Finance Committee on June 2nd, 2009

[The Co-Chair, Conservative, James Rajotte]

I call to order this joint meeting of the Standing Committee on Industry, Science and Technology and the Standing Committee on Finance. We are continuing, pursuant to Standing Order 108(2), our study of credit card interchange fees and the debit payment system in Canada.

We have with us here today four organizations: the Canadian Payments Association, Option consommateurs, the Canadian Federation of Independent Grocers, and the Canadian Community Reinvestment Coalition.

We'll start with the Canadian Payments Association.

[Doug Kreviazuk, Vice-President, Policy and Public Affairs, Canadian Payments Association]

Good morning.

First of all, l'd like to thank the members for the invitation and the opportunity for the Canadian Payments Association to speak on this important issue here today.

The Canadian Payments Association, or CPA, was created by an act of Parliament in 1980. Our membership currently stands at 136 financial institutions, including the Bank of Canada, the chartered banks, the trust and loan companies, credit union and caisse populaire centrals, cooperative credit associations, and other institutions.

Parliament has given us a very specific mandate to establish and operate the national clearing and settlement system; to facilitate the interaction of our system with others; and to facilitate the development of new payment methods and technologies. Parliament has further set out a clear public policy mandate for the CPA to promote the safety, soundness, and efficiency of our systems, taking into account the interests of all users. As such, the CPA plays a leadership role in providing safe and efficient clearing and settlement systems for Canadians.

Payments are the lifeblood of our economy. Every day, Canadians, businesses, and governments use a variety of payment instruments to purchase goods and services, make financial investments, and transfer funds between two parties.

Financial institutions need arrangements to transfer funds among themselves. This is facilitated through clearing and settlement systems and a framework of rules and standards maintained by the Canadian Payments Association. On an average day, we clear and settle $202 billion. Last year alone, we cleared and settled more than 5.7 billion payment transactions.

The CPA operates in a very well-defined environment. We operate pursuant to our legislated mandate and our clear public policy objectives, and under the careful oversight of both the Minister of Finance and the Governor of the Bank of Canada.

Our bylaws are considered statutory instruments. As such, they require Governor-in-Council approval.

The rules we develop in support of the various payment applications and for the operation of the clearing and settlement system are subject to scrutiny by the Minister of Finance, who has the power of disapproval on any CPA rule, in whole or in part, for public policy reasons.

The CPA also owns and operates this country's Large Value Transfer System, which has been designated as a systemically important payments system under the Payment Clearing and Settlement Act. As such, the Governor of the Bank of Canada has direct oversight responsibility for this system and the affairs of the CPA with regard to that system.

But the relationship with both of these important oversight bodies extends well beyond the formal requirements established in the legislation. As an effective self-regulated organization, the CPA fosters and promotes close relationships with all the stakeholders in the payment system.

In this regard, the CPA maintains a rigorous consultation process. In the development of new rules or policies for the payment system, we rely heavily on the advice provided by specialized committees composed of members and stakeholders alike.

Once the new policy has been drafted, it's presented to the Stakeholder Advisory Council for their consideration and guidance. Subsequently, board approval is sought for the release of this policy for broad public consultation. Only after stakeholder and member input is fully considered will the final recommendation be put forward to my board of directors. If the new or amended rule is approved by the board, it will immediately be sent to the Minister of Finance for his consideration. The minister has disapproval power of any CPA rule within 30 days of receipt.

A moment ago, I spoke of the importance of the Stakeholder Advisory Council. It’s been in existence since 1996, but only enshrined in our legislation since 2001. The council is composed of 18 stakeholders, representing retailers, large and small corporate entities, provincial and federal governments, payment service providers, and consumer groups. Given the breadth of knowledge on this council and the diversity of its composition, the members of this council participate in all significant activities at the CPA.

Now, returning to my mandate for a moment, the first mandate, “to establish and operate the system”, is in fact critical to a well functioning Canadian economy, but the CPA's facilitation role is equally important for the smooth operation of the payment system and its evolution. The change drivers to the payments system are many, but the CPA continues to be responsive to the industry's needs through the provision of a rules framework for payments and the portal for members to clear and settle these payment transactions.

As a result, the focus of financial institutions and payment service providers need not be on the back end of the payments system, but on the front end and the development of new and more efficient payments applications to meet the needs of Canadians.

Before I conclude, I'd like to briefly comment on credit cards. Credit cards have not historically been seen as part of the CPA's scope. When the CPA was first created back in 1980, payments were, for the most part, paper cheques, and our business was to clear and settle payments drawn on demand deposit accounts. Since credit cards at that time did not draw on demand deposit accounts, they were not seen to be part of the CPA's mandate, and that remains true today.

