Finance Committee on May 12th, 2009

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

I assume the credit card companies would say that offering these additional reward values causes consumers to do more purchasing. Do you believe that's true?

[The Co-Chair, Conservative, Michael Chong]

Ms. Chayer.

[Danielle Chayer]

In actual fact, I don't believe that anyone will rent a suite at a hotel and pay $300 more a night in order to get bonus points. Everyone stays within a budget. People won't buy more in order to get points. In addition, consumers don't know that it's the merchant who's paying for the gifts they're given. They think it's the company that's giving them gifts. When we ask our friends whether they know that it's the merchant who pays when they use a particular credit card, no one knows that. That's also part of this transparency.

[The Co-Chair, Conservative, Michael Chong]

Thank you, Ms. Chayer.

Ms. Coady.

[Siobhan Coady, Liberal, St. John's South—Mount Pearl, NL]

Thank you very much.

First of all, allow me to say thank you to all of you for appearing here today. It takes a lot of time and attention away from other matters, and I certainly appreciate it. I thank you, as well, Ms. O'Reilly, for coming all the way from St. John's, Newfoundland, to visit us today. Thank you very much. I know the time and attention is important, and thank you for all your briefing notes.

I also want to compliment you on bringing so many industry organizations together on this very important issue. It shows the magnitude of the difficulty you are having in this particular issue, and I appreciate that. Because it did raise all kinds of red flags—I know when industry associations try to bring together a diverse group, it certainly is important.

I have a lot of questions and I want to try to take them systematically, but sometimes it won't make sense until the end of it.

First of all, I think in my notes I understand that interchange fees in Canada are higher than in other countries, leaving out Australia, because we know why they're lower in Australia. Am I to understand they're higher than in the United States, and can someone offer an answer as to why that would be the case?

[The Co-Chair, Conservative, Michael Chong]

Madame Brisebois, allez-vous.

[Diane Brisebois]

In fact, no one knows the reason. It also obviously supports the argument that there's no correlation between the service provided and the cost charged to the merchant.

[Siobhan Coady, Liberal, St. John's South—Mount Pearl, NL]

It was an interesting chart when I reviewed it, that the United States would be indeed lower than Canada.

Another quick question is on the charge of interchange on HST. Is that correct, that your interchange fee is on your HST as well?

[A witness]

Yes.

[Siobhan Coady, Liberal, St. John's South—Mount Pearl, NL]

Okay. I thought those were two interesting questions.

This is an agreement between businesses. I think it's a challenge to all of us when you're talking about a business-to-business agreement, so I'm going to ask you a couple of questions about the business-to-business agreement itself.

I'm going to use Visa as an example because I know they have a multi-tiered rate on their new interchange rates. I understand their interchange rates had changed approximately a year ago. Did they advise you that they were changing their interchange to a tiered level, and did they give you a rationale for that?

[The Co-Chair, Conservative, Michael Chong]

Mr. Taylor.

[Justin Taylor]

They did advise the association that they would be changing the tiers. What they didn't advise us was how many cardholders they were moving over to those more expensive cards. So there was some warning given that they were considering a change in structure, but as Madame Brisebois said, initially, when we were reviewing these changes, it didn't seem to be as huge as this.

[Siobhan Coady, Liberal, St. John's South—Mount Pearl, NL]

So no red flags went up. You saw the tiers, a separate tier for gas stations and separate tiers for different ones, and there were no real red flags at that point, until you had this other perfect storm happening, when people were starting to move to this new Infinite card, the higher-priced....

I think Ms. O'Reilly has a point.

[Brenda O'Reilly]

The thing is it started last April and it just gradually got worse. I will gladly provide you with my statements for the past year to show how it has progressed—so much so that most recently, in the last month I have here in front of me, one of the cards I process cost me 3.66%. So it's gone from being 1.64 plus 30¢ or 20¢ or 50¢, depending on the card, to 1.64 plus 2.02.

So it's getting progressively worse and worse, and it's not explained to you how it's done here. It's sort of, “there's your base rate, but here's this other one”—but it's on top of the base rate, which a lot of people probably wouldn't realize. They think the card is pretty cheap, because they don't realize that it's actually on the base rate that you've already negotiated.

I will gladly provide my merchant agreements for the committee, so you can read through them.

[The Co-Chair, Conservative, Michael Chong]

Thank you, Madam O'Reilly.

Madam Brisebois, and then Madam Swift.

[Diane Brisebois]

Thank you.

In fact, I want to echo a comment that Catherine made a bit earlier on to Ms. Coady's excellent question.

The problem is that for merchants, not only are they dealing with this interchange fee that Visa and MasterCard have published, but they are also dealing with an assessment fee. They're dealing with a foreign card fee and then some of the processors, the acquirers. We really hope—this is where I'm getting to Catherine's comment—that this committee urges the different players in the supply chain to appear before this committee. There are a lot of processors that are also taking advantage of small businesses by adding even more charges, which end up on a bill where you're showing a 3.35% interchange. It's not an interchange fee; it's a discount merchant rate.

[The Co-Chair, Conservative, Michael Chong]

Thank you, Madam Brisebois.

Madam Swift.

[Catherine Swift]

Something we haven't even touched on yet is that there is also the introduction of different kinds of transactions--qualified transactions, non-qualified transactions--and they attract different charges. A qualified transaction typically is one where the customer is standing in front of you, swipes the card, the card is physically present and so on. We've actually heard of semi-qualified transactions. Anyway, it's another layer of confusion being laid on here.

To give you an example, a business card, like a corporate card, would be a non-qualified transaction. An Internet transaction.... We mentioned earlier that you can't use cash on the Internet. That's one thing we know we need some kind of plastic for. Of course, an Internet or even a phone transaction is viewed as non-qualified. It does make sense because there's more likelihood of fraud. The person is not physically standing in front of you with a card.

I just wanted to mention that we haven't even touched on the different transaction types that are also proliferating.

[The Co-Chair, Conservative, Michael Chong]

Thank you, Madam Swift.

We'll go to Mr. Rajotte now. He has some questions for the witnesses.

[James Rajotte, Conservative, Edmonton—Leduc, AB]

Thank you all for coming in today.

I'm trying to understand this model. It reminds me of the voyage that Dan McTeague and I took through gasoline pricing and the Competition Act.

It's three for three here, Dan.

We do have a model, and the researchers have very helpfully identified the relationships among the merchant, the payment processer or the credit card company, the card issuer, and the cardholder.

I think where Ms. Coady was going next was the difference between the merchant discount rate and the interchange rate cost. If we can get someone to just identify.... What proportion of the merchant discount rate typically is the interchange rate? I think that's where she was going.

Madam Brisebois, do you want to answer that?

[Diane Brisebois]

Thank you.

Well over two-thirds of the discount merchant rate is comprised of the interchange. The larger amount is usually the interchange, or what I would call the Visa or MasterCard rates, which would include interchange, their assessment fee, and any other fee they charge where you cannot negotiate. The rest, which is less than one-third, would be where the processor would negotiate with the merchant.

[James Rajotte, Conservative, Edmonton—Leduc, AB]

That's negotiated directly between the processor and the merchant.

[Diane Brisebois]

The only negotiation the merchant can make is on the processing fee and not on the fees charged by Visa and MasterCard.

[James Rajotte, Conservative, Edmonton—Leduc, AB]

The interchange rate, as you've mentioned, is different according to what they call “baskets”, but those different baskets are set by Visa and MasterCard and they are not negotiable. Is that correct?

[Diane Brisebois]

That is correct.