Thank you, Tim.
First let me provide some background on Visa.
Visa's fundamental role is to facilitate financial transactions between consumers and businesses. We are not a bank or a financial institution. We do not issue cards, make loans, or set rates and fees associated with card usage or acceptance. That's the domain of the Visa financial institution clients. Instead, think of Visa as a network for commerce.
In facilitating transactions, Visa connects 1.7 billion cards to 30 million merchants in 16,600 banks worldwide securely and reliably every second of every day. In making these connections, Visa creates value for all of the systems' participants. Cardholders receive a more convenient, secure, and widely accepted way to make payments. Retailers benefit from the speed, efficiency, reliability, and guaranteed payment that only electronic payments can bring. They also have the ability to take payment from any Visa cardholder regardless of their home country.
Today Visa operates in a highly competitive environment. There is robust competition between the payment types and various local and global networks well beyond credit cards. We also compete with an array of existing and emerging competitors, including cash, cheque, pre-authorized debits, Interac, retail-issued credit, PayPal, and higher-cost competitors such as American Express.
Retailers have also benefited greatly from billions of dollars in infrastructure investment that has increased security on business transactions. Other benefits to merchants include guaranteed payment, innovations like contactless cards that speed transactions, and improved access to international customers. Small businesses in particular benefit from the Visa system, in that they can compete on a more level playing field with large retailers. Small businesses can also dedicate their capital toward their businesses, as opposed to having to dedicate capital toward payment products.
Consumers benefit from payment choices such as credit or prepaid, the convenience of fast checkout, global acceptance, rewards, 24-hour customer service, and enhanced security protections such as zero liability and purchase protection. Consumers can obtain cards from financial institutions that meet their needs--from small local credit unions or large multinational banks--with the assurance that every Visa card will afford them the same security, protection, and access to global acceptance regardless of who issued it.
Visa uses a mechanism called interchange to maximize the benefits of the system, encourage participation in innovation, and ensure that the economics are appropriately balanced. Interchange makes the system run. It's the small amount of money retailers pay a cardholder's bank for every transaction. In part, interchange compensates the cardholder's bank for the value they provide to merchants and acquirers, and it motivates the cardholder bank to bring cardholders into the system. By helping balance the economics of the system, interchange is an effective incentive for banks to participate. It encourages investments in innovations that deliver consumer benefits like new products, rewards, and enhancements, while encouraging merchants to accept cards.
Visa's interest in setting interchange fees is to maintain the balance of the system. If interchange rates are set too high, merchants will stop accepting cards. If interchange rates are set too low, issuers will go uncompensated for the value they deliver to their cardholders, and the features that attract cardholders will be diminished. This in turn reduces cardholder participation and the value of Visa to merchants.
When setting rates, Visa considers a host of factors and sets rates to help promote overall system growth and growth in specific payment segments, and to reflect the value delivered to retailers and cardholders by payment type.
With that context in place, I'd like to address a few points about interchange and acceptance costs.
First, interchange is not the price a retailer pays to accept electronic payments. Retailers pay a merchant discount, and that rate is set by their acquiring bank or payment processor.
Importantly, interchange is not a Visa revenue stream. Visa's only goal is to set rates that maximize system participation from banks, cardholders, and merchants. Interchange rates paid by acquirers may vary based on type of card used, type of transaction, or type of retailer.
In 2008, Visa Canada introduced a change to its interchange structure that resulted in some transactions attracting a higher interchange rate and others attracting a lower rate. This was the first fundamental change we introduced to our rate structure in Canada in 30 years, and we provided more than a year's notice to our clients.
The overall effect of the change was neutral for the system, and Visa Canada's effective interchange rate has remained relatively flat for some time, at approximately 1.6%. Interchange rates in Canada are fully transparent and available on our website.
Some retailers argue that government intervention of interchange is needed. Visa believes that these attempts are not only wrong but are also harmful to consumers and other system participants, as I'm sure we'll discuss. The regulatory intervention sought by the retail lobby would unfairly pass merchant business expenses on to consumers. Such government intervention would result in fewer payment choices, a reduction in benefits for consumers, and possibly higher costs for consumers in their monthly statements or at the checkout counter.
This scenario has been tested in Australia, with harmful and unintended consequences for all parties. In Australia, where caps on interchange yields were imposed with the intention that the price of goods would go down, consumers have not seen the savings. What they have seen are fewer rewards and other benefits from their payment cards, along with the higher costs associated with surcharging at the checkout counter.
In addition, issuance of American Express cards increased because American Express was not subject to the same regulation as Visa and MasterCard. Not only did this create an unlevel playing field between American Express, Visa, and MasterCard, but ironically it resulted in more higher-cost American Express cards being used for payment at retailers. Government intervention in interchange is not the standard elsewhere in the world and should not be so in Canada.