That point aside, we're all aware that the landscape continues to change quickly. In this regard, the CPA continues to play a leadership role in providing safe and efficient clearing settlement systems to meet the current and future needs of Canadians.

Thank you very much.

[The Co-Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We'll now go to Option consommateurs, s'il vous plaît.

[Anu Bose, Head, Ottawa Office, Option consommateurs]

Thank you very much, Mr. Rajotte.

Committee chairs, vice-chairs, committee members, the clerks of the committee, and analysts, let me begin by thanking you for giving Option consommateurs the opportunity to appear before you on the issue of fees charged to merchants and to consumers for the use of credit and debit cards.

Option consommateurs was established in 1983. We are a non-profit association whose mission is to promote and protect consumers' interests and to ensure they are respected. Our head office is located in Montreal, and we've recently opened a small office in Ottawa.

We intervene on matters of public policy with both the Government of Quebec and the federal government. We have been involved in analyses of the Canadian financial services sector for several years, through research, surveys, and by representing consumers' interests in different fora, such as the Canadian Payments Association.

With me today is Ms. Geneviève Reed, from Montreal, who is the Head of the Research and Representation Department of Option consommateurs. I will hand the floor over to my colleague.

[Geneviève Reed, Head, Research and Representation Department, Option consommateurs]

There has been much recent discussion that it is consumers who ultimately foot the bill for interchange fees, whether or not they use their credit cards. In addition, it appears that all consumers "subsidize" business and premium credit card users through overall increased prices of the goods and services which they consume. This practice combined with other practices such as cuts in the minimum monthly payment, over-limit and late-payment penalties, discounted introductory interest rates, cash advance cheques, cash rebates, payment holidays and countless offers in the mail and in stores, do the consumer no favour. Instead, they only confuse the ill-informed or already indebted consumer.

Credit products are increasingly complex. Unfortunately, a significant segment of the Canadian population faces challenges of basic literacy and, most likely, also challenges of financial capacity and financial literacy. We believe that it is time, where credit cards are concerned, to reduce the imbalance between large corporations and individual consumers. We must also raise the principle of lender responsibility, by this, we mean the responsibility of the financial institution which chooses to provide a new credit card to someone already carrying $40,000 of unsecured consumer debt, or is unable to alert a consumer immediately when he or she exceeds the credit limit.

Lending institutions often overlook their obligation to provide full disclosure, to provide sound financial advice and to assess the repayment capacity of their borrowers. Several witnesses whom you have heard during previous sessions of this committee have already demonstrated the problem. The system is complex and full of holes. Canadians are certainly heavy users of credit and debit cards. They use these payment mechanisms without really understanding how they actually operate and without always knowing what their rights and responsibilities are.

Credit cards and debit cards are electronic payment instruments, they are monetary transactions without paper currency or cheques. We have observed with alarm that in 21^st century Canada, there's no recognition in the Currency Act of electronic money. It simply does not exist. Instead, electronic payment systems involve multiple stakeholders whose activities are each subject to different regulatory frameworks. No one player appears to bear overall responsibility. There must be clear and fair rules for all players in the system. At present, users bear the responsibility and risks related to electronic payments even though they themselves do not create these risks. In addition, the majority of the instruments governing electronic payments provide no penalties for non-compliance. The delegation of supervisory powers to the private sector leads to a democratic deficit since the interests of consumers cannot be properly represented as they are in a parliamentary or regulatory process.

Take the example of debit cards. Their use is governed by the Code of Practice for Consumer Debit Card Services, adopted in 1992. The application of this code is voluntary. And according to various surveys and studies, the financial institutions apply it partially and unevenly and consumers are left in the dark. Since Interac may change its business model and Visa and MasterCard may enter the debit card market, we believe it is imperative that governments ensure that Canadian users of debit cards are guaranteed a safe and fair environment.

I will now hand the floor over to Ms. Bose, who will share with you our conclusions.

[Anu Bose]

We ask that the results of the investigation being conducted by the Competition Bureau on the practices of Visa and MasterCard under section 79 be made public and open to discussions; that the Competition Bureau initiate an investigation into profit levels; that the Department of Finance undertake a consultation on electronic funds transfer; and that clear and mandatory rules be established for account statements.

Thank you, ladies and gentlemen.

We would be most happy to take questions.

[The Co-Chair, Conservative, James Rajotte]

Thank you for your presentation.

We'll now go to the Canadian Federation of Independent Grocers.

