Finance Committee on June 2nd, 2009

[John Scott]

I honestly think the critical thing is transparency and a clear understanding upfront. There has been none. These things arrived on the market, and I can guarantee that everybody in this room has one in their wallet. There was no transparency upfront with anybody. That's number one.

Let's be really clear. In the grocery industry, with the competitive margins, there is no way to pass on these additional fees. You eat them. There is no room there. The debit card has to stay at cents per transaction. It has to stay there. If you move to a percentage, you will knock a ton of small businesses out of the market, and not just grocers. You'll knock a ton out of the market.

[Chris Warkentin, Conservative, Peace River, AB]

I appreciate that, but I'm looking for some type of solution here. The credit card companies tell us that because of the new technologies they're implementing they have to charge an additional interchange fee for the processing of the chip. On the other side, we hear that transparency is necessary.

I was a small business owner. We could work in a situation of increased costs for our business as long as we knew those costs were coming. We could work them into the price and everybody was on the same playing field.

I'm not hearing your recommendation. Is it that you should know that these things are happening? We know they're all happening now, but that's not helping the situation today. Is it necessary to level these fees?

[John Scott]

That would be great, but it would take the whole concept of entrepreneurship out of the marketplace. There has to be some modicum of equilibrium. Can we charge an enhanced fee for this credit card? Sure, but if you take it to François' store, he needs to know it's going to be there. There has to be some range of fairness.

I want to come back to a point I made in my testimony. These things are not discretionary by retailers; these are absolutes. You must carry these things. You cannot train your front-end staff to accept this card and not another one. If this committee does nothing else but recommend transparency in credit fees to the merchant, that will be huge.

[Chris Warkentin, Conservative, Peace River, AB]

Thank you.

[The Co-Chair, Conservative, James Rajotte]

Thank you, Mr. Warkentin.

We'll go to Mr. Thibeault.

[Glenn Thibeault, NDP, Sudbury, ON]

Thank you, Mr. Chair.

Welcome, everyone.

Mr. Conacher, in your opening statement, you raised some important points that have been overlooked throughout a lot of this. We've heard about fair treatment, fair pricing, corporate responsibility, and transparency.

What can we do to ensure those things are put in place so that credit card companies can't gouge consumers with 26% interest rates because they're four days late on a payment? What can we do to ensure that merchants and small and medium-sized businesses won't have to increase their costs to the consumer because of what interchange fees are doing?

Maybe you can explain some of your ideas.

[Duff Conacher]

Sure. As I mentioned, the first is a price review.

In the past decade when Canadians have been asked about access to credit and these banking services, 90% have said these are essential to function in society. Whether you're trying to travel or rent a car, you just need to have access to basic credit. We view it as something that should be treated as other essential services are treated, like energy utilities. When you have the concentration of market share within a few companies, there is even more reason to do so.

So in order to establish where the fair baseline is in terms of fair prices, you need to go through an audit. Send in the auditors to these companies. Don't trust their own figures, because they can fudge them given the looseness of general accounting rules and how often their credit card divisions are mixed in with all their operations. Do these independent audits.

Nothing would be disclosed that would be proprietary. It would just simply let consumers know what the profit levels are that these companies are operating at. If they're operating at profits margins of 50% to 100%, just the news of that is going to bring down the prices and interest rates the next day. But if it doesn't, then the government steps in and goes further.

Secondly, consumers pay for all of the advocacy of financial institutions and the other companies. Why? Because these companies can easily add a loonie or a toonie to their charges or a percentage point to their interest rates and raise millions of dollars--tens of millions and hundreds of millions of dollars overall across the industry because they have 25 million customers.

How do you balance that out? Well, we're sitting here as consumer groups with very limited budgets, trying to interest people and get them to join in support across the country. It's very difficult. We can't just add a loonie or a toonie to some bill we're sending them like the institutions can. So at no cost to the industry or the government, the government can require these companies to enclose a one-page pamphlet like this one, like the magazines used to use. It's a lick-and-stick. It would describe the group and invite people to join. They'd stick their cheque in and send it back.

Twenty-five million Canadians would receive it. If only 3% responded, there would be a group of 750,000 members. If there were a $40 membership fee, the group would have a $30 million budget. Then you would have a group that people could call, that could help them shop around, and that could be here participating in policy-making processes. It could also help people complain. It could do a ton of financial literacy work that no other organization could possibly do as effectively as a group that's run and funded by consumers themselves.

Then you need an overall audit of competition as well.

Do those three things and you'll actually have effective accountability, fair treatment, and fair prices.

[Glenn Thibeault, NDP, Sudbury, ON]

Great. Thanks.

Madam Reed, you mentioned--I can't rhyme them all off--a list of credit card products, from credit cheques to premium cards, and you said these products do consumers no favours.

Can you explain that?

[Geneviève Reed]

Actually, we have been conducting research on those commercial practices. The report will be out soon, so I will be glad to share the report with all the members.

For instance, we can take the example of the minimum payment. The amount of the minimum payment has changed from time to time. Ten years ago, it was 5% of your balance. Now it's 2%. If a person is paying only his minimum payment every month, it will increase the amount of interest that he will pay to the lender, to the credit card owner. This is one thing that we may want to regulate or have a framework on. This is one example.

[Glenn Thibeault, NDP, Sudbury, ON]

Great. Thanks.

Mr. Scott, one of the things I've heard from my local chamber of commerce in Sudbury is that many of these small and medium-sized businesses, as I think Mr. Conacher said, see credit cards and debit cards as a public utility. I like the way he's using that.

