Finance Committee on June 9th, 2009

[Prof. Ian Lee]

This is a feature of the modern economy, this complexity of the product lines. On what you were saying about all the bells and whistles, there are over 200 credit cards. It reminds me of walking into a shoe store; it's just an amazing blizzard of options. Or buying a car.... In most consumer markets today, they're much more sophisticated than back in the fifties, when you went into a store and they had two of everything. You had two choices. If you go back even further, Henry Ford said you can have it in any colour you want as long as it's black--

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

But aren't we talking about a blizzard of money here, and do I really need a blizzard of money in order to pay for all of those various shoes in the shoe store?

[The Co-Chair, Conservative, Michael Chong]

Okay. We're going to hear from Mr. Lee, and then from Mr. Ware.

[Prof. Ian Lee]

But I'm answering your question. I said this is a feature of consumer product markets across the economy. That's number one.

Number two, the consumer makes that choice.

[A voice]

No, they don't.

[Prof. Ian Lee]

Those credit cards or those shoes or whatever that are not going to meet the needs of consumers will wither and die. Surely it's not the role of the legislators to determine, or to pick, winners and losers among product lines. So if you've shifted from picking winners and losers among credit card companies to saying let's pick winners and losers among product lines, that's called business strategy, and that's the role of the entrepreneur, not of Parliament.

[The Co-Chair, Conservative, Michael Chong]

Thank you, Mr. Lee.

Mr. Ware, you had a comment in response.

[Prof. Roger Ware]

Yes.

Well, the answer to your question is no, we would not want a system like the Interac system for credit cards. It may have fortuitously worked well for Interac back in the mid-nineties, but as I said earlier, we need to change it now.

Just really to echo what Professor Lee said, this is a differentiated product market in which there is a wide variety of products available to consumers. Those are there because consumers demand a wide variety of products. That's a good thing, not a bad thing. It's a good thing.

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

I do wonder whether consumers demand these things or they're told to want these things. Therein lies an incredible difference. When I'm paying for a product, I'm just paying for a product. I didn't even realize—and I think I'm a sophisticated consumer; I had no idea of all the costs to the merchants and all the things that were loaded on to my credit card, much to my surprise, which ultimately cost the system a great deal more money.

So I agree with your point that the debit card system worked well, and probably the consent order; its best before date has arrived, but you don't want to necessarily throw the baby out with the bathwater. I look at the Bank of Canada costs on a per transaction basis, and on a debit basis it's about two-thirds. The processing fee costs about two-thirds of the overall cost. On a credit card, the processing fee represents about 90% of the overall cost.

Why wouldn't I want a credit system to look a lot more like a debit system, so that ultimately I have more money in my pocket?

[The Co-Chair, Conservative, Michael Chong]

Thank you, Mr. McKay.

Please be brief, Mr. Ware, and then we're going to—

[Prof. Roger Ware]

Well, of course, there's nothing to stop you using a debit card to make your purchase, in which case you'll get that.

On your point about variety, you know we could argue that consumers all want to wear white shirts, and if we just made them wear white shirts, then they'd all be better off, but that's not the kind of society we live in, and hopefully we don't want to live there.

[The Co-Chair, Conservative, Michael Chong]

Thank you, Mr. Ware.

Now we're going to give Mr. Rajotte, my co-chair, a chance to ask one or two questions before we adjourn for the day.

[The Co-Chair, Conservative, James Rajotte]

Thank you very much, Mr. Chairman. Thank you all for coming in and making your presentations in this very lively discussion.

Mr. Scholnick, on page 4 you talk about the economics of two-sided markets, and you talk about a balancing act, where a platform loses value if either side withdraws. The objectives of the platform are to make as much money but still keep both sides using your platform, retailers and consumers. But is it a fair two-sided market there, because retailers in my view.... You say there's an option of cash or cheque, but in reality, as Mr. Lee pointed out, that's a decreasing option, if it is still an option today, because as a consumer, if I go into a store and they tell me I can't use a credit card, the reality is I'm going to frequent that store less and less.

Can you address whether this platform is fair to retailers? One side is much stronger than the other in this two-sided market.

[Prof. Barry Scholnick]

This is the very nature of two-sided markets. This is why two-sided markets are so different from what we see in the economic textbooks that we all teach.

You possibly are right, and I think the remedy, the way to fix this problem, is through the competition authorities, which is why I was pleased to see that the Canadian Competition Bureau is looking at this under the very specific element of the Canadian Competition Act, which is the abuse of dominant power, abuse of a dominant position. You correctly say that Visa and MasterCard have a dominant position. They're different from the shopping mall. If they're abusing that—and we don't know if this is the case yet—then the competition authorities and the Competition Tribunal should penalize them. But if they're not abusing it, then I would suggest this is the nature of two-sided markets, in that because you've built up your platform, because your platform is valuable, because people have to use the platform, some people will be subsidized and the other side will not be subsidized.

[The Co-Chair, Conservative, James Rajotte]

I wish I had more time, but thank you very much for clearing that up.

[The Co-Chair, Conservative, Michael Chong]

Thank you, Mr. Rajotte.

Before we adjourn, I just want to ask Mr. Lee if there are any more recent studies that were conducted after October 2004. One of the members of the committee asked me if there were any studies more recent than the AEI-Brookings working paper that was published in October 2004, in light of the fact that some card products have been introduced since that date.

[Prof. Ian Lee]

I've copied the Brookings study, which by the way was in 2006, and I have also copied onto the clerk's laptop the Bank of Canada 2008 study of merchant attitudes towards the relative cost of payments. I have also copied the Federal Reserve study of the central bank of Australia. So I've copied several studies for the committee.

[The Co-Chair, Conservative, Michael Chong]

Thank you.

Perhaps we could clarify with the clerk after the meeting the exact dates of those studies.

Thank you to all the witnesses for attending. We appreciate your advice and your comments.

The meeting is adjourned.