[John Scott, President and Chief Executive Officer, Canadian Federation of Independent Grocers]

Good morning. My name is John Scott. I am the president and CEO of the Canadian Federation of Independent Grocers. With me today is François Bouchard, who is the owner of The Country Grocer here in Ottawa. He's also the volunteer treasurer of our organization.

Before I address the credit card fee issue and the proposal by Interac to restructure, I'd like to put the issue into context by ensuring that members of these committees understand the unique situation of independent grocery retailers in the Canadian market. This $72-billion retail food industry is both highly competitive and very concentrated, with approximately 85% of food distribution in the hands of only five corporations.

While statistics suggest that independent grocers account for about 40% of overall retail food sales, this seeming dichotomy is explained by understanding that independent grocers that are not large enough to buy products directly from the manufacturer must garner their goods from a wholesale operation of one of these major players. In fact, Canada is a very rare country indeed, because a company can operate retail stores, franchise, and wholesale all in the same market.

In order to stay on the playing field in this extremely difficult environment, it is critical that the independent grocer be differentiated from all other competitors. But given the high concentration in this market and the impact of buying power, you can imagine how hard it is for us to maintain our competitive position. Consequently, to the maximum extent possible, the independent must have a degree of certainty in its operating cost structure.

One of those cost centres is the expense associated with financial transactions, such as the growing and ubiquitous use by consumers of debit and credit cards. At one time, acceptance of these cards in the retail food environment was a “nice-to-have”. Today it's a must-have. It's almost a public utility.

I don’t want to use our time to regurgitate the endless statistics and percentages that you've been bombarded with through the course of these hearings. The crux of the issue, from our perspective, is that Visa and MasterCard control 94% of the credit card market in Canada, which enables them to impose and adjust very high fees both to retailers and to consumers. Based on their history, the planned move by these two huge corporations to enter the debit and credit card market suggests that there will be an upward trajectory in fees in the future.

In the past 18 months alone, Visa and MasterCard have taken a ton from our retailers. We know that the new enhanced credit cards that have been extensively marketed to the public have resulted in totally unexpected double-digit fee increases to the retailer. There is no cost certainty here, and there is no ability to control the cost base. Simply put, the consumer is told by the issuer that the cards are accepted at all retail outlets, and the retailer, regardless of size, must accept all of those cards or lose a percentage of customers. Imagine trying to train a cashier on the different appearance of a Visa card.

We are strongly of the opinion that these fee increases, if allowed to continue on their present unchecked course with no accountability or caps, will force some of our people out of the market. You all know that the profit margins in grocery are already razor-thin, and, because of scale, an independent grocer simply does not have the ability to negotiate a lower fee. For competitive reasons, it is impossible to pass these unexpected fees on to the consumer. No, for the independent grocer, disproportionately higher fees challenge the competitive landscape of the market. In such cases, the independent grocer, because of cost pressures, simply becomes less competitive.

Second, let's be really clear on this. When small businesses such as independent grocers are forced by ever-changing and uncontrollable external cost structures to go out of business, many elements of our society suffer harm, including the consumer, local producers, employees, and indeed, the diversity they bring through their entrepreneurship to our Canadian economy. In fact, every political party represented here cites small business as being the backbone of the economy in every election campaign. Why would you do anything to damage their competitive nature?

Enhanced credit card fees present an extremely difficult problem, but issues pertaining to the potential restructuring of the debit card and Interac agreement are even more daunting. The reality is that debit cards are much more prevalent in our stores than cash or credit cards. In fact, in some cases, 60% to 70% of all transactions are done with debit. Debit fees are very important to a retailer. They're based on so many cents per transaction.

Independent grocers are already at a disadvantage because they don't have the ability to negotiate transaction fees at the same level as major players. However, through the non-profit status and operation of Interac, we've arrived at a reasonable degree of certainty in the cost structure, and we do compete effectively in the Canadian market on that basis.

But any adjustment to this system or, in the worst possible case, a change to a percentage-based transaction, would dramatically exacerbate the cost differential that currently exists and would artificially and negatively affect the competitive landscape.

That's why it is imperative that if Visa and MasterCard are allowed to implement a debit system here, it should operate under the Canadian rules that govern Interac. Fees must relate to the cost of processing, plus only a reasonable rate of return with no contemplation of, or ability to move to, a percentage charge.

We do not accept the contention of Interac that this non-profit entity can compete against these two multinational credit card companies by continuing to offer low-cost alternatives. In essence, Interac would be placed in the same situation as the independent grocer. Because of lack of scale, the firm would have no alternative but to raise its fee base. Small business ends up being the victim.

