting. The first is related to what I just said, that Canada—at least someone somewhere—should regulate the credit card payment system. Ultimately, it's always the consumer who has to pay more. Consumers are increasingly expressing their anger, which is hard to direct at someone, since they don't know who to turn to. As I'm telling you, it's a bit anarchic. They may think it's the banks that are making extreme profits; they may think it's the merchant or all the other people possible. They don't know who exactly. That's why we really have to shed some light on this point. The first step you're taking is very interesting in that sense.

In the recommendations you make, you're saying, first, that Canada must develop regulations and that they should be based, second, on what's been put in place in Australia. In Australia, have they had the time to analyze the consequences? Among other things, they reduced the interchange by a half a percentage point, I believe. Has that produced any operating results? Are there any people or institutions that have gone bankrupt because the Australian government legislated in this field?

[Gaston Lafleur]

Thank you for the question, Mr. Laforest.

Mr. Chairman, the approach that was adopted in Australia has definitely produced some results. However, on the one hand, it must be said that the studies that have been conducted to date have definitely not shown that there were negative effects on consumers or merchants.

On the other hand, if you look at some of the tables we've provided, especially at the end, there is a demonstration of the inflation-related impact: we've seen a certain reduction in inflation in the years that followed the program's introduction. However, I would say that there's not necessarily any causal relationship here. We've even seen a drop in inflation, then a subsequent rise.

In addition, we've also noticed that credit card transactions have been as frequent, and that the amounts of those transactions have risen as well.

Ultimately, that leads us to the conclusion that the introduction of regulations in Australia has made it possible to establish a framework for harmonious evolution. There has been no major decline in the use of credit cards, on the contrary. The statistics as a whole show us that there has been a gradual evolution.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

In your third recommendation, you say that there should be more transparency and flexibility, among other things, so that associations, merchants can eventually decline certain credit cards. I think that's the case in the United States, as in Australia.

[The Co-Chair, Conservative, Michael Chong]

Mr. Laforest, I believe Ms. Brisebois wants to go back to your question.

[Diane Brisebois]

Thank you, Mr. Chairman.

I simply wanted to add that it is important to note that, even if we take the Australian system as an example, a study should be conducted in Canada to ensure that the system improves and adjusts to our Canadian environment.

One of the suggestions that were made, even by Australian retailers, is that it should be ensured that all credit cards are represented in the system. Some say the mistake in Australia is that American Express and Diners Club cards were not previously regulated. That's the only change that I would suggest.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

Mr. Chairman, I have perhaps a final question to ask, if I have any time left.

You're asking that there be more transparency, but I would like to know whether your groups have approached the credit card companies, in particular Visa and MasterCard, the acquirers and major banks. If that's the case, what answer did they give you?

[Diane Brisebois]

Do you really want me to repeat the answer we were given? In fact, we weren't given an answer. At the Canadian association, we hold meetings three times a year to which we invite representatives of the banks, credit card companies and acquirers. At the last meeting in September, the MasterCard people decided not to attend. We were surprised. When we request information and encourage transparency, these people simply tell us that they're dealing with software problems, that they can't answer our requests. Often our questions are ignored. We're really disappointed.

I'm sure other witnesses have comments to make on that subject.

[The Co-Chair, Conservative, Michael Chong]

Thank you, Ms. Brisebois.

Thank you, Mr. Laforest.

Mr. Wallace.

[Mike Wallace, Conservative, Burlington, ON]

Thank you, Mr. Chairman.

Thank you to our guests for coming today. I appreciate the opportunity. There are lots of questions on this side, so I'll try to go quickly.

I've never been in a retail business, so understanding what happens with your credit card is a new experience for me. I'm still not sure I understand it completely, because it is complicated.

You're here today about the merchant's cost, not what my card costs me in interest as a consumer. Is that an accurate statement? Okay. So you are charged an interchange fee every time a card is swiped in your store or restaurant. That's one issue. The other issue is the debit one. I'm going to avoid that because I don't have time for it today. Others may ask you about that.

You're telling us today you had a meeting with a credit card company. There are a number of players in the marketplace. There's the consumer. Then there's you. Then you have a deal with a payment processor acquirer, which is the middle person. Then there's the bank that actually issued the card--the issuer. Then there's the company on its own, like MasterCard. So there are really five players in the marketplace.

