Finance Committee on March 22nd, 2007

[Mike Wallace, Conservative, Burlington, ON]

Thank you, Mr. Chairman.

[The Chair, Conservative, Brian Pallister]

You're most welcome, Mr. Wallace.

We continue now with the section on the Canadian Payments Association. From the Canadian Payments Association, we have president and chief executive officer, Guy Legault.

Monsieur Legault, I will give you an indication when you have a minute remaining, but I now give you five minutes to make your introductory presentation, sir.

Welcome. Proceed.

[Guy Legault, President and Chief Executive Officer, Canadian Payments Association]

Thank you, Mr. Chairman.

Before I begin, I'd like to thank you for having given us this opportunity to appear before the House of Commons Standing Committee on Finance in order to discuss the CPA and the process involved in bill paying.

I'd like to introduce my colleagues, they are Mr. Doug Kreviazuk, who is our Vice-President, Policy and Research, and Ms. Barbara Ciarniello, Associate Vice-President, delegate of the Credit Union Central of British Columbia.

In coming before you today, I know you have many questions about how bill payments operate in this country and specifically why the process is not instantaneous, particularly in light of all the automation we see today in the banking and payments arena.

The reality is that other than cash, there are no real payment options in the marketplace that are truly instantaneous. Although some provide the appearance of real-time payment and settlement, this appearance is generally in the eyes of the consumer and is not necessarily from the biller or merchant.

The short answer is this. Moving payments and the related billing information from a consumer to the biller requires a number of sequential steps, each of which relies on a separate system. Further, the delivery route and mode may vary considerably among billers and depends on a number of factors, such as how the consumer initiated the payment and the technical capabilities of the biller.

While the process of initiating a bill payment electronically is both quick and convenient for the consumer, there's a complex web of arrangements behind the scene to ultimately make it happen. The CPA plays an integral role in most instances, as it operates the national clearing and settlement system through which many of these payments will be exchanged among financial institutions. In essence, our role could be seen as the central link in a chain, with other links both before and after our links that are operated and managed by other parties.

First, I would like to walk you through the life cycle of a bill payment. Although alternative clearing arrangements exist outside the CPA for bill payments, my comments will focus solely on the case where the payment is processed via CPA systems and rules.

Indeed, today there is no online, real-time, end-to-end processing to support the payment of a bill. By end to end, I mean from the point that a consumer initiates the payment instruction to the time a biller updates the consumer's account to reflect the payment. In fact, most consumer bill payments or the information respecting the bill payment must go through four unrelated systems, as indicated in our submission.

First, let's say a consumer decides to pay a utility bill online. He or she logs on to the financial institution website, selects the bill to be paid, and initiates the transaction. To the consumer, this looks like it is seamless and fully integrated, but it is not.

You instruct your financial institution or FI to send the payment. This is the first system connecting you to your FI.

Then your FI takes the instruction, along with all the others for the day, and batches them in a particular electronic file format that is sent across the CPA clearing system to the FI for the utility company. This is the second system.

Each day there are specific cut-off times that FIs must adhere to when delivering this information. Once the utility company's FI has received the files, they aggregate the payments to the utility company received from all the other FIs on that particular day and credit the account of the utility company for the total amount received. This is the third system.

To complete the fourth step, the utility company will need the detailed data pertaining to each customer who has made a payment on that day so that the biller is able to assign the appropriate credits to the individual accounts.

Depending on the biller's technical capabilities, receiving the data from the various FIs may take several forms. While the most efficient system for delivering this information is electronic data interchange, EDI, many billers in Canada have not adopted this technology, in part due to cost and complexity.

Non-EDI billers receive the details of each payment in the format specifically requested by that biller, for example, by fax or e-mail. In most of these cases, the biller is not able to use an automated process to transfer the information into the accounts receivable system. Where a manual process is involved, this would likely extend the time required by the biller to update the individual customer account. There is a time-in-transit period that must be considered.