It is imperative that we continue to maintain an accessible and equitable debit card system in Canada. We have yet to hear a convincing argument as to why a debit fee should have anything to do with the size of a grocery bill. The money is being transferred from the customer's account to the issuer in real time, and it's not a credit charge or a loan.

Canada has allowed a very unique system to develop. This open, unregulated system has created some huge challenges that have recently been exacerbated by the unwanted charges from value-enhanced credit cards.

It is now imperative that we as Canadians ensure the development of a fair, made-in-Canada payment system. We need to control the spiralling costs of accepting value-enhanced credit cards. More importantly, we need to ensure that we maintain a flat, reasonable, and cents-per-transaction merchant fee for debit cards. We need a system that provides for accountability and oversight. In short, together, let's develop a made-in-Canada solution that's fair to all players.

Thank you very much for allowing us the opportunity to bring our concerns to these committees today. We look forward to responding to your questions.

[The Co-Chair, Conservative, James Rajotte]

Thank you.

We'll go to the Canadian Community Reinvestment Coalition for the final presentation today.

[Duff Conacher, Chairperson, Canadian Community Reinvestment Coalition]

Thank you, Mr. Chair.

My name is Duff Conacher. I am the coordinator of Democracy Watch and chairperson of the Canadian Community Reinvestment Coalition. Thank you for the invitation to appear today on this very important topic, which essentially amounts to corporate responsibility and effective accountability measures in this area of access to credit, fair pricing, and the fair treatment of consumers across Canada.

The Canadian Community Reinvestment Coalition is made up of 100 organizations from across Canada. They are citizen groups that have come together and have been together now for 13 years. During this time, we have been advocating measures to effectively increase the accountability of banks and other financial institutions.

I welcome this opportunity today. I will not repeat the very well-stated concerns and problems with the current marketplace that other witnesses have already set out. Instead, I will highlight a couple of other factors having to do with access to credit and the credit card market.

I agree with Mr. Scott that this access-to-credit system is essentially now a public utility and should be regulated as such. Other public utilities are required to prove that their prices are fair and are required to go through public reviews before they can hike any of their rates. We need to apply this practice to our systems of basic credit and overall banking services.

The banks and other credit card companies have marketed credit cards much like tobacco companies have marketed their products, trying to hook youth on these products with images of security, freedom, and all the wonderful things that will come with credit, with little information about the downside. The downside, of course, is not to physical health but to financial health. Being hooked on debt can be just as damaging in the long run as being hooked on tobacco.

We need to have measures in place to ensure that these companies are providing full information, and also that consumers are receiving full information from other sources, because they generally will not trust the information that is coming from sellers. They realize that the seller is always trying to sell them something and does not have an incentive to fully inform them about any product.

The coalition was here in February 1997 before the industry committee, which held the last hearings on credit cards. Those hearings were unfortunately cut short by the election call in the spring of 1997, but I'd urge all members of the committee to read through the transcripts of those hearings. They contain some very interesting information. Pretty much all the stakeholders appeared, but because of the election, the committee did not issue a report.

Here we are now, 12 years later. The problems haven't gone away and have actually become worse as the gap between the credit card interest rate and the Bank of Canada prime lending rate has increased. We have also seen unilateral increases over the past year. It is our position that the banks are essentially trying to recoup the $16 billion in losses they suffered mainly due to their own decisions to get involved in very risky lending.

Since then, there have been three rounds of reviews of the Bank Act and financial institutions legislation. None of the rounds has produced any measures that will protect consumers from gouging and ensure that banks and other financial institutions are serving everyone fairly, at fair prices.

We heard from John McCallum, when he was secretary of state for financial institutions and entering his first cabinet meeting in 2002, that credit card interest rates were “grotesquely high”. That's a direct quote. Yet nothing has been done about these grotesquely high credit card interest rates since then.

These proposals by Minister of Finance Flaherty were made just a week ago. You should have before you a news release that the coalition issued on May 22 responding to the proposals. If you don't have it, you will soon, as it is being translated. The proposals are too little, too late, to protect financial consumers from being gouged.

Three of the eight proposed regulations change only credit card disclosure requirements, and only in minor ways. Another proposal only addresses consumer consent for increasing the credit limit. Another only limits debt collection practices in one way. None of these five of the eight proposed regulations will do anything to prevent gouging, nor will the proposal to create a task force on financial literacy. It will largely be redundant, given the existence of the Financial Consumer Agency of Canada, which has been doing financial literacy work for the past eight years now.

