Finance Committee on May 26th, 2009

[Glenn Thibeault, NDP, Sudbury, ON]

I'd like to get clarification on this. If this happens, I am the consumer, I have my card, I'd swipe it; I now have the remote--or whatever the technical terms is--in my hand. I have a choice of credit, debit, or other. “Other” would be Interac, for example, because you still have to offer that as a merchant as well, is that correct?

Now, if I choose “debit”, that's going to be priority routing. Is priority routing going to be higher if I choose “debit” rather than pushing “other”? I don't know what “other” is. Will merchants then have to inform people where they should be choosing to push, to make sure the costs are lower?

[Jim Baumgartner]

In the case of Visa, it's a prompt. It's either Interac or Visa debit. As for the card you would use, if you have a client card where you get cash out of your debit card today, you would be prompted with Visa for either Visa debit or Interac. You can choose either one. It will still go into your bank account.

With MasterCard, there will not be a prompt the way it's currently envisioned. This has not been rolled out yet. This is still being built. The way it's envisioned, the transaction would not be slowed down with the prompt. It would go right through Maestro if your issuing bank issues Maestro and they instructed us to route those transactions through Maestro.

[Fern Glowinsky]

I have a point of clarity that might help. The instructions will actually be on the card. When you get your debit card, the card will already have been predetermined in terms of a debit card from a MasterCard bank that's also offering Maestro. The card will be predetermined in terms of how to route the transaction.

[Glenn Thibeault, NDP, Sudbury, ON]

I appreciate the fact that it's going to be on there, but we've been hearing about the issues with small print for the last few months. Once again, we're getting another document with small print. We want to make sure that everyone is informed, so if there is any way we can change it from the small print to make sure consumers know, that's what we want to do. The more we talk to consumers about interchange fees and all the little fees that the merchants are paying, they're starting to understand the importance of not dinging merchants with their big premium cards along those lines, so I think that's an important piece.

One of the things I haven't heard yet is, will the priority routing fees be higher than average regular Interac fees, if I am choosing debit on Visa or MasterCard?

[Jim Baumgartner]

I'll start with that.

With Visa, as it's currently envisioned, they will be higher, because Visa has set their interchange level at a level that, in our opinion, is too high. They believe there's value brought, and there is value brought in both scenarios. For example, if you buy something online and you dispute that it was you, with Interac you're more of an unsecured creditor. Visa and MasterCard have a policy that will protect you, so there is definitely value there.

In Visa's case it will be more expensive, upwards of maybe three times more expensive on average. It'll vary by merchant. With MasterCard it actually wouldn't be more expensive, because they've committed, so far, to holding consistent with or lower than Interac.

[Glenn Thibeault, NDP, Sudbury, ON]

We've heard, I believe, from 250,000 members of the RCC, the 2.4 million from CFIB, and they're all talking about the concerns they have with interchange fees. I think instead of adding higher fees, we need to start looking at what we can do to be more transparent so we can get everyone on the same playing field.

[The Co-Chair, Conservative, Michael Chong]

Thank you very much, Mr. Thibeault.

Mr. Rota.

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

Thank you, Mr. Chair.

Thank you for being here today.

I was just going through this, listening to the priority routing. I just want to clarify if the priority routing comes up on the terminal. Does it show up anywhere? I know you've answered this question earlier, but I'd like some clarification. I'm not 100% clear on how this works.

I show up with my card and it gets swiped. Now with priority routing, from what I understand of Visa or MasterCard, depending on whose program gets that priority, is that priority a benefit to the merchant? How does it work, and who gets the benefit by that priority being there?

[Jeff van Duynhoven]

I can start.

I wouldn't characterize Visa debit as priority routing, because the consumer does have the choice. What will happen is that on the point-of-sale dialogue.... Today, if you use your debit card, the terminal dialogue will ask you after you've swiped your card—and in this case, it would have to be a chip card, so it would only be applied to a chip transaction—if you want to pay by Visa debit or Interac. You will select Interac by pushing a button on there, just as you do today. The dollar amount of the transaction will come up, and you will confirm that and enter your PIN, etc., and the transaction will be processed. So you have, as a consumer, selected Visa debit.

As Jim has said, MasterCard has taken a different approach and has implemented priority routing. So the bank has issued a card with Interac and Maestro on it, and if it comes to an intersect, a merchant who actually accepts the Maestro MasterCard transaction.... Again, that's important to distinguish: the merchant has to be enabled for Maestro. If the merchant is enabled for Maestro, there is no terminal dialogue in that case, because the bank and the merchant have essentially agreed. The bank has issued a card to a consumer that will be processed by Maestro, and the merchant has agreed to accept Maestro, so in that case it will get priority routed to Maestro versus Interac.

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

So there's no pre-arranged agreement that automatically defaults to one or the other. It depends on the card, not on the merchant agreement with the bank?

[Jeff van Duynhoven]

It depends on the merchant agreement with the bank, because the merchant has to agree to accept Maestro and/or Visa debit. So unless that happens, the transaction would not be processed through either of those two means.

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

Okay. I'd like to come to back something else, and then I'll come back to the priority routing.

But one of the areas that really concerned me was the shifting of liability. One of the features as a merchant is that when you are taking in money through plastic—through a credit card or a debit card—you don't have to worry about the liability. You are basically selling your receivables and taking the money in, and there are no more worries.

