Finance Committee on May 26th, 2009

[Jeff van Duynhoven]

We're charging a surcharge on top because, as I said in my opening remarks, those changes cost millions of dollars for us to change our systems to be able to process these incremental cost transactions. We need to be able to recoup our cost. As any good business person would, we look at the cost and ask how we can do that and do it in a fair and transparent manner. That's what we've done here.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

It's largely an equipment cost.

[Jeff van Duynhoven]

Equipment and technology costs. It's less on the equipment side because it's not a point-of-sale device; it's more our own internal processing systems.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Okay. Where I was actually going was to the point-of-sale devices.

I'll move to the other statement you have here. Perhaps we could walk quickly through who sets what and who gets what.

First of all, simply to clarify on the point-of-sale devices, I notice there's a rental charge of $35. Is that per hand-held set-up?

[Jeff van Duynhoven]

This is again an illustrative statement. Customer fees will range depending upon the individual negotiation with that merchant and the type of equipment they have. Do they have a stand-alone point-of-sale device? Do they also want a PIN pad attached? In that case, I have to buy two component pieces. It really does depend on the individual client preferences of what they need and require to run their business.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

At the very top of the summary of fees, that goes to Visa, is that right?

[Jeff van Duynhoven]

No. That is what we have called the merchant discount rate. We are only a Visa acquirer, so we process the transactions for MasterCard but we don't bill for the MasterCard transactions. It's complicated, unlike Moneris who--

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

This sample company would actually get a separate statement for MasterCard as well.

[Jeff van Duynhoven]

A statement for MasterCard, that's right. That's really the legacy out of the Competition Bureau previously not allowing duality in Canada. They've since lifted that restriction, last November, but currently this is a legacy of that. We process Interac and Visa transactions for our merchants directly.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

So the Visa discount fee is set by Visa.

[Jeff van Duynhoven]

No, that is our merchant discount rate. We've elected to pass those fees on. The Visa discount rate is set by TD Merchant Services, and that's the charge we levy to the merchant for processing their Visa credit card transactions.

[The Co-Chair, Conservative, Michael Chong]

Mr. McTeague.

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

My thanks to the witnesses for being here.

I wanted to let everybody know the price of gas is dropping a penny tonight in some parts of the country.

Outside the country, there seems to be some concern about Visa and MasterCard attempting to get into the debit business. I think it behooves some of the members on the committee to find out whether there is any process by which debit clearing would take place outside of Canada. Is there a risk? I asked this question to Mr. Stanton, and he said no. But his answer was not clear. He guaranteed the clearing house for processing debit will not take place outside of Canada, which could bring forth concerns having to do with the USA PATRIOT Act and our own privacy laws.

Mr. van Duynhoven?

[Jeff van Duynhoven]

We process those transactions. Everything is processed in Canada. We don't send information outside Canada. However, we do send information to Visa, and Visa is a global company. In a technical session, we transmit information to Visa on our premises. We give it to a Visa server, and then they take it over their global network. As to where that transaction routes, I can't definitively say. I think the same would be the case for MasterCard.

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

So we can't be sure that it will find itself in the United States or under the jurisdiction of another country?

[Jeff van Duynhoven]

Credit cards are processed globally today. I can't be certain, no.

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

Mr. Baumgartner.

[Jim Baumgartner]

As to the way the electrons flow, in the case of Visa I think those servers would go either to McLean, Virginia, or Denver. In the case of MasterCard, I believe it goes either to St. Louis or Kansas City. That's something that we should confirm for you, or perhaps we could ask the card companies to diagram it out for us.

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

I think that brings in a whole level of interest that this committee will want to look a little closer at.

Mr. Baumgartner, in connection with the priority routing and the new point-of-sale machines, with the advent of chip cards and the probability of their being pervasive in the next few years, how likely is it that a merchant will be able to refuse to use the new priority routing machines? You said earlier that they have the option of not having them—for instance, Maestro. But given where we're going with these cards, is it not likely that saying no would also mean putting yourself out of business?

[Jim Baumgartner]

In the case of chip cards, they'll essentially replace the mag-stripe cards that we have today. It's the intention of Visa and MasterCard, as well as the Interac issuers, to gradually replace all of their cards with the chip technology. We have found that from a merchant perspective the chip technology is a positive thing. We found “It wasn't me” disputes to have gone down. Most countries in the world are moving towards chip. We have a sizable presence in the U.S. We're trying to encourage the U.S. to go to chip as well. Most countries, including most in Europe, are moving to chip. France went there a long time ago, and it's chip-and-PIN, which we believe ultimately is the most—

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

Mr. Baumgartner, using existing technology would not work. You could not use the same machines. I think you know what I getting at. Let's be honest, we're dealing with new machines required, and merchants will not be able to refuse. If they're not able to accept the new chip technology and the cards and fees that go with it, they'll be electing to go out of business.

[Jim Baumgartner]

That's not quite accurate, depending on the type of merchant. If you were a merchant who had very little dispute activity, a restaurant, for example, where almost no one disputes whether the meal was good, where the returns are very low, you may not need a chip device. Please keep in mind that the cards themselves will still have a magnetic stripe on the back. For example, when you go the U.S. or anywhere else that doesn't take chip cards, and you want to buy something, you'll still have a magnetic stripe. The issuer will need that for you to be able to buy something, say, in the United States. We will still need to be able to process mag-stripe transactions, since we have U.S. customers coming to Canada and using the machines.

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

Mr. Baumgartner, I have a very simple question for you on a very complicated case. Someone has reported to me a problem they have with respect to fees they've been charged for non-qualified purchases. It would appear that the charges were placed on the wrong item on the bill, some for qualified, some for non-qualified. I'm wondering, given the example that's here, what this means for merchants as far as card acceptance is concerned, when they don't know how large the volume is of non-qualified cards. The concern by a number of these companies is that the line items in which something may be charged may not reflect the actual number or kind of client card they have, and they obviously have no right to refuse. How do they get around that conundrum, and do you have instances where you may be charging them the wrong line, in terms of the bill you're providing them?

[Jim Baumgartner]

We don't believe we do. We also have reporting that would delineate every specific transaction for the merchant to be able to review, and it would indicate whether or not it was a qualified transaction or a non-qualified transaction. In the case of an error being made, we'd certainly make sure we'd correct it. Yes, thank you.

[The Co-Chair, Conservative, Michael Chong]

Thank you very much, Mr. Baumgartner and Mr. McTeague.

We're now going to the member for Burlington, Mr. Wallace.