Industry Committee on May 14th, 2009

[Bill Sheedy]

Visa wouldn't typically look at those kinds of revenue growth expectations or earnings per share expectations at a country level. I think we have said publicly that our North America business is more mature.

We've been in Canada much longer than we have in many markets around the globe. I think that our revenue growth here is less than what we would see in many markets around the globe.

[John McKay, Liberal, Scarborough—Guildwood, ON]

You stayed out of the debit card market particularly in Canada, but you've been in the debit card market in a lot of other countries. Could I suggest to you that you stayed out of the debit card market because the system here works pretty well and it's pretty cost-effective and you'd be heading into pretty serious competition headwinds, so you've practised in other countries and are now coming into Canada? Is that a fair observation?

[Tim Wilson]

It's partly correct in that we do have a debit system in Canada that has been very successful and has served Canadians well to date. However, as I mentioned, consumer needs are changing, transaction behaviours are changing. For example, consumers are starting to shop more online, and the current debit product doesn't allow them to do that ubiquitously. Our debit product would.

[John McKay, Liberal, Scarborough—Guildwood, ON]

I wasn't aware that my consumer needs were actually changing that much. I just thought it was a debit card system.

For argument's sake, let's say that you're correct, that there's more shopping online. Why wouldn't the response be, on the part of the folks who run the debit card system, simply to enhance their system, improve their fraud system, whatever? Why do Canadians need Visa or MasterCard doing debit?

[Tim Wilson]

I'm not familiar with the details of the Interac system, but as I understand it, it's challenging for them and challenging for retailers to roll out online acceptance in Canada, hence the reason it's only available at a limited number of merchants.

[John McKay, Liberal, Scarborough—Guildwood, ON]

If you find it challenging, you can imagine what we find it. This Byzantine system of following the bouncing ball around between a merchant down to a consumer and back again is a challenge at times.

Would you agree with the view that essentially cash subsidizes the credit system? Really, when a guy walks in with $100 to the merchant, the merchant gets $100. If he walks in with a cheap card, the merchant might get $99 or $98. If walks in with one of these fancy cards, he ends up with $95 or $96.

The irony of the whole exercise is that cash subsidizes credit. That doesn't sound quite right.

[Bill Sheedy]

I know Visa would not agree there's a cash subsidy. It's shocking to you, I know.

[Some hon. members]

Oh, oh!

[Bill Sheedy]

In fact, one of the things we talk quite a bit about with our merchant partners and have measured a number of times, as have a host of third parties, is that there are exceptional costs associated with handling cash; and I think that typically gets lost in the discussion.

[John McKay, Liberal, Scarborough—Guildwood, ON]

I'm sorry, you perform a bookkeeping function and you perform...I suppose there's not that much fraudulent cash that actually changes hands. I don't dispute that. But the irony of this whole exercise is that Canadians would be well advised to gas their cash and just go right to credit cards.

[Bill Sheedy]

My only point, Mr. McKay, is that when you look at the North American market in total, our research suggests that somewhere close to $3.6 trillion to $3.7 trillion a year is expended in cash transactions. Not only are those transactions very expensive for the merchants in terms of handling the cash at the point of sale, but there are also a lot of broader costs associated with non-electronic transactions.

[John McKay, Liberal, Scarborough—Guildwood, ON]

I don't disagree with your observation. I just wanted to state that as a bit of an irony.

I take it you're no great fans of regulatory intervention, particularly in Australia. So the big problem for those of us who might wish to do some regulation is that it's either going to be a very comprehensive regulatory system or nothing. I take it you folks would go with nothing. I say this because if we were to regulate fees, then you would move the interest rate; and if we regulated the interest rate, then you would move the time to pay. And if you do it to that, then you're going to do it to something else; you'll up the fees on the cards, or things of that nature.

Is that a fair observation?

[Bill Sheedy]

We respect that payments are very important to Canada. They're important to merchants; they're important to consumers; and they're certainly very important to the banks, our clients.

I don't think Visa has a problem with regulation. In fact, we live in a regulated industry, as my colleague has testified. I think what we see in front of us are examples such as Australia, where regulation, with price controls, and changes to network rules driven by one side of the equation, as opposed to the entire network benefit.... In our view, those types of regulatory steps are not in the best interests of the payment system.

[The Co-Chair, Conservative, James Rajotte]

Thank you very much, Mr. McKay.

Monsieur Bouchard, s'il vous plaît, pour sept minutes.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

Thank you, Mr. Chair.

I also wish to thank you for being here, as we approach the end of the day.

I do not know whether Mr. Wilson or Mr.Sheedy will answer this first question: how do you explain the fact that the credit card payment method is so popular, when the Bank of Canada has determined that it is the most costly way to pay a merchant?

[Tim Wilson]

I think that just looking at the cost of a particular system isn't taking a complete view of competition or the market.

So what I'd suggest is that there's perhaps a cost to accepting cards, as there is to accepting any form of payment like cash, but credit cards deliver tremendous value to both retailers and consumers. To consumers, they deliver convenience and speed. They allow consumers to have purchasing power in their wallet rather than rely on the amount of cash they're carrying around at a given point in time. They also have purchase protection features that benefit consumers. There are various charge-back rights, and there are other sorts of protection measures and insurances that come with cards and benefit consumers.

On the retailers' side, there's obviously the benefit of creating satisfied customers. We have many studies showing that consumers spend more at retailers when they're using their cards versus cash. It's a way for retailers to extend instant credit to their consumers, which allows smaller retailers who wouldn't be able to afford a credit program to compete more effectively with large retailers.

