Thank you very much.
Thank you for the invitation to speak to the committee regarding the study of the credit and debit card industry in Canada. We appreciate the opportunity to appear before you and share information with you in support of your study.
I'm Jim Baumgartner, president of CEO of Moneris Solutions, and with me here today is Fern Glowinsky, our senior vice-president and general counsel.
Moneris Solutions is a Canadian-based payment processor with operations in Canada as well as the U.S. Our head office is in Toronto, and we also have offices in Sackville, New Brunswick; Montreal; Calgary; Vancouver; and throughout the United States. We've been providing credit, debit, and gift card acceptance solutions to merchants in Canada and the U.S. since December 2000. We process for approximately 350,000 merchant locations in Canada and close to 65,000 merchants in the U.S.
Moneris is a joint investment of the Royal Bank of Canada and the Bank of Montreal. We distribute our products and services to the market directly through various sales channels. Moneris employs approximately 1,800 people, the vast majority of whom are right here in Canada.
As our role in the industry tends to be the least understood, I'll take a moment to briefly describe what we do. First, we enable merchants' acceptance of electronic payments by providing and supporting the cardholder facing solution, which may be a stand-alone device at the point of sale or enablement of a cash register, gas pump, kiosk, or even a website. Second, when a card is swiped--or inserted, in the chip context--we route that transaction and the authorization request through the payment brands to the card issuer. They send back an authorization message that we deliver to the merchant so the merchant knows that the customer is authorized by the issuing bank to complete the transaction. Once the transaction is authorized by the card issuer, the merchant will finalize the transaction with the cardholder and send us a settlement file that prompts us to settle funds into the merchant's bank account for that day's transaction activity.
An important component of our business model is merchant underwriting. We bear the risk when the merchant does not deliver the goods or services that have been paid for in advance--for example, when a cardholder purchases an airline ticket and the airline goes out of business prior to delivering the flight--and in the cases of merchant fraud and non-compliance with payment brand rules.
We also provide reporting to enable the merchant to monitor their transaction activity for the purposes of operational and financial reconciliation, as well as fraud monitoring.
Another important element of our service is exception item management. This includes the tracing of individual transactions and mediating on behalf of the merchant in the case of a transaction being disputed by a cardholder.
As a whole, these components are the payment processing value proposition. Payment processing is often the last interaction or final impression between the merchant and the consumer in the shopping experience, therefore it has to be instant, always on, and easy to operate. It is critical in enabling cashflow, and therefore the merchant must receive funds when and where they want them and have certainty of payment. The finality of payment feature in today's uncertain times removes an element of credit risk from the equation, as well as the risk in handling large amounts of cash.
The payment processor also plays a leading role in the integrity and evolution of electronic payment networks. With the introduction of enhanced verification technology such as chip, data security standards such as PCI, or new card entry modes such as contactless, the processor must upgrade its infrastructure. These are no small tasks. They're very capital-intensive and complex undertakings that have helped Canada maintain one of the most ubiquitous, secure, and successful networks in the entire world.
As an industry, we're subject to the increasing liabilities associated with potential data compromises. A number of recent high-profile breaches in the U.S. have highlighted the threats posed to the digital infrastructure. The reality is that the cost of compliance and ensuring security within the payment system is continually increasing as the threat of breaches and fraud continues to evolve.
The Canadian payment processing market is highly competitive. Most of North America's top processors actively market in Canada. Significant established players regularly enter the market. U.S.-based merchant processors now control a significant percentage of the Canadian market. In addition, there's a robust reseller industry that offers even more choice to merchants. Our industry is forced to compete on price and innovation to maintain our market position. And at this point in the evolution of the payment card industry, card acceptance is roughly equivalent to the growth in the retail economy. It is essentially a zero-sum game, requiring each industry participant to strive to be the most relevant to its merchants. We negotiate fees with merchants directly.
In terms of merchant acceptance of cards, merchants have a choice about acceptance, and they do so because of the significant value they receive from electronic payments, including avoiding the costs associated with handling cash, reporting and reconciliation, finality of payment, speed and throughput at the point of sale, and increasing customer satisfaction by offering their customers a payment method of choice.
There has been much discussion about interchange, and as you may know, it is the fee that's paid by the payment processors to the card issuers. In our pricing model, it is a component of our cost of goods sold. Payment processors do not set interchange rates; we are advised of them by the payment brands. Other components of our cost base include the assessment fees that are paid to the payment brands, as well as our operating infrastructure.
There has also been much discussion about the introduction of competing debit products in Canada. As payment enablers, we have to invest in the infrastructure to process new acceptance products from card issuers because we expect that at least some of our merchants will want to be able to accept the card their customer presents for payment. As a result, we must develop the technical acceptance capability, build business processes, commercialize, and inform and train the merchant. New products attract a greater compliance burden, greater wear and tear on our hardware, as well as additional risk and exception item management.
We hope our remarks have provided some helpful insights, and we look forward to answering your questions. Thank you again for the opportunity to be here.