Thank you, Mr. Chairman.
Good afternoon, everyone.
This is a very important opportunity for MasterCard, so we thank the joint committee for inviting us.
We thank you for the opportunity to be heard before this committee. Through our discussions on this topic, we have realized that the value of the payments industry and its economic impact is largely misunderstood. We have also realized that the likely negative impact of proposed price controls to consumers has been ignored.
In Canada, MasterCard and other electronic payment providers facilitate over half a trillion dollars of commerce flawlessly each year. They operate in a highly competitive environment that offers a host of payment alternatives to merchants and consumers.
We believe Canada's current regulatory framework safeguards the interests of all participants and that direct regulatory price controls will suppress innovation, reduce competition, and harm consumers.
MasterCard believes that government promotion of market forces over monopoly in Canada's debit system will ensure that consumers and merchants benefit from choice, price competition, innovation, and international reach.
Finally, we believe that Canada's credit card systems are well balanced and managed to maximize their value to merchants, cardholders, and the Canadian economy as a whole. However, there is always room for improvement. Through this process we have identified specific market responses that would address merchant concerns without harming consumers.
Retail lobbyists are advocating for price controls that have hurt consumers elsewhere. MasterCard believes that it is time for consumers to understand the harm that has happened in Australia when that country introduced the kind of price controls now being advocated by the global retail lobby represented in Canada by the Retail Council.
When the Reserve Bank of Australia adopted price controls in 2003, it expected that the savings would be passed on to consumers in the form of lower prices. But nearly six years later, there is no evidence that prices came down.
Price controls did reduce interchange revenues to credit card issuers, but that, in turn, forced reductions in credit card features and benefits. Interest rates, which had been subsidized by interchange revenue streams before the RBA price controls, had to be increased for issuers to operate their credit card portfolios within prudent banking guidelines. For similar reasons, grace periods had to be shortened.
RBA price controls reduced competition. Under the new economics, only issuers with sufficient scale could operate profitably, leaving niche providers and new entrants with no choice but to vacate the field. This is an important consideration in Canada, where new entrants and innovative issuers have led to unparalleled price and feature competition. The RBA price controls did not apply to American Express. This was inexplicable, as it transferred considerable advantage to the most expensive merchant proposition in Australia. In fact, we believe that a fulsome review of credit and debit cards in Canada must include American Express.
Government interchange regulation is not the standard elsewhere in the world. Australia is the only country even remotely comparable to Canada that has regulated interchange. It has been a disaster for consumers and a textbook example of unintended consequences.
Now I'd like to address some of the commentary about our entry into the debit arena in Canada. The same special interest groups that seek to impose price controls that will harm consumers are asking the government to suppress competition in debit.
MasterCard's debit proposition in Canada is called Maestro. Maestro is a PIN-based, real-time debit offering that works just like Interac. However, Maestro delivers more value to consumers and merchants than Interac through enhanced security, greater network reliability, and international reach.
For the record, and to officially clear up any confusion on this point, Maestro has a flat fee to merchants, and that flat fee is substantially lower than Interac's. MasterCard sees an opportunity to engender merchant demand and loyalty by offering a lower-cost, more reliable, and more valuable debit product in Canada. When Interac raised its fees by 60% this February, MasterCard chose not to. That's one of the benefits of competition.
MasterCard operates in a highly competitive environment and works hard to earn merchant and consumer loyalty as they consider the payment alternatives available to them. These include cash, cheque, Interac, Visa, American Express, retail store cards, pre-authorized debit, and most recently, unregulated web-based payments like PayPal.
Allegations of duopoly are untrue and ignore the high degree of competition in Canadian payments. That competition requires MasterCard and its financial institution customers to labour to retain and increase acceptance and usage by providing compelling and tangible benefits to both merchants and consumers. As a result, while neither consumers nor merchants are required to use or accept MasterCard, an increasing number choose to do so.
For merchants, these benefits include a payment guarantee, increased sales, improved efficiency, increased safety, billions of dollars in infrastructure investment, innovation, speedier check-out, and easy access to international customers. For merchants who prefer the cost structure of cash but want to reap the benefits of accepting credit cards, MasterCard has always allowed merchants to offer and advertise discounts for cash.
For small businesses in particular, the MasterCard system helps level the playing field. It provides lower rates than would likely result from one-on-one negotiations for access to the purchasing power of credit card holders, and an intra-system competition that allows them to shop around for the best merchant processing deal. These efficiencies are further enhanced by the collective credit card acceptance arrangements offered by merchant associations.
For consumers, increased usage is earned through zero liability, global acceptance, grace periods, intra-system competition, chargeback protection, and the very rewards and benefits that are threatened by the price controls proposed by the retail lobby.
Interchange is determined by MasterCard—not by issuers or acquirers. Interchange makes up a part of the fee paid by a merchant for card acceptance, but ultimately that price is determined by negotiations with their acquirer. Interchange is not MasterCard revenue, and consumers most certainly do not pay interchange more than they pay any other operational fees directly.
MasterCard continuously assesses the value that it delivers to merchants and, in that context, recently reduced interchange in several merchant categories. We also determined that we were at a disadvantage among affluent, rewards-driven cardholders, with American Express and Visa having the majority. For that reason, we introduced premium card programs that represent about 5% of our cardholders, while still being priced lower than American Express.
Finally, to make MasterCard more competitive in the small-purchase category, we dropped rates to compete with cash and debit by eliminating minimum fees.
Overall we moved from three rates to nineteen. Our highest interchange rate went from 2% to 2.13%, and our lowest effective interchange rate was reduced from 1.45% to 1.21%. All these adjustments were the first in seven years, and our rates remain below those of other developed markets and often well below flat-fee equivalents like that of Interac.
At heart, this issue involves a commercial dispute in the private sector. It is unfortunate that lobbyists called for government regulation as a matter of first instance, before providing any recommendations directly to MasterCard. When the RCC and CFIB launched their campaigns in September, I personally invited both organizations to meet with us to discuss their concerns on the very same day. When we met with the CFIB, we had a frank discussion, but they made no specific requests. However, they have since made several recommendations to the Senate banking committee, and many of them are in areas where we can work together.
Since then, we have met with the CFIB and put forth specific proposals that address small-merchant concerns without harming consumers. We have reiterated our invitation to the RCC, and they have confirmed their availability for a meeting in June.
MasterCard believes Canada's current regulatory framework is sufficiently robust to ensure competition in payments, and that price controls will result in consumer harm. We also believe the system always benefits from greater transparency and education. In that respect, MasterCard recognizes that we have a role to play. We pioneered web-based disclosure of our interchange rates and have recently improved this program by providing customized reports to merchants that enable them to shop around for the best acquirer deal. We are currently developing model disclosures, merchant education materials, and an online cost-benefit calculator designed to help merchants understand whether credit cards deliver sufficient benefit to them to outweigh their cost.
We believe that Canada has one of the strongest financial systems in the world. Credit cards are an important part of that system, providing one of the few credit delivery mechanisms that remains reliable, despite the current economic crisis. We understand that this system is simple on its surface, allowing you to exercise your purchasing power across the street and around the world. But that simplicity is underpinned by a sophisticated infrastructure that requires continuous investment, innovation, and balance.
Therefore, we thank you for the opportunity to participate in this process. I look forward to your questions.
Merci. Thank you.
