Finance Committee on May 28th, 2009

[The Co-Chair, Conservative, James Rajotte]

I call to order this joint meeting of the Standing Committee on Finance and the Standing Committee on Industry, Science and Technology, dealing with credit card interchange fees and the debit payment system in Canada.

Before we get to the witnesses, the other co-chair, the honourable Michael Chong, has a statement for the industry committee members. He just wishes to inform them of something.

[The Co-Chair, Conservative, Michael Chong]

As a point of information for the members of the industry committee, since we did not have a chance to review the main estimates for Industry Canada, I just want to let them know that they will be deemed reported automatically tomorrow to the House.

[The Co-Chair, Conservative, James Rajotte]

Thank you, Mr. Chong.

This is the fourth joint meeting we're having on this issue. We started with the merchants. We next went to the credit card companies. We had the payment processors here on Tuesday, and now we're dealing with the card issuers part of the four-party credit card model.

We have a number of witnesses here with us today. I'll just read the organizations, for information's sake. We have, first of all, the Credit Union Central of Canada; secondly, the Canadian Bankers Association; and then individual banks, including the Canadian Imperial Bank of Commerce, BMO Financial Group, TD Canada Trust, Scotiabank, and, finally, RBC Royal Bank.

My understanding is that we will have a brief opening presentation from the Credit Union Central of Canada, and then the Canadian Bankers Association will be speaking for, I believe, most of the banks. My understanding is that RBC Royal Bank will have a short addition to the presentation by the Canadian Bankers Association.

So we will start with the Credit Union Central of Canada. If we could have a presentation of between five and ten minutes long, then we'll go to the Canadian Bankers Association.

[Brigitte Goulard, Vice-President, Policy, Credit Union Central of Canada]

Mr. Chair, ladies and gentlemen of the committee, thank you for the opportunity to speak to you today. My name is Brigitte Goulard. I am the vice-president of policy with the Credit Union Central of Canada. I would like to introduce you to my colleague, Mr. Douglas Whalen, director of payments policy.

Before addressing the issue, allow me to begin by making a few preliminary remarks regarding the role of Canadian Central and, more generally, the credit union system in Canada.

Canadian Central is a federally regulated financial institution that operates as a national trade association and finance facility for its owners, the provincial credit union centrals, and, through them, for approximately 440 affiliated credit unions across Canada. With over 1,700 branches serving more than five million members, and over 24,000 employees, and holding more than $114 billion in assets, credit unions represent an important component of the Canadian economy.

Although the global economic downturn experienced since the latter half of 2008 continues to present challenges for credit unions and their members, we are pleased to report that our performance for 2008 will go on the record as one of the most successful years ever for the Canadian credit union system. Our financial position remains strong, and we have maintained our share of the market, in step with growth of the Canadian population.

Credit unions in Canada come in all shapes and sizes and operate in almost every community. Actually, in more than 300 communities in Canada, the only financial institution in town is a credit union. Credit unions are the first choice of a significant percentage of the population. In fact, one in three Canadians are members of credit unions and caisses populaires. We believe these numbers reflect the strong cooperative values of the system and the commitment of the system to the economic development of their communities.

Charitable donations, employee participation in worthwhile causes, and scholarships and bursaries are all part of the contribution that Canadian credit unions make every day. In fact, in 2007, the Canadian credit union community's involvement reached $35.8 million.

Let us now turn to the issue that brings us here before you today: credit card interchange fees and the debit payment system in Canada.

I will now turn to my colleague, Douglas Whalen, to speak to that issue.

[Douglas Whalen, Director, Payments Policy, Credit Union Central of Canada]

Canada's credit unions provide their members with access to a broad range of consumer card services, including both debit cards and credit cards.

While credit unions offer one of Canada's largest networks of proprietary ATMs, they are not significant providers of services to merchants for acquiring debit or credit transactions.

Visa products are offered by some credit unions and MasterCard by others, and approximately 600,000 credit union members have obtained a credit card through their association with a credit union.

Credit unions use a variety of different business models to provide credit card services to members, and each credit union makes its own decision regarding which card products and services they will offer, how they will deliver them, and which suppliers they will use, based on what best fits their business situation and the needs of their members.

