Finance Committee on June 16th, 2009

[Mark O'Connell]

While I can't comment specifically on the ongoing pricing deliberations within the restructuring project, I can say that our history is based on a simple transparent flat fee, switch fee, and we will respect that legacy. I think it's important to note, with respect to previous testimony, that there are switch fees and often around the world--even with my U.S. card counterparts--those are flat fees. But there are other fees. I believe there are eight in the United States, other fees and assessments, that can have different characteristics. Then there's interchange, which is almost uniformly ad valorem.

We have one simple fee and it's a flat fee.

[The Co-Chair, Conservative, James Rajotte]

Okay, thank you.

Monsieur Laforest, s'il vous plaît.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

Thank you, Mr. Chair.

Good morning, Mr. O'Connell. Thank you for being here. You gave an excellent and clear presentation that I greatly appreciated.

Under the current structure, fixed fees are charged to the “processors“, the ones providing the technology to merchants, who in turn transfer the costs to the retailers, with additional fees. Is that how things currently work?

[Mark O'Connell]

You're correct. From what I heard at the end, we charge a flat fee to the acquirer of 0.8¢, and then together with the other services they provide to the merchant, they would bundle that into their contract with the merchant.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

I would like to fully understand. Is 0.8% or 8¢ charged per transaction? There are fixed fees per transaction, correct? Yes.

Do the financial institutions that issue debit cards currently receive royalties for transactions made at points of sale? Do the debit card issuing banks receive a royalty when these client debit cards are used for a transaction?

[Mark O'Connell]

In answer to your first question, our fee to the acquirers is less than a cent; it's 0.8¢. That's charged to the acquirers. And no, the issuers don't receive royalties from the point of sale transaction.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

That means that 0.8¢ is charged for each transaction, of which 0.1¢ goes to the “processor”. Is this correct? Therefore, Visa earns 0.7¢ per transaction.

[Mark O'Connell]

In the Interac model, Interac charges the acquirer less than a cent to process that transaction from the merchants into the system. We also charge the issuer the same flat fee amount to process the transaction on the other side into the account to ensure that the money is available, etc. Those are the only fees that are charged within the Interac debit model. I can't comment on the Visa model.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

How are the fees charged to the merchant broken down? If an individual makes a $100-purchase using a debit card, 0.8¢ is charged to the merchant for this transaction. Is that correct? How is the 0.8¢ broken down?

[Mark O'Connell]

We charge the acquirer 0.8¢ to process the transaction. Of course, the acquirer has a contract with that merchant and provides other services in processing and the terminal that sits on the point of sale at the merchant location. We're part of their operating costs. They would have a contract with the merchants that would bundle their other services and pass on those fees in a competitive environment. Typically, the end merchant cost in the Interac environment is anywhere from 3¢ to 15¢ at an average of 7¢ or 8¢ per transaction.

You're right. On the $100 it doesn't matter whether it's a $10 purchase, a $100 purchase, or a $1,000 TV; it's still the same flat-fee amount.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

If possible, I would like you to provide us with a breakdown of the fees charged to merchants, in writing. Who is billed for these fees?

MasterCard told us that Interac had increased its fees by 60% in February. Is this correct? Why did you increase your fees by 60%?

[Mark O'Connell]

We're mandated under a cost recovery basis. Our flat-rate switch fee increases or decreases on an annual basis based on the operating costs and needs of the network in any given year. For example, historically, our fee has vacillated only from 0.4¢ to 0.8¢, and it depends on the operating expenditures in that given year. This year, we had some investments to make and we are undergoing a restructuring. Last year the 0.5¢ is where MasterCard has put its pricing, which is Interac's last year's rate. So it has increased just with the cost recovery model.

[The Co-Chair, Conservative, James Rajotte]

You have one minute remaining, Mr. Laforest.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

With the possible entry of Visa and MasterCard into the debit card market, Visa told us that a client may choose to make a purchase using Visa, Visa debit or Interac. Do you think that this is possible? Will consumers be sufficiently informed to make a wise choice?

