Finance Committee on May 26th, 2009

[Jeff van Duynhoven]

Yes, and there could be more fees. There could be standard fees charged, again, for the way the transaction is processed. So there could be different fees that we pay. The merchant can no longer say, “I pay 1.8% as a merchant discount rate and that's my all-in cost.”

As I tried to articulate in the opening remarks, that's the way it used to be. It was much easier for merchants and it was much easier for acquirers to go and levy those costs. Now with the complexity, we've had to spend lots of money to ready our systems, and the industry has typically tried to break out those transactions.

[The Co-Chair, Conservative, James Rajotte]

Has this complexity been imposed on you by the credit card companies?

[Jeff van Duynhoven]

Yes. They change the interchange rates. They don't consult with us to see what we think; they change those.

[The Co-Chair, Conservative, James Rajotte]

You, as companies, preferred the much simpler system that was in effect before?

[Jeff van Duynhoven]

Certainly I would have preferred to stay there, yes, because we've had to spend considerable sums of money, and clearly, merchants are upset with the increased costs associated with it.

[Jim Baumgartner]

If I could just add this, there are actually some good instances where varying interchange makes sense, in my experience. I don't know if you have government travel cards when you travel. You don't have government travel cards? Okay, I used to work on the issuing side in that particular space. It used to be that Diners Club and American Express had a lock on the market, and when Visa and MasterCard introduced different interchange rates for those particular products they allowed issuers to compete against Amex and Diners Club in that particular space.

Then in some cases, not here yet in Canada, although I would argue it would be a good thing, when merchants pass additional data along, as with purchasing cards—I think you have a purchasing card program—that additional data helps companies streamline their costs. There are arguments for tiering interchange to incent merchants to do that.

So it's not as though a more complex interchange system is inherently bad, although overall it has made our lives a lot more complex.

[The Co-Chair, Conservative, James Rajotte]

Unfortunately, my time is up, but I appreciate this.

Any more information you have explaining to members of this committee all the fees that are new or increased or that apply to merchants would be helpful. We have a fairly good explanation of a four-party model, but still, any more information you have on that would be helpful. We'd appreciate it.

[The Co-Chair, Conservative, Michael Chong]

Thank you, Mr. Rajotte.

Mr. Thibeault.

[Glenn Thibeault, NDP, Sudbury, ON]

Thank you, Mr. Chair.

Just going back to that one question I wanted to get in, it was relating to priority routing and the new terminals. Will merchants have to get involved with that? Do they have the option of staying out of priority routing and just keeping the current system, or ultimately will that be the new system that's phased in?

[Jim Baumgartner]

If merchants do not want to accept Maestro, we certainly would never force them to do that. We will turn it on.

[Glenn Thibeault, NDP, Sudbury, ON]

What about with Visa?

[Jim Baumgartner]

Yes, with Visa there will be a prompt at the point of sale. Also, the merchants will have to elect whether they want Visa debit as well.

[Glenn Thibeault, NDP, Sudbury, ON]

Thank you.

[Jim Baumgartner]

That would be as long as Visa sticks to the non-enforcement of the honour-all-cards rule, which is very important in that answer.

[Glenn Thibeault, NDP, Sudbury, ON]

Thank you.

I want to jump a little bit to the question of liability and some of the fees we've been hearing about. I was interested to notice, in following the collapse--I believe it was in April--of Conquest Vacations, that they talked about unrealistic and unreasonable demands by credit card processing companies being one of the determining factors. There was also a piece in the Globe and Mail about credit card processors making them hold on to $900 million. I think there was some resolution of that. I'm not sure.

Could you talk to that point of having to have this cash in reserve and then companies coming out saying these things?

[Jim Baumgartner]

I'd love to, and thank you for raising the question.

I'm going to distinguish between an airline and a travel agent. There are government agencies involved in the tour operator business. In the case of the tour operators, TICO, if you're familiar with it--and there's a fund in Quebec as well--protects the travellers. They will require the tour operators to place on deposit funds for future trips. If you buy a trip to Cancun in June, for example, and it's a thousand dollars, and let's say you buy it from a major tour operator, that tour operator will have to place the money in a trust fund. However, if that tour operator were to fail, and let's say you were the merchant processor, you would dispute the transaction with your card issuer. We, as the merchant processor, would end up absorbing that charge if the tour operator was out of business. So we require, in the case of the more challenged tour operators, deposits as well.