For example, one credit union issues credit cards directly to their members and maintains control of the service relationship with the member, the terms and conditions of the card service, the design of the card, the marketing, pricing, fees, and interest rates, and the ownership of the card balances. Only the back office processing is outsourced to a third party.

Most credit unions, however, have completely outsourced their credit card services to a third-party financial institution. In this situation, it is the third party that issues the card, manages the customer relationship, sets the terms and conditions of the card service, and controls card design, marketing, pricing fees, interest rates, and owns the card balances.

In regard to debit card services, Canadian credit unions have issued approximately 3.5 million proprietary debit cards and are members of several ATM and debit payment networks. Credit unions affiliated with Canadian Central have access to Acculink, the national credit union system's proprietary network of over 1,700 surcharge-free ATMs across Canada.

Credit unions in British Columbia and the Atlantic provinces, and many in Ontario, are also members of The Exchange, a national network that includes credit unions and other financial institutions and provides surcharge-free access to more than 2,000 ATMs across Canada.

Credit unions have access to Interac membership and services through the group memberships provided by Canadian Central or Central 1, or through a direct membership with Interac. Credit unions also have access to international ATM and debit services networks through MasterCard Cirrus, Maestro, and Visa Plus.

It is important to note that each credit union individually determines which of these debit services they will provide to their members and at what pricing, and puts in place the service delivery models and appropriate supplier relationships that best fit the needs of the credit union and its members. This individuality is both a reflection and a reminder that credit unions are locally based organizations, delivering services that match the unique and diverse needs of the communities they serve.

To continue meeting these needs, Canada's credit unions need access to the broadest possible range of products, suppliers, and delivery models for debit and credit card services. This kind of flexibility is consistent with an open market environment that provides competitive choice for credit unions and their members. It also includes support for ensuring that a strong, domestically focused payments delivery channel, as provided by Interac, is preserved.

This should include allowing Interac to restructure its governance model to gain access to the capital and revenue generation tools needed to support development and implementation of new products and services, and a review of the regulatory and compliance environment to ensure that it provides a level playing field for all payments services.

As locally based organizations, credit unions respond to the unique needs of the communities they serve. Nationally, the tremendous success of Interac shows that it is similarly well positioned to respond to the unique needs of Canadians.

And as the card services market is transformed by the introduction of chip and other new technologies, the capability of Interac to develop and deliver new services focused on the needs of Canadians and the characteristics of the Canadian market will be of critical strategic value to Canada's credit unions in preserving their ability to remain competitive and continue meeting the needs of credit union members.

We wish to thank you once more for the opportunity to address you today. Ms. Goulard and I would be pleased to answer your questions.

[The Co-Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We'll now go to the Canadian Bankers Association.

[Nancy Hughes Anthony, President and Chief Executive Officer, Canadian Bankers Association]

Thank you very much, Mr. Chair.

I am pleased to be here.

With me today is my colleague, Terry Campbell, the Vice-President of Policy at the Canadian Bankers Association.

I'm also pleased that there are five individual bank representatives here, who have made themselves available on very short notice, and they will obviously be pleased to answer your questions as well.

We have a brief for you—and I hope you all have a copy of it. It contains information on the issues we will be discussing this afternoon.

We have met with many members of Parliament, many of whom are here at this table. In addition, we appeared before the Senate Committee on Banking to discuss the same issues you are focusing on in your study. I have also spoken with the president of the Retail Council of Canada and the Canadian Federation of Independent Business. We have heard the full range of their concerns.

While we're pleased to offer our thoughts and suggestions on issues from the perspective of institutions that issue credit cards, there are a range of matters—and I would include as examples the setting of interchange fees and the specific terms of merchant acquirer contracts—that the banking industry does not control and where we are therefore not able to provide specific detailed commentary. It's also important to remember that in a competitive marketplace, where individual institutions are actively competing for customer business, information regarding bank operations and business strategies is highly confidential and proprietary in nature. It is information that banks do not share among themselves or with the CBA to ensure we're in full compliance with the Competition Act.