While the proposed 21-day interest-free period and a restriction on one fee, and payment allocation requirements will protect a very few customers from a very few charges, none of the proposals would decrease the likely already excessive credit card interest rates. Nor will they affect the extra interest rate and fee hikes the banks and other companies have unilaterally imposed in the past year, nor their overcharging for various credit card services.

What will actually bring accountability to the banks? What will effectively require them to do something that will actually help consumers in return for the up to $200 billion in subsidies offered to the banks? What will balance the marketplace, especially to balance the fact that consumers pay for all financial institution advocacy simply because the financial institutions charge consumers--

[The Co-Chair, Conservative, James Rajotte]

Mr. Conacher, could we ask you to conclude?

[Duff Conacher]

Yes, I will.

Our estimate is that consumers provide $200 million in annual costs to financial industry advocacy efforts.

We are asking for three simple things.

Yes, you can cap credit card interest rates, but you need an independent audit first, which should go back at least 10 years. It would require the credit card companies to prove that their prices and interest rates have been fair throughout that time period and that they've only been making a basic profit that's reasonable, not an excessive profit.

Second, we need to require the institutions to enclose a one-page pamphlet like this lick-and-stick envelope in their mailings to customers. This would invite customers to join their own “bank watch” facilities at no cost to industry and no cost to government.

[The Co-Chair, Conservative, James Rajotte]

Mr. Conacher, you're well over your time here. Thank you very much for your presentation.

We'll start with questions from members in a seven-minute round.

Mr. McTeague, you have the floor.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Thank you, Chair.

Thank you for everyone for being here today.

This is a very important subject for our party. We are the ones who pushed for these studies, both in the Senate and in the House of Commons. I am extremely pleased to see you here today.

If I may, I'll begin with you, Mr. Kreviazuk.

I have a couple of questions with respect to the CPA. You refer to and define stakeholders: a group of 18 consumer groups and provincial-federal representatives. I take it that they are experts. Can you tell us who they are specifically?

[Doug Kreviazuk]

I didn't bring the list with me, but I'll go through it. We have representation from the federal government with PWGSC. The provincial governments of Ontario and Quebec are represented; Ontario is the identified representative for the rest of English-speaking Canada. TMAC, which is the Treasury Management Association of Canada, has three representatives on our stakeholder council, which represent the interests of the utilities and the petroleum industries.

We also have three council members for consumer representation. Option consommateurs is a member. The Consumers Council of Canada and the Consumers' Association of Canada are also represented on our stakeholder council.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Okay. If you could just provide that in writing as well, at some stage down the road, that would be great.

[Doug Kreviazuk]

Certainly.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

You referred to the nexus of the two credit/debit systems. What's your relationship? What's CPA's relationship with the debit system right now?

[Doug Kreviazuk]

It's really a complementary relationship. Interac itself is not a member of the Canadian Payments Association. Our membership is set out in our legislation and it is those I identified: banks, trusts and loans, etc.

But there is a parallel between the memberships of Interac and of the CPA. Interac, through its rules structure, in explaining how the POS environment works, relies on the CPA to clear and settle all the payments from their members. At the end of the day, the members of Interac deliver their payments to the CPA for clearing and settlement, pursuant to our rules.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Thank you for that.

Do you see the CPA as having the ability to provide more valuable, more direct oversight if the point of sale system were included in your mandate?

[Doug Kreviazuk]

We have the mandate already to deal with all electronic payments that our members choose to deliver to us. Currently we have rules that deal not only with cheques, a dying payment technology, but also with POS, the new payments that are developing with “tap and go”, the electronic bill payment, the person-to-person payment, and the business payment. We already have a very broad mandate to clear and settle payments in this country.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Do you think you would play a more effective role, given your position, in creating a more transparent electronic payments market by requiring disclosure of losses, for instance, as we've heard here from previous witnesses, due to fraud or other aspects of the payments market?

[Doug Kreviazuk]

There are certain elements of the clearing and settlement system that obviously are proprietary to the individual financial institution and there are those that are system related. From the CPA's perspective, on the clearing and settlement side and on the systems side, we have full disclosure. In fact, broad public consultation is effectively part of our DNA. There's no policy or rule or rule change that does not go forward for broad public consultation and to the Stakeholder Advisory Council.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Assuming the CPA some day had the power to regulate interchange fees, and considering that your board is made up of, among other things, representatives of financial institutions, would that constitute a proverbial conflict of interest?

[Doug Kreviazuk]

First, the Canadian Payments Association does not have a mandate to regulate any fees whatsoever.