As part of our strategic planning for 2006, we'd already considered examining the provisions of the frameworks for bill payments.

When we met with you last time, we'd also indicated that we intended to begin a consultation. In order to support this commitment, we will soon be establishing a task force composed of representatives of member financial institutions and stakeholders who will analyze the current issues and recommend improvements. We will also prepare a public consultation document for you and later, we will hold a series of round table discussions including stakeholders as well as members of financial institutions.

Since some of the current challenges of the bill payment environment go beyond the scope of action of the CPA, the implementation of solutions will have to be done in cooperation and with commitment from various stakeholders within the industry. To succeed, the participation of bill payment service providers and billers will be essential. Your support for this initiative is therefore important and will enable us to put greater emphasis on this review.

I thank you for your time. We remain at your disposal to answer your questions.

[The Chair, Conservative, Brian Pallister]

Merci beaucoup, monsieur.

We will continue now with some questions, beginning with Mr. McKay.

Six minutes, Mr. McKay.

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

Thank you, Chair.

And thank you for the presentation.

I think the problem of the clearance system is that you're being hoisted by your own petard. What you appear to have is an instant system when in fact you don't have an instant system. As you properly described, it goes from a bank account to a batching system to another batching system and to the creditor, and frequently it is a two- or three- or four-day process.

Your entire system is based upon the notion of cheque clearances and things of that nature, just as everybody did in the old days. What I see as the problem is that you, in some respects, have sold Canadians an illusion. I'm not criticizing you personally, but the financial system. You've sold Canadians an illusion, because when I am sitting at my computer paying my bills online, doing my own batching, if you will, I'm thinking that when I see the money removed from my account—and therefore inaccessible to me—I have somehow or another paid my VISA bill, when in fact I haven't paid my VISA bill. I'm not going to be able to pay my VISA bill for two days, or some such time.

What I see as the problem, Mr. Legault, is that this is simply a failure of coding, if you will. And here I use VISA as an example of a large creditor that receives money daily—in fact, hourly, or every minute—in saying that, really, the coding of my VISA card on my computer could be set up so that when the money came out of my bank, it really went instantaneously around, or through, the batching system. You could code this on my computer so that could happen.

Is that technologically possible, is my first question? And if it is technologically possible, is this simply a failure of will, if you will, or a lack of intention to put resources into a system that could make what appears to be instant in fact instant?

[Guy Legault]

I'll start with the first question on the technical possibility.

First of all, you have to realize that the clearing and settlement portion basically takes a day. I could ask my colleagues for more details on this, but basically if you do it within the cut-off time, the next day the clearing and settlement will have occurred already. Now if you talk specifically of a credit card, that's one issue. If you talk of other billers, as you can imagine, there are also other systems that need to be put in place. When you talk about credit cards, again, we don't deal specifically with credit cards per se, because there are different ways that credit cards can be paid, but as I said, it could be done for the next day. We cannot talk on behalf of credit card companies, but our understanding is that most of them can in fact give you credit fairly quickly for the payment of your account.

Now is it a failure of will or not? It seems to me that it's not a question of failure of will, because I think it does occur within that period of time for most payments. And when you look at some of the credit cards, again, most of the transactions are done under one of our rules, which we referred to last time, whereby they give you credit for the date of the payment.

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

But it seems to me that it's a whole bunch of little rules here and there, in that I may fully pay my VISA bill online today, but VISA in fact doesn't receive the money for two days, or for one day, or whatever it is. So in VISA's mind—if there is a mind of VISA—I'm in arrears, and then you have a whole bunch of little rules that say, no, no, he really did pay it on time, but it's just that we didn't get the money to you on time.

Now in my case, living in a relatively affluent environment, that's not a major problem, but for people who live on the edge of credit, shall we say, not having this paid when they go to their friendly store is a big issue. And for VISA it's a huge issue, because in VISA's mind, this isn't paid, this is an outstanding account, and therefore credit can't be extended. I think for the purposes of merchants, speeding this entire system up.... I'm not just speaking from the consumer's standpoint, but also from the merchant's. Speeding it up electronically is in fact almost a necessity.