The final point I'd make is that it's a form of guaranteed payment. Retailers don't have to worry about fraudulent money; they don't have to worry about bounced cheques. They are guaranteed those funds, and guaranteed them generally within about two business days.

[Bill Sheedy]

If it's all right, I'd like to add one element to my colleague's answer.

I agree with Tim that when we look at costs, it misses the benefits. I also think that if we look back historically in Canada over the last 20 or 30 years, we see that most major retailers invested in their own store card programs. They issued their own credit programs because they knew that was how their consumers wanted to do transactions.

What has happened over the last couple of decades is that the cost and responsibility associated with administering those programs has moved to the banks. The banks are running those more effectively; they have lowered the costs associated with those card programs and are taking on the credit risks. And that is the cycle we're entering into now. It's a true cost that allows the merchants to invest their capital where it's more productive for them, and that's in the business of retailing.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

Would you agree that the interchange rate is currently being borne by the merchant but that it is passed on to the consumer without the latter being aware of it?

If these interchange fees were paid by the consumer rather than the merchant, do you think that credit card utilization practices would change? In other words, would there be a reduction in the use of credit cards because consumers would be paying for that rate directly? Consumers are paying anyway. Merchants are paying it but in reality they pass it on to the consumer.

Do you understand my question?

[Bill Sheedy]

I understand. It's a very good question.

I think part of what gets lost, as I'm sure the committee understands, is that this is a complex payment system, and consumers are very important constituencies here. They absolutely benefit from card acceptance; they receive rewards and other features associated with the card.

My concern with thinking that interchange is ultimately a consumer expense is that it's inconsistent with the flow. The flow of interchanges we've established moves from the acquiring financial institution to the issuing financial institution; but ultimately we know that the consumers and the merchants are the beneficiaries of the payment system. And if we think of that interchange on an indirect basis, as just a consumer expense, I think what gets lost is the operating efficiencies and the benefits to the merchants in servicing the customer the way they want to be serviced; to deliver products through efficient channels like the Internet or automated field dispensers; and to experience the benefits that many merchants experience, which is that consumers spend more in certain categories when they have access to unsecured credit lines.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

As a credit card company representative, how can you explain that for many years, associations of merchants, hotel owners and businesses that deal with credit cards did not complain, did not protest, but very recently, we have seen this sudden surge in demand that the government regulate this area?

In your opinion, what do you feel you've done to provoke these reactions and this action?

[Bill Sheedy]

I was just going to indicate that I appreciate that there's clearly an issue here. We wouldn't be having this hearing, we wouldn't be having these discussions, if there weren't. And in many of the exchanges that my colleague and I have had with merchants, we understand that many of the groups and merchants aren't pleased.

I think that as an industry, and certainly as a company, we can do a better job--and have done a better job--being more transparent with our rates and doing a better job explaining why we do what we do. I think that will help. I do think that over time, merchants have forgotten that the credit card network and the payments industry provide tremendous benefit to them. Increasingly, as the business has evolved and matured, they've focused less on the benefits and more on the dollars of expense.

[The Co-Chair, Conservative, James Rajotte]

Merci, Monsieur Bouchard.

We'll go now to Mr. Dechert, please.

[Bob Dechert, Conservative, Mississauga—Erindale, ON]

Thank you, Mr. Chair, and welcome, gentlemen.

Our government understands the importance of small business to our economy. We understand that most merchants are small businesses. For example, that's one of the reasons we decreased the GST by 2%, which had a big benefit to retailers across Canada.

I certainly want to acknowledge the important role that Visa and MasterCard, and other credit card payment mechanisms, provide to enhancing the business and consumer spending, and therefore the success of merchants. We also acknowledge that consumer spending is a big part of the success of our economy. Of course, we want to do everything we can to encourage consumer spending to help bring us out of the current economic situation.

Having said that, I have some questions for you about your request to enter the debit market, and also some questions on the credit card side.

We heard from the Retail Council of Canada and the CFIB that the lowest-cost payment form that their members have access to is the debit payment mechanism. They showed us some statistics to show that. They also gave us some statistics on the percentage of consumers who have availability of using the Interac system and the debit system in Canada. Will the percentage of Canadian consumers who have access to debit increase if your company and, for example, MasterCard are allowed to enter this market? That's one question.

What will the effect of the entry of your company into this market be on the cost of transactions to merchants? We heard from MasterCard just a few minutes ago, and they told us their proposition for debit is a flat fee and lower than Interac rates. Is that your model as well?

The fourth question on this is, why would the retailers not want to have you enter the debit market if by entering the market you gave access to more consumers to the debit system, which is a lower-cost form of payment for them?

[Tim Wilson]

We believe that by entering the debit market in Canada we can bring value to both merchants and to consumers. There are a couple of reasons for that. On the consumer side, we bring the opportunity for increased functionality, as I mentioned, the opportunity to use the card online, for mail or telephone order, and in 170 different countries around the world, when people travel internationally, which is becoming more important as our economy becomes more globally integrated. So we bring functionality.

We also bring best-in-class fraud controls, the opportunity for banks to bring new security features to the debit cards they offer in Canada and to more effectively manage fraud.

On the retailer side, we offer, number one, the opportunity for them to provide choice to their consumers, to create satisfied customers, and also the benefits of bringing new technologies. So we have innovations, like what we call Visa payWave, a card that's just waved in front of a reader and requires no signature for transactions under $25 to $50. That can help retailers who operate in a small ticket environment, whose business model relies on quick throughput, to speed up that throughput and generate efficiencies.

[Bob Dechert, Conservative, Mississauga—Erindale, ON]

Those are obviously some benefits to merchants. So why do you think the merchants are telling us that they don't want Visa and MasterCard to enter that space?