So the tour operators are being doubly penalized, because the funds are holding money and ultimately, if it's charged on a credit card, the merchant processors get charged. That's a real problem for the industry. If there's anything anyone can do to help that particular industry out, they really need the help. I think Conquest was, in part, a victim of that particular situation.

In the case of the airlines, there is no such regime. We process for both. In the case of the airlines, we have a great big credit department that would look at the risk. If you own an airline and your airline is profitable and has plenty of cash and so on, we may not require a deposit. If you are more challenged or are going through some tougher times, we may require a deposit to protect against the risks I alluded to earlier.

[Brian Crozier]

Can I add something about Conquest?

Have you ever noticed that you can't buy an airline ticket in this country unless you have a credit card? If you don't have a credit card, you can't buy an airline ticket. It's the only country in the world like this.

If you really want to help that industry, what you need to do is help people use their money to make that payment online. Air Canada needs the help of UseMyBank so they can accept payments from their customers in real time at a rate that is going to be competitive with Visa and MasterCard. Instead of so many regulations, we could have competition help drive those prices down.

The technology has been here for 10 years, and we're the only country that is not using it. We have Visa and MasterCard that want to have the entire market to themselves. We have online banking, and we have customers who want to receive those payments. There's really nothing in the way of making it happen.

If you buy a $5,000 trip, you don't have to pay 3% to Visa to get that job done. It can be done for a lot less than $150 on that transaction. That's what we're talking about.

At UseMyBank, we're only in the online world. When you talk about point of sale, it's a place we're not at. But in the online world, I think Canada needs to have some more ability for customers, if they want to make cash payments, to make them. If they decide they want to use Visa, they can use Visa. But we need to have more choices, I would say. Conquest Vacations, I think, could still be in business if they'd had that edge, that competitive edge, to offer their customers the ability to pick a debit payment.

Thirty to forty per cent of people don't have Visa or MasterCard. If you don't have a credit card, you can't shop online. It doesn't seem fair. It seems that you need to have two systems to reflect the same values as you have in the physical world, where you can shop with your cash, your debit, and your credit. When you go on the Internet, you're stuck with credit cards only.

I think Canada needs to have some kind of regulation or something in place to allow merchants to accept cash payments from customers who decide that they want to use their online banks. It makes sense.

[The Co-Chair, Conservative, Michael Chong]

Thank you very much, Mr. Crozier, that was helpful.

Thank you very much, Mr. Thibeault.

Mr. Lake.

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

I want to direct my questions to Mr. van Duynhoven.

I'll go back to the letter, and to the statement that you provided us as well. I'm not sure that I'm any clearer, having been provided a sample statement, in terms of the flow of information. Maybe you can help me with this.

First of all to the letter, though, you mentioned that the letter is designed to kind of clarify situations for customers, but I notice that you use an example in your chart. You talk about the Visa corporate, commercial, and business card transaction fee and you use an example. With this fee change, a $75 transaction processed by your business will cost about 9¢ more than the current calculation. I think you're probably using that example to show that it's not much of an increase. Then with the Visa Infinite card transaction fee, which is a new charge--50 basis points--there is no such example. I would note that on the same $75 charge, it was easy to calculate using your number, and it looks like it would be about 37.5¢ more that they would pay.

Why would you not have an example there?

[Jeff van Duynhoven]

That's a great point, and several of our customers pointed that out to us as well. Essentially, that was a miss on our part.

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

Only it seems that oftentimes the miss happens to be when the change is to the detriment of the customer.

[Jeff van Duynhoven]

As I said, we pride ourselves on transparency. When we look at what some of our competitors have done, we think we still are very transparent with that. We've clearly articulated...in this example it was 50 basis points extra, you're right. We've learned, as we've gone through some of this, that some customers don't understand what basis points mean. We didn't put a tangible example in that particular case.

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

I think it illustrates the importance of the communication and some of the challenges here.

On the extra charge, I'm curious about the Visa Infinite transaction fee. Some people talked about 20 basis points or something, but in the letter it says 50 basis points. Is there an extra charge? Do TD Merchant Services make any extra money or charge extra for any of your clients when they use the Infinite card?

[Jeff van Duynhoven]

Yes, and in this particular example it was a 50 basis point charge. To answer your question directly, yes, some merchants pay more than the 20 basis point cost.

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

TD Merchant Services is actually making more money now. It's not any more complicated for you to do that transaction, but you're charging a surcharge on top.