[Doug Kreviazuk, Vice-President, Policy and Research, Canadian Payments Association]

If I may, just to supplement Mr. Legault's comment, with regard to the credit card systems, essentially there are three ways in which credit card statements at the end of the month can be paid. Many Canadians bank with a single financial institution. They also take a credit card from that financial institution. At the end of the month, when you're paying your bill, we call that transfer “on us” because it's all within the financial institution.

In the discussions leading up to this meeting here today we spoke to many of our financial institutions, and we were assured that in the majority of those cases credit to that credit card statement is made the same day. For the balance of the VISA statements that Canadians must pay off at the end of each month, the majority that we're aware of are cleared and settled through the rules that we have called “H6”. The requirement under that rule is that the biller, and in this case VISA, will value-date the payment on the payment date. So if they utilize our rule and clear and settle through our systems, they will receive payment on the date the payment is made, so long as it's not very late in the evening. Each financial institution is somewhat different.

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

Am I out of time?

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you.

Merci, monsieur McKay. It's over six minutes.

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

It's scandalous.

[Le vice-président, Liberal, Massimo Pacetti]

Mr. Paquette, you have six minutes.

And then we have Mr. Wallace and Ms. Wasylycia-Leis.

[Pierre Paquette, Bloc, Joliette, QC]

To begin with, I would like you to remind us exactly who is part of the Canadian Payments Association and how it works.

[Guy Legault]

All financial institutions in Canada who make deposits are members of our association. That includes the banks, the caisses populaires, the credit unions as well as other members, such as the Bank of Canada, for example.

[Pierre Paquette, Bloc, Joliette, QC]

Now with regard to credit cards, when the banks agreed to establish that consumer liability would be limited to $50, did that decision involve your association?

[Doug Kreviazuk]

No, it does not.

May I ask for clarification? Are you referring to the indemnity, the liability portion?

[Pierre Paquette, Bloc, Joliette, QC]

I was wondering if the fact that the consumer's liability, in the case of fraudulent use of a credit card is limited to $50 had been the subject of negotiation between the—

[Doug Kreviazuk]

No.

[Pierre Paquette, Bloc, Joliette, QC]

I know that that's not part of any legislation. Do you know if that $50 amount was negotiated?

[Doug Kreviazuk]

That's a matter between the issuing financial institutions of VISA and VISA. It does not involve the CPA, and we were not involved in any of those discussions.

[Pierre Paquette, Bloc, Joliette, QC]

Let's talk about electronic payments. Don't you think there should be a limit on consumer liability when there is fraudulent use of a debit card, for example?

[Doug Kreviazuk]

Within the CPA we have a number of rules that afford consumers recourse. In the case of bill payments, once the consumer has made a payment to a utility company, it cannot be reversed. But in those cases, it's unlikely that a fraudulent transaction will be made in order to pay my bill. I'd like it, but I doubt it would happen.

In the case of, particularly, pre-authorized debits, the consumer is afforded a 90-day recourse in the event there's either an erroneous or a fraudulent transaction to their account.

[Pierre Paquette, Bloc, Joliette, QC]

Many people feel that there is a multitude of rules in Canada. We were reminded of that. There is less surveillance of electronic payments in Canada than in the United States. Is that the case? What do they do in the States that Canada does not do with regard to electronic payments?

[Doug Kreviazuk]

With respect to the clearing and settlement of transactions between financial institutions, essentially the rules that are promulgated by the CPA mirror the rules of the ACH systems. So from a processing perspective, our rules mirror one another, although the technologies are somewhat different. The United States does, however, have a base of law dealing with e-funds, transfers, and Regulation E, which is more in their line of consumer protection.

[Pierre Paquette, Bloc, Joliette, QC]

Can I share my time with my friend?