[Mark O'Connell]

As I was saying on the priority routing issue, when you have two competing networks on the same card, it does raise some issues of transparency and choice for the consumer. I would agree with you. I think it's interesting that neither MasterCard nor Visa allows each other's applications to ever co-reside on the same card, and there are some reasons for that. Today, there's no confusion in the market. When you pull out a credit card, as a consumer you know the payment vehicle you're using. It's your Visa or your MasterCard. When you pull out your Interac card, you know that as debit. It's important that transparency be instituted in the market if we're going to have the same card with two competing debit networks on it. Financial institutions would need to clearly disclose that there are two debit networks on that card.

The cards would need to be clearly branded with both networks in a way that doesn't confer advantage on either of them. Consumers would need to be educated on how the system works at the point of sale, and that terminal would need to display both networks clearly, fairly, and on the same screen, allowing the consumer to make an informed choice and the merchant to be able to influence that choice.

[The Co-Chair, Conservative, James Rajotte]

Thank you, Mr. O'Connell.

We'll go now to Mr. Wallace, please.

[Mike Wallace, Conservative, Burlington, ON]

Thank you, Mr. Chair.

Thank you for coming this morning, Mr. O'Connell, and for your presentation.

I have two quick follow-ups before I get into a couple of questions. In your opening statement you say...and I'm quoting from what you have here. It's why I think there's a little bit of confusion. You say in one paragraph that you do not charge fees to merchants or consumers, and then two paragraphs later you say that you have a record of being Canadian merchants' low-cost payment option.

So there's some confusion. When I heard that, I thought, well, didn't you just tell us that you're not...? You actually do charge a fee to the acquirer, they bundle it together with all their other fees, and they do charge the merchants for it. Eventually, it gets to them. It's a flat fee, and I understand that, and I understand why. This is just a clarification.

I'm not sure if Mr. McTeague was on that route or not, but one of my initial questions was this. You're clearly not here to say we should keep competition out of the marketplace. Is it your opinion and your organization's opinion that Visa Debit and Debit MasterCard are coming to Canada regardless? Would that be your opinion?

[Mark O'Connell]

It's stronger than that. When I joined Interac two years ago, and we started the conversations with the Competition Bureau shortly thereafter, Visa and MasterCard were in the process of entering the Canadian debit market. They are here. There are over one million cards.

[Mike Wallace, Conservative, Burlington, ON]

You're advocating for your organization that you need a legislative change, or--I don't know if it would be a legislative change--a change to the operating rules for Interac so that you're able to compete against those new players in the marketplace. That is basically what you're telling us here today, is that correct?

[Mark O'Connell]

To your first question, you're right, we're like a wholesaler, so we provide a fee to the acquirer, who then adds other services. We're an operating cost to them--and you're right, it does reach the merchants.

I am not here to prescribe legislative remedies or any prescriptive remedy; I am here to indicate that we do not have a level playing field and to indicate that Interac cannot survive if there isn't a level playing field. I'll just go to the exact attributes of that.

Number one, it's internal. We need to remove the artificial funding and governance constraints that currently are on Interac. We are different from our competitors. That's consent order imposed.

[Mike Wallace, Conservative, Burlington, ON]

Consent order imposed, okay.

[Mark O'Connell]

We are, as you know, in discussions with the bureau on restructuring ourselves internally so that we have the same capabilities as our competitors.

But the second is that we need to ensure that consumers and merchants are making overt and open, informed choices in the marketplace, and this is what I think Mr. McTeague was getting to. Consumers need to know the payment vehicle they're using. They shouldn't be thinking they're using Interac when they're actually using a competitor's brand. That's going to erode my market share.

Merchants need to clearly understand the payment options available to them and their associated costs, and they need to choose the options they wish to accept. So merchant contracts, which are an issue in the industry, need to be in clear language, ensuring that the payment options are separately priced. They can't be blended or bundled, because that takes away our strategy and the Interac low-cost, sustainable option.

[Mike Wallace, Conservative, Burlington, ON]

How quickly do the consent order changes need to happen for you to be in the marketplace in a timely manner?

[Mark O'Connell]

Yesterday.

[Mike Wallace, Conservative, Burlington, ON]

Okay. You've been in my office before, and you're active on that file now, right?