That said, we're certainly very happy to have this discussion today to answer any questions we can to the best of our ability. With this in mind, I'd like to turn to our submission. As you'll see at the beginning, we've outlined the many benefits of credit cards for both consumers and retailers, including choice and competition in the marketplace. I think that unfortunately many of these benefits have been overlooked in the recent public commentary. We also need to keep in mind a few key statistics about credit cards, such as the fact that 70% of Canadians pay off their cards every month, the fact that credit card debt at the moment is only 3% of total household debt, and the fact as well that there are over 60 low-rate cards currently available in the marketplace in Canada.

In the interest of time, Mr. Chair, I'm going to touch very briefly on four issues of interest to this committee.

Starting on page 4 of our submission, I'd like to clarify a few points on interchange fees. As this committee well knows, interchange rates are set by the credit card companies, not issuers or acquirers. Further, while Visa and MasterCard do not receive the interchange fee directly, they do receive a transaction fee from acquirers and they do receive a transaction fee from card issuers like banks and credit unions. I think the important point here is that in a credit card transaction, all participants benefit from the transaction so all share in the cost.

A key issue that has been raised in the committee hearings is around the disclosure of interchange fees by both card companies and by acquirers to merchants. We have to admit that what we hear is that this is very complex. We note from their presentations to this committee that both Visa and MasterCard have heard these concerns, and we understand they will be working more closely with retailers to resolve these concerns. We've also heard the same sentiments from the acquiring companies that you had testifying before you on Tuesday.

Even though banks do not set these fees, our members agree there are things that can be further enhanced to assist consumers in better understanding this process. Banks as card issuers are considering better explanations for their card customers about the cost of interchange fees to merchants when credit cards are used. Clearly the suggestions of this committee are very welcome in that regard.

If I could turn to premium cards, it's on page 5 of our brief. We know this committee has heard a great deal about premium cards, particularly around the introduction and issuing of some of these cards to consumers. We agree there was some confusion on the part of some who received the cards, and there could have been better and clearer communications to the customer about why these cards were being introduced. Going forward, the lesson learned here is that more care needs to be taken to ensure there is greater clarity for our clients in any such further implementation.

Another matter that has been raised is the question of premium credit cards being sent to consumers without their consent. I think there's been a discussion around this, but banks have heard these concerns and they are reviewing their practices around issuing these cards. As well, there's a concern that a true premium card--and I would say “true” is one that attracts a higher interchange fee--had been sent to people who perhaps should not have received them. A step that could be taken by the banks is to further clarify for customers what the criteria and the requirements are for these true premium cards.

The third area I'd like to comment on—which is in our brief, on page 6 in English, et à la page 7 en français--is the recently introduced new government regulations. While obviously the full implications of these regulations are still unclear and we're still working through the implications and the impact of these, they will require significant changes to products, systems, and processes. They will be very costly to implement. We're still looking at what that could mean. Estimates go as high as hundreds of millions of dollars, which is exceedingly material. We would be very pleased to answer your questions today on these regulations, and of course we will be commenting to the government in terms of the period that is available for public comment.

Lastly, we have some comments on debit cards. That starts on page 6 in our brief, à la page 8 en français. While the current debit card system in Canada has served Canadians well, it needs to grow and evolve to meet the needs of a more integrated global economy. We know that Canadians are among the heaviest users of debit cards in the world and that Interac can rightfully take credit for that. However, Interac is an association and it operates on a strict cost-recovery basis, which limits its ability to raise capital for innovation. For competition to be an effective driver of innovation, all competitors need to have the freedom to compete fully in an open marketplace, including Interac.

We know there are other players in the market. They have testified before you. Both Visa and MasterCard recently entered Canada with debit products. The point I wish to make is that debit market choice and competition is an international reality and Canadians should not be left behind.

I'd like to conclude by saying that the payment card system in Canada works well for individuals and for businesses. Nonetheless, there's always room for improvement. I've given you a few suggestions about areas where the banks are able to make changes to improve clarity and transparency for consumers. I would also stress that it's an exceedingly complex system. It's very important that we carefully consider the potential impacts and consequences of all aspects of the system before new measures are put in place.

Merci beaucoup. I'd be happy to answer your questions.

[The Co-Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We'll go finally to RBC Royal Bank, please.