With the shifting of the liability to the merchants, I'm concerned about two things. One, there is the cost of all of a sudden having to self-insure, because not having to do that was one of the big features. But the other concern I've heard is that with the new technology, with the chips, I understand there are some changes coming up to the terminals themselves. For large merchants that's an issue; it's a cost, but they can absorb it. But for smaller merchants, who will be absorbing the cost of this shift? Do they have an option not to shift over to the new technology, and what would be the consequences if they didn't shift?

[Jeff van Duynhoven]

That's an excellent question, and Jim can certainly add to this.

Getting ready for the chips has been a very expensive proposition for all acquirers. We've spent tens of millions of dollars preparing our systems, because our systems need to change, and the industry has probably spent hundreds of millions of dollars buying new point-of-sale devices. I know that for TD Merchant Services, it has been north of $50 million over the last several years that we have spent from our capital to purchase new point-of-sale devices, which get deployed by us because the average merchant ends up having a rental agreement with us as part of the services. So as part of the monthly fee they pay for POS rental and servicing of that device, we've built in redundancy. So I will send a service technician out to that merchant site, where we'll deploy a new chip-capable terminal for them, at typically the exact same or lower cost than the old terminal that's out there. So we've enabled those merchants.

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

So you're telling me there's no increase in cost to the merchant?

[Jeff van Duynhoven]

For the vast majority of merchants, no, there has been no increased cost.

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

And for smaller merchants as well?

[Jeff van Duynhoven]

That's correct, yes.

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

Okay. I'll let you continue.

[Jeff van Duynhoven]

The risk to the merchant with this liability shift that will occur in October 2010 only exists if there is not a chip-capable device processing that transaction.

Our goal is to enable all of our merchants with chip-capable devices before October 2010. And we're well over 60% of the way there, so we've converted already 60% of our merchants to chip-capable devices. Again, as Jim said at the outset, if the merchant isn't capable of taking that risk because they don't have the funds on hand or if they were to go bankrupt, etc., that liability falls to the acquirer. The acquirers are not a fan of this new regulation either, but it has caused us considerable expense to go and retrofit our customer base.

[The Co-Chair, Conservative, Michael Chong]

Thank you very much, Mr. van Duynhoven. Thank you very much, Mr. Rota.

Mr. Brown.

[Gord Brown, Conservative, Leeds—Grenville, ON]

Thank you very much, Mr. Chairman, and I want to thank our witnesses for being here today.

My background is in the lodging and food service industry, so I'm quite familiar with what you do, from a merchant standpoint. It's a really good thing that you're here, because we've been hearing much from the Canadian Federation of Independent Business, so it's great that you're here to explain exactly how you operate.

Mr. Rota had some good questions and I want to follow up on those. I want you to explain a little bit more about this liability shift and what that is actually going to mean for a merchant. Could you possibly use an example, say in the lodging industry, that some of us might understand? I know that we've taken many cards over the years and I don't think that all cards are going to be chip-enabled by 2010. Is that going to mean that the merchant is going to take on liability that they currently don't have right now?

The floor is open on this.

[Jim Baumgartner]

If you owned a hotel, for example, and it didn't have a chip-enabled device, and if you were renting from either me or Jeff or the other dozen or so competitors in the marketplace, we would, by October 2010, send out a technician and we would replace the device with a chip-enabled device. Once that chip-enabled device is in, then from the hotel owner's perspective, there is no increased liability because we have a device in there.

In fact, from a hotel perspective, you'll actually be better off because our data, so far at least.... The market hasn't been flooded with chip cards yet, but to the extent that we've had chip card transactions, our data show that the numbers of disputes--if you had disputes before at the hotel such as, “It wasn't me staying there”, etc.--have come way down.

From our perspective, from Moneris' perspective, we actually do support the introduction of the chip in Canada. We think it's a more secure way of paying. We don't support the liability shift happening as quickly as it has. We think it's a bit of a burden on the merchants that is not currently needed.

Let's say you owned your own device, as a hotel. Let's say you purchased your device and you had just invested in it and it wasn't chip-capable. If someone showed up at your hotel and disputed the transaction and said, “That wasn't me”, and you didn't have a chip-capable device, then you'd lose that dispute. So there is increased liability in the case where you do not have a chip-enabled device. But as Jeff pointed out, the vast majority of the devices that'll be deployed will be chip-enabled by October 2010.

[Gord Brown, Conservative, Leeds—Grenville, ON]

But let me go back just one second on that. If you go to a hotel, generally what they do is take an imprint of your card and you sign the registration card. So if there is a dispute, usually there is that sort of backup. Now, of course, with the chip and people putting in their PINs, that's going to be doubled. But is that going to mean that on cards that are not chip-enabled, this other backup in terms of the liability of someone saying it wasn't them staying...are those hard validators still going to be accepted?

[Jeff van Duynhoven]

That's an excellent question. That's exactly the point I was going to make, because I think in your first question you had asked, if the card is not a chip card, does the merchant have that liability? And the answer is no, it's no different from what it is today. So it's only if a chip card is presented at a non-chip-capable point-of-sale device. If the bank or credit union or other issuer has not provided you, as a consumer, with a chip card, then the liability is exactly the same and you would do exactly as you've said today. You would use your imprinter to prove that the card was in fact present for that transaction if there was ever a dispute.

[Gord Brown, Conservative, Leeds—Grenville, ON]

I don't know how much time I have, but I do have one question that I'm sure many merchants will be asking as Visa debit and Mastercard debit or Maestro roll out. Why would a merchant not want to accept those debit products?