Are we going to see, for example.... I don't want to name the financial institution, but in a television ad, there are two ladies shopping at a grocery store, and one of them says, “Hey, I got two bucks. What did you get?” Do you think people recognize that your store has just paid for that two bucks? The woman makes it seem like she just got this two dollars free and it seems like it's coming from the credit card company. Do you think the average Joe or Mary in Canadian society understands who's paying that two dollars?

[François Bouchard]

Absolutely not. My staff doesn't even understand it. If they see the ad for the thing, they're going to run and get that card and do the same thing. So no, it's misleading, absolutely misleading.

My fees go up constantly. I have to cut somewhere else. I have to cut positions. I mean, I'm looking at the future and saying, “Now what?”

I've come through a rough year with the credit cards and now we're going to debit. If they change to debit, now what do I do? You simply can't predict it. It's hard enough to be in business as a small business when all these things are changing. That's why we need the committee to make some recommendations and act on them. Nobody really gets it. To answer your question, even my staff who work in it day to day don't get it.

[Glenn Thibeault, NDP, Sudbury, ON]

So you have small profit margins and the credit card companies are coming in and grabbing them. That means you can't expand and you can't hire more people.

[François Bouchard]

I can tell you that my fees went up 25%. I didn't see it coming. I simply got a little notice that said, “By the way, the fees are changing.” That's it.

[The Co-Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. Thibeault.

Ms. Coady, please.

[Siobhan Coady, Liberal, St. John's South—Mount Pearl, NL]

Thank you very much for taking the time out of your hectic schedules to be with us today. This is a very important issue and we appreciate your time and the information you're giving.

I'd like to start, if I may, with the CPA. I have a few questions for you on clearing and settlement.

As you may be aware, as I understand it, Visa and MasterCard currently do their clearing through the Bank of America in the United States. One of the questions I wanted to ask you is on clearing and settlement should they enter the debit card market. As they're entering the debit card market, I understand they will still be clearing and settling through their traditional route. Is that your understanding as well?

[Doug Kreviazuk]

I can tell you that in our meetings with Visa, that's what was expressed to us. We've not had a similar discussion with MasterCard, although I've heard something very similar to that in these proceedings.

[Siobhan Coady, Liberal, St. John's South—Mount Pearl, NL]

I'm wondering about your thoughts on that. Considering that they may be settling outside of Canada, I guess that is an issue of some importance for the banking system, for the Canadian payment system. I'm wondering what your thoughts are on that. Do you think there should be a regulatory framework put around Visa or MasterCard or any entrant into the debit card market to require that they would clear and settle through the Canadian Payments Association?

Would you give me your perspective on that?

[Doug Kreviazuk]

I think there are two points to that question. The first is with respect to processing the payments. At the Canadian Payments Association, all of the clearing and settlement is done within the borders of Canada. Even our backup contingency, and our second backup, and our third backup remain within the borders of this country.

If for any reason they all failed at one time and we had to go to a fourth level of backup, it could conceivably be routed through the United States, because that's really where the only other system is. But that would only happen if the supplier of our services contacted the CPA and we subsequently contacted each of the member institutions to safeguard any of the issues related to the Patriot Act, etc. That's the first point.

The second point was with respect to settlement. Settlement in this country happens across the books of the Bank of Canada. The reason it does is so that the bank itself is the lender of last resort. In the event that at the end of the day there was a failure or a systemic failure, the Bank of Canada stands in as the lender of last resort in order to preserve the soundness of our system.

[Siobhan Coady, Liberal, St. John's South—Mount Pearl, NL]

Based on that interesting information, would you think that we should consider regulations for Visa and MasterCard to debit and clear in Canada should they enter the field of debit?

[Doug Kreviazuk]

I've not opined on that question, but I can tell you that it raises significant public policy concerns.

[Siobhan Coady, Liberal, St. John's South—Mount Pearl, NL]

Thank you. I agree with you there.

I'm sure you have an observation on the U.S. system. As you may be aware, STAR was similar--and I'll say “similar”--to Interac. They've basically been crowded out of the market by Visa and MasterCard. What have been your observations? Have you seen increases in exchange fees, for example, on the debit product because of this? What are the shifts in the U.S. marketplace? What observations do you have?

[Doug Kreviazuk]

Well, we're not directly involved with the United States, although in my capacity at the CPA I do have occasion to meet with my colleagues both south of the border and overseas.

I can tell you that particularly in the United States their current preoccupation is with regard to risk, I guess, both liquidity risk and safety risk, but it is, as it is in Canada, a very dynamic industry. There are a lot of players moving into the space and new payment products happening. Some are succeeding and some are failing, but as you point out, Visa and MasterCard have done exceptionally well in their growth rate in the United States, and I guess you could say at the expense of some of the smaller regional networks.

[Siobhan Coady, Liberal, St. John's South—Mount Pearl, NL]

Thank you.

I'm going to have to move to the grocers' association. I have a couple of seconds left. I have two quick questions.

Have you seen a huge increase in these premium cards? I understood that it was only 8%. Some retailers are telling me it's 25% to 30%.

Second, there are 50% more Aeroplan miles given on gas and groceries and in drug stores as per their information in their own leaflets. Are you seeing more people using credit and premium cards at the grocers?

[The Co-Chair, Conservative, James Rajotte]

Be very brief, please, Mr. Bouchard.

[François Bouchard]

Definitely, the increase has been significant. We're seeing people use them more and more. I can track back four or five years. We're seeing a double-digit increase in the usage. You've seen the ads. People are saying, “I spend $5,000 on groceries a year so why don't I use my points and collect?” There is no doubt about that.

The other thing we're seeing a lot of is those Infinite cards. The consumers are coming into our stores saying that “well, they changed them to put the chip in the card”, but sure enough, it's not just a chip. It's now an Infinite card. We're seeing that at the store.