Evidence of meeting #28 for Finance in the 40th Parliament, 2nd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was merchants.
A recording is available from Parliament.
President, MasterCard Canada
We make money when you spend money, not when you borrow money.
Conservative
Mike Wallace Conservative Burlington, ON
It's when we spend money, because you make a transactional fee every single time.
Conservative
Mike Wallace Conservative Burlington, ON
Didn't you mention earlier that you went to 19 different...? How is that simpler?
President, MasterCard Canada
I didn't say it was simpler. There's going to be a variable value delivered to different merchants. For example, a gas station isn't going to experience the same increased sales that another merchant might. So we lowered the rate to recognize that there is a finite limit on the amount our card can produce in terms of increased sales. That required more rates. But for any given merchant, there are only three consumer card rates.
Conservative
Mike Wallace Conservative Burlington, ON
Okay. So when I get my bill from MasterCard—we'll use you as an example—the interest rate that's being charged there has nothing to do with you, you're telling me. That's what the bank has decided to charge on the cost of money that's being borrowed. Is that correct?
President, MasterCard Canada
We have nothing to do with the price setting--including interest--charged to cardholders, and we don't have anything to do with the price setting that acquirers charge to merchants.
Conservative
Mike Wallace Conservative Burlington, ON
Disclosure is an interest of mine. I'll just use an example. When I get my mortgage statement, it tells me how much interest I'm paying and how much of the principal I'm paying. I don't get that when I get my Visa card bill or my MasterCard bill. It gives your monthly fee.
Do you set the formula that tells me how that monthly fee is calculated, or does the bank set that?
President, MasterCard Canada
The bank does it in compliance with the laws of Canada.
Conservative
Mike Wallace Conservative Burlington, ON
Those are the present laws. That's what you're saying. Those are the issues. So—
Conservative
Mike Wallace Conservative Burlington, ON
Okay. In terms of the law.... You're talking about an update to what needs to be disclosed. Is that a change that you've done voluntarily or has that happened through government regulation?
President, MasterCard Canada
We worked with the FCAC voluntarily to produce model disclosures and simplified language for that purpose.
Conservative
Mike Wallace Conservative Burlington, ON
This new practice of just sending you a card in the mail, where suddenly you're lucky that you get all of these benefits because you have a higher credit rating or whatever the reason is.... You've entered that market and you thought Visa had gotten ahead of you on that market in terms of a premium card, right? So are you doing something to encourage the banks to get those cards out to their customers?
President, MasterCard Canada
As I said in my statement, to compete against American Express and Visa, we offer programs that make it more attractive for issuers to go after those cardholders.
Conservative
Glenn Thibeault NDP Sudbury, ON
Thank you, Mr. Chair.
Welcome to this meeting.
You mentioned earlier that at some meetings you may have felt ambushed. I hope you don't feel that way here. The seat may be a little hot, but I think we're all working to try to come up with some solutions, so thank you for coming.
In your opening statement, you talked about regulation or legislation reducing competition. I think it's important that we talk about that. I'm seeing competition in a different way, and it has also been discussed, I believe, by the RCC. Competition is actually going to increase the prices that consumers will pay, because the competition is between you and Visa and a few of the other credit card companies. The competition is raising the rate to get the bank to take your card. Is that not correct?
President, MasterCard Canada
That's not correct. That's not the model we work on.
President, MasterCard Canada
Sure.
When we set our rates, what we're trying to do is maximize participation in the system by merchants and cardholders. If we, for example, were to follow the model the RCC thinks exists, we would delight issuers and lose all of our merchants and then eventually make our issuers quite unhappy. The only thing we do in setting the rates is balance the system. That's why we lowered rates. It was because we saw an opportunity to compete against cash and debit by eliminating minimum fees. For example, an iTunes transaction, which is a very low-value transaction, used to cost the merchant 5¢. Now, under the new schedule, it costs 1.72¢, and it makes our proposition more attractive to that merchant, although less attractive to the issuer.
It isn't a matter of upping the ante to get more issuers; that's not how it works. We have to be relevant to everybody to be attractive to anybody.
NDP
Glenn Thibeault NDP Sudbury, ON
Okay, fair enough.
One of the other things we heard on Tuesday was from the restaurant association. They talked about an example in which the fee was negotiated. I don't know the exact number.... The interchange fee that was negotiated was 1.61%, but when they got their bill at the end of the month, or whenever they got that bill, that total fee was about over 2%. Can you tell us why the rate would be negotiated at one figure and then be higher when they got their bill?
President, MasterCard Canada
Sure. Again, I listened to the witnesses from the other day, and I have to say some of the rates they were talking about bore no relationship to our interchange rates. They were much higher. Again, to refer back to my speech, that's because we don't control end-user pricing.
I think one of the projects we want to undertake with the CFIB in particular is to make sure merchants understand that there are basically three kinds of acquirer contracts out there. There's flat-fee pricing, which people like because it creates price predictability, but you may be paying more for certain kinds of cards than you should have to. There's pass-through pricing, which means you have interchange plus a markup; that's hard to manage, because it creates a lot of unevenness in the costs of cards.
Then there's something in between, which I think Catherine Swift described, called qualified contracts. These are not our contracts, and I'm being very generic, but that's a world in between saying, here's your basic price and we're going to predict how much of the other cards you'll see, the corporate card or foreign card and that sort of thing. There will be a specific markup for those cards, and that creates somewhere in between predictability and appropriate pricing when the price is lower.
I don't think these concepts are well understood by small merchants, and we think we can lend a hand in making sure they understand that as they make their choices.
NDP
Glenn Thibeault NDP Sudbury, ON
Great. Thanks for that, because that would be the next thing, the type of solution we could bring forward to this.
I believe we heard that there are 19 current interchange rates. Is that something you said earlier?
President, MasterCard Canada
Yes, but for any given merchant, there are only three consumer rates.
