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.
Conservative
Mike Lake Conservative Edmonton—Mill Woods—Beaumont, AB
Was it at a higher cost than the MasterCard rate would originally have been?
Conservative
Mike Lake Conservative Edmonton—Mill Woods—Beaumont, AB
Then you are encouraging users to use these higher interchange cards.
President, MasterCard Canada
Actually, we've turned down several program proposals because they didn't meet the criteria. We have to keep the system balanced. A widespread issuance of these cards with no justification in terms of a value proposition to the merchant is not in our best interests.
Conservative
Mike Lake Conservative Edmonton—Mill Woods—Beaumont, AB
Would you say it's reasonable to expect that a clerk at a given merchant would know whether a card was a premium one or not?
President, MasterCard Canada
No, and I don't know if it's workable to identify them. We've had this conversation with the CFIB. It's not workable to expect a clerk in an operating environment to recognize a card.
Conservative
Mike Lake Conservative Edmonton—Mill Woods—Beaumont, AB
So the clerk who is representing the merchant—who is basically a customer, in the sense that they pay interchange fees, which the banks receive and which you in turn receive a portion of—doesn't even know the price they're paying. It's as if you went to a gas station and there was no rate posted or no dollar amount on the metre, but you just filled up according to the number of litres on the gas pump and then walked in and just paid whatever they told you to pay, based on a rate that was not posted anywhere but was just a number after you'd already made the decision. That's what it's like for the merchant. When someone slaps down a card, there's no rate attached to that card that they can see. They just pay it.
President, MasterCard Canada
I think it would be unlikely that a clerk would understand the cost of the payments he's managing. I doubt the clerk would understand the cost of cash either.
Conservative
The Co-Chair Conservative James Rajotte
Thank you, Mr. Lake.
We'll go to Mr. Garneau. Monsieur Garneau, s'il vous plaît.
Liberal
Marc Garneau Liberal Westmount—Ville-Marie, QC
Thank you.
I'm just trying to get clarification of your opening comments, Mr. Stanton. You made some very strong statements about the fact that a regulatory framework would suppress innovation, reduce competition, and harm consumers. Those are very strong words.
I don't see any evidence that it would suppress innovation.
Then you talk about it hurting consumers. You talk about the Australian example and say that it forced a reduction in interchange revenues in Australia, which it was clearly intended to do. But then you were saying that interest rates, which had been subsidized by interchange revenues, had to be increased. In other words, you were saying that interchange revenue had been used to keep interest rates low—although most people have trouble seeing those rates as low—and had to be increased to compensate for that loss of revenue. Did I clearly understand that?
And grace periods had to be shortened as a result of the reduction in the interchange rate.
Liberal
President, MasterCard Canada
It's in the reports that we'll deliver to the committee. But there are three revenue streams that an issuer receives when it runs a credit card portfolio: interest, fees, and interchange. When one of those goes down, you have to adjust the others to operate within the margin requirements of prudent banking.
This is well documented. It did happen in Australia, and you can look in Canada to credit card systems that don't have interchange, such as retail store cards, which have interest rates approaching 30%, versus the 65 low-interest-rate programs available under the system involving interchange.
Liberal
Marc Garneau Liberal Westmount—Ville-Marie, QC
What is the cost of processing the fees as a percentage of the interchange fee?
President, MasterCard Canada
We can try to do some research on that, but the cost of processing the transaction isn't something that's considered in Canada.
There's a paper by Jack Carr that says that the only appropriate basis for interchange is to look at value versus cost recovery.
Liberal
Marc Garneau Liberal Westmount—Ville-Marie, QC
Well, we've been told by the RCC that it's about 13% of the interchange fee.
What I'd like to know is whether you are suggesting, from these reports saying that interchange fee reductions were transferred to interest rate increases, that it was a one-for-one relationship?
Liberal
Marc Garneau Liberal Westmount—Ville-Marie, QC
Thank you.
Can you tell me how this suppresses innovation? For most people, the business of innovation in the area of credit cards is not something that's obvious. I'd like to know what kinds of things are being lost by the consumers as a result of this?
President, MasterCard Canada
Australia was very much like Canada in that respect before this regulation was put in place. Things like chip deployment, contactless payments, and security systems all need proper economic framework for investment.
When you hear from Interac, they'll say they need economic rationality in order to innovate and compete. I think one of the problems with Interac is that they are under-investing in security. They don't have an interchange regime.
Liberal
Marc Garneau Liberal Westmount—Ville-Marie, QC
You say this has resulted in reduced competition; it has priced certain potential competitors out of the market.
President, MasterCard Canada
At that low economic value level you need to have enormous scale to play. Small players and niche players have to go. They can't play.
It's important that when you look around the Canadian environment, price competition and feature competition have been led by niche and innovative new entrants. If they're forced out because their interchange revenues don't support continuing, then it's only left to the larger banks.
Liberal
Marc Garneau Liberal Westmount—Ville-Marie, QC
I would offer perhaps a philosophical comment, that people might accept a little less competition for a reduced rate. But that's something we can debate.
Conservative