[Cathy Honor, Head, Cards and Payments Solutions, RBC Royal Bank]

Thank you. We appreciate the opportunity to appear before the committee today.

My name is Cathy Honor, and I head up RBC's global cards and payments business, overseeing card products in more than 20 countries around the world.

As in issuer, RBC provides debit, credit, Visa, MasterCard, and Amex products all around the world. We are also our own acquirer in many countries, but in Canada and the U.S., our acquiring business was transferred to a separately run joint venture company, Moneris, which has appeared at these hearings on its own behalf. Up until earlier this year, I also sat on the Interac board.

RBC is the second-largest credit card issuer in Canada and the ninth-largest in North America. Based on our experience globally, we believe the credit card market in Canada is functioning well for consumers and retailers who are benefiting from choice, competition, and the convenience of a thriving payment system.

Merchants have enjoyed virtually no changes to interchange rates for over a decade, despite rising fraud and payment costs. I acknowledge, however, that there have been a lot of changes over the last year to align Canada with other parts of the world. Despite these changes, Canada remains and continues to enjoy significantly lower interchange rates than similar industrialized nations.

Canadians are happy with their credit cards, both consumers and businesses who heavily use credit cards for both payments and cash management. In February 2008, Forrester Research issued a Canadian customer experience report, with overall customer experience ratings across multiple industries. Canadian credit card issuers came out amongst the highest ratings.

In closing, we are privileged to participate in one of the world's largest and most successful electronic payments markets. At the same time, we recognize that there are always areas for improvement, and we will continue to work with our customers, the industry, and the government to ensure that Canada's payment system remains one of the best in the world.

Thank you.

[The Co-Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We'll now go to members for questions, starting with Mr. McKay for seven minutes.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Thank you, Chair, and thank you, witnesses.

I'm interested in the issue of credit cards. In the early part of this year, I received this card, and I have an old card I'm not going to show you. But this one has “Infinity” on it, and apparently if I take this card to a merchant, the merchant pays more money for the card than if I take the other card to the merchant. I had no idea until these hearings started that this was what was happening to these merchants. I like to think that I do pay attention to these things, but maybe that just slipped by.

So I want to know, what's the difference in the rate of interchange? If I present my Infinity card as opposed to a regular card, what's the difference in the rate between the two as far as the merchant is concerned?

[Nancy Hughes Anthony]

Of course, we're all dying to know what card Mr. McKay has.

[John McKay, Liberal, Scarborough—Guildwood, ON]

That's why I didn't show it to you.

[Nancy Hughes Anthony]

Oh, darn.

Seriously, there are so many cards.

I wonder if one of my colleagues would take that question.

[Cheryl Longo, Senior Vice-President, Card Products, Retail Markets, Canadian Imperial Bank of Commerce]

It's one-fifth of 1%. Twenty basis points is the differential.

[John McKay, Liberal, Scarborough—Guildwood, ON]

I'm told it's about 20 basis points through to about 0.3%. If I take your base rate of about 1.5%....

Is that correct? Is that your base rate, 1.5% to 1.6%?

[Cheryl Longo]

On a blended basis—and it depends for every issuer, because it depends on the consumer behaviour of where they shop—it's about 1.5% or 1.6%.

[John McKay, Liberal, Scarborough—Guildwood, ON]

So it's 1.5% to 1.6%. You're saying it's two basis points on top of that, and I've heard it's up to 3.5 basis points.

[Cheryl Longo]

No, I'm sorry. That would make it 1.7% to 1.8%, not 200 basis points.

[John McKay, Liberal, Scarborough—Guildwood, ON]

In terms of an increase on 1.5% and two basis points, what does that work out to in percentage terms, in terms of the increase to your fee?

[Cheryl Longo]

It's 20 basis points on 1.6%.

[John McKay, Liberal, Scarborough—Guildwood, ON]

You have a base of 1.5%, and you're increasing by 0.2%. You're at least 10%--

[Cheryl Longo]

You're right. It's about 12%.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Effectively, you've increased your revenues by at least 10%, possibly as much as 20%, just by issuing that card. Is that correct?

[Cheryl Longo]

No, that's not correct.