Finance Committee on May 14th, 2009

[Bill Sheedy]

It's a difficult question, because we've been at this for fifty years. We've built what we think is a wonderful brand, invested billions of dollars, and have 30 million merchants that accept Visa globally. Do I think someone can come along and replicate that quickly? No, but there are a couple of things that I want to point out.

We do see new entrants in our business all the time. PayPal had almost no position five years ago; now it has almost 5% of the e-commerce business on the Internet. They've done a wonderful job and have challenged the way we think about innovation and investment in that channel. Likewise, MasterCard, American Express, and domestic debit schemes such as Interac are vigorous and challenging competitors that keep us on our toes.

The thing that I think gets lost sometimes in our business model is that when you think about interchange, it is a flow from an acquiring financial institution to an issuing financial institution, but it's not just one issuing financial institution. The same revenue steam goes to multiple financial institutions, and even though all the cards may be branded “Visa” in our system, they're all competing with one another for the consumer's business. Through that competition, the consumer wins in lower fees and better features. So we think the competition that sits within the network and across all the banks is healthy, and we do see new entrants that change the way we think about payments and change the way consumers value payments.

[Maxime Bernier, Conservative, Beauce, QC]

The fact that you hold such a significant market share is to your advantage, because you have responded to consumer needs. You served consumers to maintain their loyalty. You are competing with other companies, but you are also competing with other substitute products, such as cash payment. I commend you on your business model, because you do indeed respond to a need among Canadians.

I would like to ask you about interchange fees. Are they a fee for using debit cards?

[Tim Wilson]

There will be an interchange fee on debit transactions in Canada, and again, we've disclosed what those fees will be on our website. It's a combination of fixed and variable rates.

[Maxime Bernier, Conservative, Beauce, QC]

Is your desire to enter the debit card market part of your business plan? Is that an organizational decision you made? Do you plan on doing this over the coming months or would you need a regulatory authorization to do so?

[Tim Wilson]

We don't, as we understand it, need regulatory authorization to enter the debit market; in fact, we've been trying to do that for almost a decade now. We didn't have the right interchange pricing to make it an attractive product for either merchants or the banks that issued cards before. We didn't have a product design that was appealing to them, so we were never successful. It was only over the past year that we developed a product and a value proposition that has appeal, we think, to both merchants and the banks that issue the cards.

[The Co-Chair, Conservative, James Rajotte]

You have 30 seconds left.

[Maxime Bernier, Conservative, Beauce, QC]

If my colleagues and I have understood correctly, there is no code of conduct within the industry. Earlier, you said it is somewhat unfortunate for you to have to be here, to come before committee members in order to meet your clients' needs. Your company wants to both make a profit and satisfy consumers. I think this is not the appropriate forum to meet the needs of consumers.

[The Co-Chair, Conservative, James Rajotte]

Your question, please.

[The Hon. Maxime Bernier]

Will your industry soon have a code of ethics?

[The Co-Chair, Conservative, James Rajotte]

Go ahead, very briefly.

[Bill Sheedy]

There are a couple of things.

My comments earlier were referring to the challenges with the merchant community. I think you've heard from merchants that are not pleased, and we do think that's a problem. We think the consumers, the cardholders, that you refer to in your question are very pleased with the way their cards work at the point of sale. There are clearly some challenges that the industry is going through with credit losses. I think that issue is being addressed.

I do think that the industry can do better, but I think that's something the banks will handle, and it will improve.

[The Co-Chair, Conservative, James Rajotte]

Thank you.

We'll go to Mr. McKay, please.

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

This is actually “Mr. McKeague”—we're going to split the time.

Mr. Laforest and I have been trying to figure out profit here. You have been playing a noble game of dodge ball. But you also said something quite interesting--that you see it as sort of a North American market. Does that mean Canadians are effectively paying for the financial train wreck down in the United States?

[Bill Sheedy]

No.

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

So you must separate the two.

[Bill Sheedy]

First of all, we are a payments network. We don't take credit risk. Many of our banks are having challenges in the U.S. and elsewhere, but the investments we have made in Canada have increased with the restructuring and going public, and there is no cross-subsidization.

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

But Americans generally carry higher balances on their cards and default more frequently. Somehow that has to wash through your profit margins, and indirectly we end up paying for credit excesses in the U.S.

[Bill Sheedy]

I think I understand the confusion.

The revenue streams that we as a company earn are for transactions that come over the network. The difficulty around credit quality and balances on cards is a matter for the banks and really has nothing to do with the way Visa operates in the U.S. or in Canada.

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

My final question has to do with the features you keep talking about. You should try to book an Aeroplan ticket some time. The last one we booked was two weeks ago, and it took my wife three hours.

Anyway, I'll pass it over to Mr. McTeague.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

That's why I drive. But as I'm driving, I'm going to run into a lot of merchants along the way who are going to tell me that despite what you've just said about low-cost fees, the reality is that fewer and fewer of those cards are being distributed as you indiscriminately provide opportunities for people to receive rewards on the higher-premium, Infinite-type cards.

You say the merchants are coming to you, and I appreciate that you've talked to the RCC and a whole host of others, and you've taken a more diplomatic and high-road approach. But it almost sounds as if you might want to revisit the record.

Interchange fees are on the way up for merchants as a result of that new card being chosen by more and more—advocated by you and the banks. The merchant ultimately has to pay. I'm looking at the example of Giant Tiger, which came before the committee--0% to 30% in the span of a year and a half. I'm looking at small independents that can't afford them, especially when the price of gasoline goes up, and are very concerned about this.

Can you be specific about this? Do you not acknowledge that interchange fees, which you are responsible for, are heading up and having a devastating impact on merchants and ultimately consumers, who wind up paying for this at the grocery store, as an example?

[Bill Sheedy]

Since you directed the question to me, I'll start. I'm sure my colleague can add even more specifics.

We absolutely have seen an increase in business on Visa Infinite and rewards-based cards. We've testified that there are higher interchange rates. They are one-fifth higher, so they're 20 basis points higher than our core credit product. But we've also testified that as we saw that trend develop—and it's in less than 10% of our accounts in Canada—and introduced slightly higher interchange rates on Visa Infinite, we also lowered interchange rates elsewhere. So across the Visa system in Canada the rates have been flat at 1.6%.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

But that's the concern I have. You're lowering it on cards that people no longer use, that are no longer distributed. In other words, people are choosing to use the better, higher-reward cards, and merchants have no idea they're being used. You know there's been a drop in those numbers, and your so-called core rate is irrelevant because it's disappearing rapidly.

[Bill Sheedy]

Thank you for the clarification. I should have made it more clear in my response.

The 1.6% I'm referring to is a weighted average number. It's not off the rates sheet; it's based on usage. It's all the rates times the volume, and it reflects all the volume shifts we've referred to in this testimony.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Thank you, Mr. Sheedy.

Thank you, Chair.

[The Co-Chair, Conservative, James Rajotte]

Thank you, Mr. McTeague.

We'll go to Mr. Lake.