Evidence of meeting #31 for Finance in the 40th Parliament, 2nd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was merchants.
A recording is available from Parliament.
5:15 p.m.
Head, Cards and Payments Solutions, RBC Royal Bank
I'll answer that.
First of all, interchange rates are a charge to the merchant--not to the consumer, to the merchant--for the benefits that they receive.
5:15 p.m.
Conservative
Michael Chong Conservative Wellington—Halton Hills, ON
Yes, and I'm suggesting that we change that. I'm suggesting that a potential solution is to change that, and charge it to the consumer rather than to the merchant.
At the till, let's say the consumer is asked, “Cash or credit?” If the consumer says cash, they don't pay the interchange. If they say credit, then boom, the interchange is added on of whatever bank issuer, of whatever credit card they are using. It's itemized on the final bill of sale at the point of sale, just like the provincial sales tax and the GST are, thereby empowering the consumer to choose the credit card and interchange rate that best fit their needs.
5:15 p.m.
Head, Cards and Payments Solutions, RBC Royal Bank
There are a couple of things here.
Let's say you allow each bank to set the interchange. The first problem is that payment cards are not a Canadian phenomenon. We have to allow those cards to be used everywhere else in the world, and those merchants need to know what the rates are. So by allowing me to say, okay, it's going to be 2%, and at CIBC it's going to be 6%--
5:15 p.m.
Conservative
Michael Chong Conservative Wellington—Halton Hills, ON
With all due respect, we've just gone from, I think, two interchange rates to a plethora. Obviously the computer systems and the wherewithal to handle that kind of complexity exist.
5:20 p.m.
Head, Cards and Payments Solutions, RBC Royal Bank
No, but the problem is for the merchant. I don't think the merchant would want that. The merchant will not know whether she, coming in with her Visa card, and I, coming in with my Visa card, will have different rates.
5:20 p.m.
Conservative
Michael Chong Conservative Wellington—Halton Hills, ON
But the merchant doesn't care, because the merchant's not paying the interchange rate. The merchant will be paying a separate fee to the acquirer for the service the acquirer pays, but it's simply a fee added to the bill that the consumer would pay and pass on, through the acquirer, to the issuing bank.
5:20 p.m.
Head, Cards and Payments Solutions, RBC Royal Bank
But the interchange rate, by definition, is the cost to the merchants for the benefits they derive out of the payments. So it doesn't make sense.
5:20 p.m.
Vice-President, Personal Lending and Credit Cards, TD Canada Trust
To a certain extent, you have that in existence somewhat today, because merchants can offer a discount for cash. That ultimately is really the biggest break on excessive interchange rates, I think. If all of a sudden MasterCard or Visa tomorrow wanted to charge 10% interchange, I think you'd quickly see merchants offering significant discounts for cash payments.
The model you're describing is surcharging. That could also work as the flip side of a discount for cash. Merchants can compete on whether or not to absorb the cost of interchange, as they absorb the cost for shipping or other features they offer their customers.
But I think you're on the right path when you say let the market be transparent and let it compete.
5:20 p.m.
Director, Payments Policy, Credit Union Central of Canada
I think there's an assumption that cash provides more value for the merchant. That's not necessarily so. Cash can be an expensive thing for a merchant to handle--
5:20 p.m.
Director, Payments Policy, Credit Union Central of Canada
--so if you're incentivizing consumer behaviour that says “I'm going to pay cash because it's cheaper to do that”, it could actually increase costs for the merchant.
5:20 p.m.
Conservative
Michael Chong Conservative Wellington—Halton Hills, ON
But clearly, credit cards, in the view of the Retail Council of Canada and other retailers, are also expensive for them to process. But I understand the bleed from the till, fraud and the like, and theft at the till in terms of cash.
Thank you very much.
5:20 p.m.
Conservative
5:20 p.m.
Liberal
Anthony Rota Liberal Nipissing—Timiskaming, ON
Thank you, Mr. Chair.
I'd like to shift over to debit and maybe spend a little bit of time on that regarding priority routing. This is for the banks, I guess, more than the association. Have you been asked or have you signed agreements to ensure priority routing for VISA or MasterCard?
I'll just open it up. If anyone's been asked to get on board, how does that help or how doesn't it help?
5:20 p.m.
Senior Vice-President, Product Management, Personal and Commercial Banking Canada, BMO Financial Group
I'll take that question, being a Maestro issuer. Just for the record, we've been a Maestro issuer for north of 15 years because we think it makes a ton of sense to allow our debit consumers to use their debit cards around the world. We've had Maestro in place all along.
As Maestro has started to enter into Canada, even on a limited basis, what priority routing does, if two networks are available to make the purchase, is allow the determination of which network is provided. We have made agreements relative to wanting to be able to pick the low-cost alternative. As a result, we can elect to priority route our customers.
We think that makes a lot of sense, because we're worried about the alternative. If you ask the customer to choose whether he wants to go to Interac or Maestro, what will happen in the marketplace over time is that we'll start competing to win that customer's choice. For all of your concerns around the merchant today, those convincing the consumer to choose will start to enter more cost into the system. We think the priority routing keeps it in a lower-cost model.
5:20 p.m.
Liberal
Anthony Rota Liberal Nipissing—Timiskaming, ON
Just to clarify, I like what I heard there, which is that the lower cost will automatically be chosen.
5:20 p.m.
Senior Vice-President, Product Management, Personal and Commercial Banking Canada, BMO Financial Group
Because of the number of parties in the system, the merchant makes his decision on whether he wants to accept each of those network providers and--
5:20 p.m.
Liberal
Anthony Rota Liberal Nipissing—Timiskaming, ON
So if there are two, does the machine look at the two rates and decide on the lowest one, or is it just whichever one the agreement is with?
5:20 p.m.
Senior Vice-President, Product Management, Personal and Commercial Banking Canada, BMO Financial Group
It's whichever one the agreement is with. There is no particular issuer.
5:20 p.m.
Senior Vice-President, Product Management, Personal and Commercial Banking Canada, BMO Financial Group
The merchant decides who it is. The merchant decides whether he wants to participate at all--
5:20 p.m.
Senior Vice-President, Product Management, Personal and Commercial Banking Canada, BMO Financial Group
--and then it's the person who has the relationship with the cardholder who makes the decision on which network it goes through. It's our card that's in use and it's our customer who is using the card, and there are costs passed along to us as well.