On the interchange rate set for you, is that an agreement between you and Visa, you and the bank, or you and the acquirer?

[The Co-Chair, Conservative, Michael Chong]

Go ahead, Mr. Taylor.

[Justin Taylor]

The agreement is set. Almost all of the associations around the table have negotiated agreements with acquirers. The problem we're facing right now is that the interchange rate is set by Visa and the issuing banks, and then it's basically forced down the throats of acquirers and passed on to merchants.

[Mike Wallace, Conservative, Burlington, ON]

A credit card company came to see me and tried to tell me that for the premium card they charge 1.5% per transaction plus an additional 0.2%. But I'm hearing from you that is not accurate. Where does that added amount come from? Is it from the bank or the acquirer?

[Justin Taylor]

The answer is almost all of the above. Visa and MasterCard set the interchange rate, which ends up basically being the floor rate for the transaction. The banks add a small rate to that and the acquirers add a small rate. At the end of the day, the rate the merchant ends up paying is a trickle-down effect from all of those players.

[Mike Wallace, Conservative, Burlington, ON]

I've never seen a statement on the cost, since I've never been in the business. Could you provide the committee with an example of a statement? You can black it out if you need to. Do you have a copy with you? If you have one, leave it with the clerk. I'd like to see that circulated. I'd like to have it when we talk to our friends from Visa and MasterCard.

One issue I want to talk about briefly is the opportunity to take cash. In some businesses it can be difficult--hotels and airlines. I understand--don't get me wrong--but there is that opportunity. One of the credit card companies tells me that merchants are free to offer discounts to consumers who pay with cash.

Is that an accurate statement? Could you, in your restaurant or retail store, have a sign saying that if you pay in cash the item will be 2% cheaper? I understand they make you sign an agreement saying you can't do that.

[Catherine Swift]

No, that used to be the case, but now they are clarifying this. I think in part that's because of the scrutiny we're putting on these types of issues right now. Yes, that is what their testimony has been before the Senate committee that looked into this. I suspect you'll get the same answer from them.

[Brenda O'Reilly]

However, with that said, I can't afford to give a discount to accept cash. Our profit margins are so thin as they are, so for us to pass on a discount to accept cash, you'd have to give a fair discount.

[Mike Wallace, Conservative, Burlington, ON]

It's simple math that if I came in with a premium card, you'd be charged 2.5%. But you don't know who has a premium card and who doesn't. That's really the bottom line as to why you can't give that discount. I could be using my regular card, which, by the way, I suddenly heard this week from my bank is down to 6.5%. Very interesting. Anyway, you can't tell, and it makes it difficult for you to do that.

Another question, and I don't mean to be rude, but some of you from the retail group have your own cards. I'm assuming there are members of your organization, Canadian Tire or others, who have their own cards. Do you internally charge your own transaction fee? How does that work?

Secondly, we heard from you last year when the dollar was above par. We were talking about prices and you said government should get out of your way, and who were we to tell you about pricing. Now you're asking us to get involved here. It's a little bit tricky that on one hand you don't want us involved, but on another hand you do. I'd appreciate a comment on that.

[The Co-Chair, Conservative, Michael Chong]

Madam Brisebois.

[Diane Brisebois]

It's my pleasure to comment on that. In fact, the government was not silent on the price of goods in Canada. We remember a moment when the minister took a book and compared the price between--

[Mike Wallace, Conservative, Burlington, ON]

But neither was your organization.

[Diane Brisebois]

So was our organization, indeed.

I think it's important to note, first of all, that the retail market is a competitive market. A consumer can choose to shop in thousands of stores, eat in thousands of establishments. That's the number one comparison. With Visa and MasterCard, merchants don't have that opportunity.

Let me clarify. Visa and MasterCard set the interchange rate and also determine if other fees will be passed on. There's an assessment fee and now there's a new foreign card fee. So if I'm a merchant in Niagara Falls, Canada, all of a sudden, all of my transactions from my neighbours in the U.S. will be charged a higher fee, for whatever reason.

I think we need to clarify the interchange. The retailers do not negotiate. They don't even generally negotiate with the bank; they negotiate with the processor. The only thing they negotiate is the processing fee. Everything else is non-negotiable.

[The Co-Chair, Conservative, Michael Chong]

Thank you, Madam Brisebois.

Mr. Thibeault.