Evidence of meeting #17 for Industry, Science and Technology in the 40th Parliament, 2nd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was merchants.

A recording is available from Parliament.

On the agenda

MPs speaking

Also speaking

Kevin Stanton  President, MasterCard Canada
Andrea Cotroneo  Vice-President and Canada Region Counsel, MasterCard Canada
Tim Wilson  Head, Visa Canada
Bill Sheedy  Regional President, North America and Head of Interchange Strategy, Visa Canada

4:40 p.m.

Conservative

The Co-Chair Conservative Michael Chong

Thank you, Mr. Chair.

I want to ask some questions that I think get to the heart of this matter. I've always felt that the key to any solution is greater competition.

Who sets the interchange rate?

4:40 p.m.

President, MasterCard Canada

Kevin Stanton

That's MasterCard.

4:40 p.m.

Conservative

The Co-Chair Conservative Michael Chong

Does the acquirer collect this interchange rate and pass it along to the banks?

4:40 p.m.

President, MasterCard Canada

Kevin Stanton

The acquirer collects it, passes it along to us, and we pass it along to the issuer.

4:40 p.m.

Conservative

The Co-Chair Conservative Michael Chong

So the ultimate institution that receives the interchange rate is the issuer, the banks.

4:40 p.m.

President, MasterCard Canada

Kevin Stanton

That's correct.

4:40 p.m.

Conservative

The Co-Chair Conservative Michael Chong

I think it's safe to assume that part of this interchange rate that the banks collect forms part of their margin on their card product.

4:40 p.m.

President, MasterCard Canada

4:40 p.m.

Conservative

The Co-Chair Conservative Michael Chong

So at no point in this transaction does the bank pass along this interchange rate--whatever they receive as a percentage--to MasterCard.

4:40 p.m.

President, MasterCard Canada

4:40 p.m.

Conservative

The Co-Chair Conservative Michael Chong

Can the bank change the interchange rate?

4:40 p.m.

President, MasterCard Canada

Kevin Stanton

No, the bank is not involved in setting it. Asking them what they want is not going to balance—

4:40 p.m.

Conservative

The Co-Chair Conservative Michael Chong

So MasterCard sets the interchange rate for each bank that it has an agreement with, but does not collect or receive that interchange rate. It seems to me that MasterCard is setting the price for each of the banks on behalf of the banks for something that MasterCard does not collect. You collect other fees, but you do not collect the interchange rate.

If I were to use an analogy, it's like Whirlpool Corporation telling Sears what its margin should be on a Whirlpool washing machine. Let's say Sears needs to have a $150 margin on a Whirlpool washing machine. Sears is not allowed to set that margin because it's been determined by Whirlpool. Sears pays another fee to Whirlpool, let's say $1,000, for the actual cost of the washing machine.

This seems to be somewhat anti-competitive in its behaviour and a contravention of the Competition Act.

4:40 p.m.

President, MasterCard Canada

Kevin Stanton

I'd have to challenge your analogy. We're saying to one side of the two-sided network that is our business that this is how much the participation of this participant's cardholders will cost you if you decide to accept the proposition. That's almost like a wholesaler saying this is how much these washing machines cost; charge what you want. That conversation goes to the acquirer, not to the issuer.

So the acquirer determines how much the merchant pays based on a wholesale price determined by a distributor, which is MasterCard.

4:45 p.m.

Conservative

The Co-Chair Conservative Michael Chong

But what Sears pays to Whirlpool Corporation is the price of the product without the margin. Sears sets its own margin. It goes into the marketplace and has discount sales to attract customers into its stores.

What Whirlpool will never say to Sears is, you must charge a $150 margin on a $1,000 washing machine. But MasterCard is telling the Bank of Montreal they must charge this intercharge rate, regardless of what the market will bear, and then pass along to MasterCard a separate and distinct fee from the interchange rate.

4:45 p.m.

President, MasterCard Canada

Kevin Stanton

To be clear, we allow issuers and acquirers to come up with bilaterals and we will support them. So they're free to enter into a completely private arrangement, and our technology will support them.

But we're not telling the acquirer, this is what you have to charge; we're saying, this is how much that card transaction will cost. What you mark it up to is entirely up to you, acquirer.

I just want to correct one thing. Interchange is part of a revenue stream; it doesn't determine a margin. An issuer might have to spend that entire revenue stream to cover loan losses, chargeback liability, and rewards benefits. And grace periods are funded out of that as well.

4:45 p.m.

Conservative

The Co-Chair Conservative Michael Chong

Thank you.

4:45 p.m.

Conservative

The Co-Chair Conservative James Rajotte

Thank you, Mr. Chong.

We'll go to Mr. Thibeault.

4:45 p.m.

NDP

Glenn Thibeault NDP Sudbury, ON

Thank you, Mr. Chair.

In terms of the interchange rates that we talked about earlier are indicated on your websites, there is mastercard.com/ca/merchant/en/canic/index.html, but we get into all of this fine print again, and that's where I think the confusing part comes in, because there are no rates posted. What it states there is that:

Merchants interested in learning more about our domestic rates and international Interchange rates are invited to complete this email inquiry form. Once completed, MasterCard will respond explaining applicable Interchange rates within two weeks.

So you have two weeks to respond to a business that wants to know the rates they'll be paying. Can you clarify that for me?

4:45 p.m.

President, MasterCard Canada

Kevin Stanton

Understanding the rate table and the rates that apply to you is an important piece of information as you go and shop for your acquirer contract. Over time, the return time on that will improve. Right now it's a person who has to call the person back and that sort of thing. There is a wide margin of error. Generally speaking, we'll get back to people much sooner than that.

4:45 p.m.

NDP

Glenn Thibeault NDP Sudbury, ON

So then what you're saying is that we can be specific on that and ask about the rates that we're paying, not necessarily posted, as was discussed earlier, like Visa--

4:45 p.m.

President, MasterCard Canada

Kevin Stanton

We used to do that, and then we got complaints that it was confusing: These weren't the rates that necessarily apply to me. How do I use this to shop around for the best rates? Please tell me what rates apply to me. So this protocol was designed to improve that experience for the merchant.

4:45 p.m.

NDP

Glenn Thibeault NDP Sudbury, ON

When I asked my first question, you stated that one can still run a viable business without credit cards. We heard from the restaurant association, from RCC, and from CFIB that in most cases it's over 70% of their customers who are using either MasterCard or Visa. So is it not somewhat misleading, considering the fact that a portion of the interchange fee charged to merchants is for network branding, and that your issuers also pay a marketing fee that's allowing you to aggressively market the card brand to your consumers?

4:45 p.m.

President, MasterCard Canada

Kevin Stanton

That may be a label that another network uses. We have assessments and transaction fees.

4:45 p.m.

NDP

Glenn Thibeault NDP Sudbury, ON

Would you not agree, though, that it's impossible for most merchants to refuse the two cards that control almost 94% of the market, especially since they're continually marketed and distributed to consumers? We've heard about the premium cards, and we see advertisements on television and everywhere you go.