Finance Committee on June 16th, 2009

[Mark O'Connell]

We are. They take their statutory duty to protect the interests, but--

[Mike Wallace, Conservative, Burlington, ON]

Maybe I misinterpreted. How are the banks not in a conflict of interest when they are customers of Visa Debit and Debit MasterCard and they're on your board? How is that not a conflict?

Do you foresee that you'll need a different governance structure if the consent order requests that you're making do come through and you're able to compete in the marketplace?

[Mark O'Connell]

I've been very open as to our governance challenges and the challenges of any association model where an organization is governed by its very users. It's tremendously difficult to gain consensus, and it moves at the pace of the slowest. I think it's important to note that the board itself has acknowledged this in their recommendation and support of the proposal to restructure the organization, which could be managed by an independent board. They've also had the foresight to set up an independent board that is now looking at many of the aspects of the future restructuring.

Now, let's remember that the Interac Association's board was instituted by the consent order itself. Under our memorandum of association, each board member has a contractual duty to operate in the best interests of the association. We regularly remind them of this obligation, and under the governance model I have, I must operate under the belief that they are adhering to this obligation and that they take it seriously.

[Mike Wallace, Conservative, Burlington, ON]

I have one more question. You may not have thought that anybody would ask this question, but the concern around here has been that the credit card industry, which basically has two big, big players, is trying to get into the debit marketplace. They've done it elsewhere, but they're trying to do it here.

Is there any discussion at your end about getting into the credit side of the business and be another player in the credit marketplace as part of your future as Interac?

[The Co-Chair, Conservative, James Rajotte]

Be very brief, Mr. O'Connell.

[Mark O'Connell]

I can't divulge our strategies fully, but I would say that if we are able to restructure and this level playing field is instituted, that is a product we would strongly have to consider.

[Mike Wallace, Conservative, Burlington, ON]

Thank you very much.

[The Co-Chair, Conservative, James Rajotte]

Thank you.

We'll go to Mr. Thibeault, please.

[Glenn Thibeault, NDP, Sudbury, ON]

Thank you, Mr. Chair.

Thank you, Mr. O'Connell, for coming here today.

Just a little bit off from what Mr. Wallace was talking about, maybe you can clarify something else for me. You're looking for a level playing field. So if MasterCard and Visa were not considering introducing debit cards in Canada, would Interac still be considering restructuring or higher fees?

[Mark O'Connell]

Yes, in a word, we would still be considering restructuring. The fact of the matter is the governance is challenged in reacting to the market and to product innovations, infrastructure, and so forth. I think Interac needs to evolve, because we're also competing on a world stage.

[Glenn Thibeault, NDP, Sudbury, ON]

So if we're looking then at interchange fees and an increase in the cost of payment transactions to merchants, then the merchants have to pass these increases off to the consumers. If debit services by Interac are increased, what benefits will consumers see, if any? Or will they just be seeing higher prices?

[Mark O'Connell]

You have to remember that the debit market is changing. Visa and MasterCard are here, and that market is going to change whether or not Interac changes. So if Interac is not able to restructure, this market is going to be left with a duopoly of those two competitors. So I believe we have to change for the merchants—and I believe that passionately. I started that two years ago. We are already seeing the countervailing force that Interac is with respect to pricing, if you look at MasterCard's strategy. So I think it's imperative in fact to keep prices down, that Interac is a viable player in this industry.

[Glenn Thibeault, NDP, Sudbury, ON]

Okay. Then to what extent do you agree with the suggestion of the CFIB—the Canadian Federation of Independent Business—and the Stop Sticking It To Us Coalition that merchant fees related to debit transactions should be a fixed amount per transaction, rather than a percentage of the value of that transaction?

[Mark O'Connell]

I think that has a lot of merit. Ad valorem, or percentage of value, emanated from the credit business, where there is risk inherent in the transaction. That's not a good funds model transaction. Interac has a flat switch fee, because there is much less risk in that transaction as far as an unsecured loan is concerned. So whether it's for $100 of groceries or whether you have enough in your bank account for a $1,000 TV, we see the argument—and Interac lives it. We're here today with a flat-fee, single-fee switch fee.

[Glenn Thibeault, NDP, Sudbury, ON]

So in your opinion, sir, what would it take to prevent Interac from adopting the debit fees as talked about, at ad valorem or a percentage of the cost of purchase, as proposed by Visa and MasterCard?

[Mark O'Connell]

Could you ask that in a different way?

[Glenn Thibeault, NDP, Sudbury, ON]

What can we do to avoid the ad valorem or the percentage of the purchase? We're hearing loud and clear from many of the consumer groups and merchants that it's what they're concerned about—going away from the flat fee to the percentage fee. How can we prevent that? What are the steps we can take to ensure we're keeping things fair?

[Mark O'Connell]

Well, we're going to be clear and transparent with all of our fees. As I've said, we're going to open up our books to the federal government on an annual basis. As I've said, we are respecting the flat fee history of Interac in our pricing in order to preserve our relationship, which is so important in our strategy, with the merchant community. We need the merchant community somewhat to be architects of their own cost future in debit. We are going to put a balanced value proposition out there, as we've always done. It will be clear and transparent.

We need that acceptance community, because that's a strategic bastion we have today. We have acceptance from coast to coast. Visa and MasterCard are attempting to do that. You heard from MasterCard that they are trying, on a business case by business case basis, to gain merchant acceptance. We believe we need to put a balanced value proposition out there, and we need to listen to the merchant community's concerns about ad valorem, because we need to appeal to that side of this two-sided market.

[Glenn Thibeault, NDP, Sudbury, ON]

You talked a little bit about something, a 0.5% switch fee by MasterCard, I believe, in your opening statements. I think you said it's larger than any other MasterCard fee that you've seen in the world. Can you clarify for me? Did I hear that incorrectly?

[Mark O'Connell]

Yes. In fact, it's the opposite. I was commenting on MasterCard's testimony that their current rate in the Canadian market is a 0.5¢ switch fee. I believe they currently have interchange set at zero basis points. We've seen that before.

What I was saying is that while it's tempting to comment as a cost recovery organization that knows the economics of this business, that has very little marketing or R and D on the sustainability of that, I was just pointing out that in all other markets that I know of around the world that is drastically lower than the Maestro and MasterCard debit pricing.

[Glenn Thibeault, NDP, Sudbury, ON]

Obviously we're not going to get into assumptions as to why they're doing that, but thank you for clarifying it for me.

If it's cost recovery and we're hearing the merchants worrying about their costs increasing and consumers will ultimately see these costs, what do we tell consumers? What are we telling them about the work we're doing right now, where we're hearing more and more people saying, or more and more organizations are going to be saying, that their costs are going to be going up?

Right now, we all know that we're in a downturn. What do we tell them when corporations like...I'm trying to do some math here. You're saying you're getting approximately 2¢ or just under 2¢ per transaction for about four billion transactions?

[Mark O'Connell]

Interac does not. Interac just receives the 0.8¢. The acquirer has various contracts and pricing agreements with their merchant base, and I think 8¢ per transaction is the average debit merchant cost, which is a payment to the acquirer.

[Glenn Thibeault, NDP, Sudbury, ON]

So you get 0.8¢ from the acquirer. Do you get anything from the issuer as well, then, just for clarification?

[Mark O'Connell]

Yes, the same 0.8¢.

[Glenn Thibeault, NDP, Sudbury, ON]

You add those two together and it gives you about 1.6¢, correct? So it's just under 2¢ per transaction.