Evidence of meeting #37 for Finance in the 40th Parliament, 2nd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was interac.

A recording is available from Parliament.

On the agenda

MPs speaking

Also speaking

Mark O'Connell  President and Chief Executive Officer, Interac Association

10:10 a.m.

Conservative

The Co-Chair Conservative James Rajotte

I call this meeting to order.

This is another joint meeting of the Standing Committee on Industry, Science and Technology and the Standing Committee on Finance. Pursuant to Standing Order 108(2), we are continuing our study of credit card interchange fees and the debit payment system in Canada.

Colleagues, we have with us today the Interac Association. We have the president and CEO, Mr. Mark O'Connell. Welcome, sir. I believe we have you for the full session today. You have time for an opening statement of up to ten minutes, and then we'll go to questions from members.

Please begin your opening statement at any time.

June 16th, 2009 / 10:10 a.m.

Mark O'Connell President and Chief Executive Officer, Interac Association

Thank you, Mr. Chair.

Good morning, ladies and gentlemen, members of the committee.

Good morning, and thank you for this opportunity.

Although the hearings to date have focused more on credit card issues, I am here to talk about the evolution of the debit market. This is an important topic, given that Canadians are the second highest users of debit in the world.

The debit market is changing, and how it evolves is going to have a significant impact on Canadian merchants and consumers well into the future. Let me be clear. There is a great deal of competition in the Canadian payments marketplace, and at Interac we welcome additional competition. That is not the core issue. The core issue is the need to have a level playing field.

I will address this issue as I talk about where we want to take Interac, a great Canadian gem, and what needs to happen to ensure that all stakeholders--issuers, acquirers, merchants, and consumers--continue to be well served in this debit marketplace. As I do so, I will also set the record straight about some comments made by others about our business, so that you can accurately understand who we are and why our continued viability is so important to the Canadian marketplace.

Without question, Canadians love Interac and Interac debit. It offers 24/7 convenience, reliability, and security. In short, Interac is a successful Canadian world-class debit payment system. Interac Association, which was first formed in 1984, 25 years ago, is responsible for the operations of the network.

Our members are not just the banks. Our membership also includes credit unions, other financial institutions, and payment and technology companies. We even have a merchant represented on our board. As a payment network, we do not issue payment cards or own or operate ABMs or merchant point-of-sale terminals, and we do not charge fees to merchants or consumers.

Interac is Canada's only domestically run, coast-to-coast debit payment network. We are the only home-grown payment brand. Interac operates on an efficient world-class national payments infrastructure with leading-edge security. We have the only debit payment product that clears and settles under the rules of the Canadian Payments Association and their built-in solvency and liquidity protections. Interac is Canadians' preferred and leading payment option, and we have a long-standing track record of being merchants' low-cost payment option. We offer a suite of trusted solutions for consumers and merchants across both the physical and the online space.

I'll turn to slide 3 and address that suite of solutions. Many of you likely know the first two, which are our main products. The first is shared cash dispensing, and this is the service upon which Interac was founded. It enables Canadians to withdraw money across the country at ABMs that do not belong to their financial institution. Our largest service by volume is Interac direct payment, which is a real-time, ubiquitous, PIN-based national debit service that allows Canadians to make purchases at retailers across Canada.

We also offer cross-border debit, which allows Canadian travellers to pay with their debit card at nearly two million point-of-sale locations in the United States through our partnership with the NYCE network, which covers about 80% of the US market. There are more partnerships in the plans and in the works.

Despite the views expressed by others, Interac is indeed in the online space. The first product is Interac e-mail money transfer. It allows Canadians to send and receive money across the country, in near-real time, from one bank account to another. Transactions are done quickly and securely through web banking, without the sender needing to know any of the recipient's banking information. All that's needed is the recipient's e-mail address.

The second is Interac Online, a unique solution that allows Canadian Internet shoppers to securely make online purchases directly from their bank account without providing any personal financial information to the merchant, not even a card number. It is offered by some prominent Canadian online merchants, including VIA Rail, the telecommunications companies—Rogers, Telus, Virgin Mobile—charities such as the Canadian Red Cross, numerous universities, municipalities, and other leading retailers such as Dell, which went live two days ago.

These are great products, but I will acknowledge that growing them has been hindered by the challenges that underscore our governance problems, which I will address shortly.

Having addressed the myth that we lack an online payment solution, let me turn to the security claims of our competitors.

Interac is and has been throughout its history a leader in the prevention, detection, and management of debit card fraud. We see investments in security as investments in the payment franchise itself. Our multi-layered strategy includes significant investments in consumer and merchant education, and of course, in our ongoing migration to chip technology, and we are delivering unique and powerful fraud management tools to our members. This investment has been ongoing, but it must be sustained and increased in the future.

In fact, this investment has played a part in the industry's enabling of its first overall declines in debit card fraud levels in many years. In 2008, debit card fraud declined by 3%, to $104 million, after years of steady growth. By contrast, according to the CBA's testimony before this very committee, our counterparts in the credit card industry saw fraud losses increase by 34%, to $500 million.

In the all-important web arena, the unique design of the Interac Online product I just described to you makes it one of the most secure electronic payment methods available anywhere, boasting a fraud loss ratio of one basis point, compared with 78 basis points for online credit card transactions and “card not present” transactions in the U.K., for example. I believe it is superior in this respect to the online debit options offered by the credit card companies.

I will turn to the matter of fees and of how Interac covers the cost of operating the Interac direct payment service.

As I noted earlier, Interac debit has always been a low-cost payment option for merchants. On a debit transaction, Interac receives a switch fee from acquirers and issuers to process the transaction. The association operates on a consent-order-mandated cost recovery basis, with these switch fees set solely to recover the operating expenditures of the association on an annual basis. The flat rate switch fee is currently 0.8¢ per transaction; historically our fees have varied from year to year, from about 0.4¢ to 0.8¢.

As you have heard in their testimony, MasterCard's switch fee is currently 0.5¢ per transaction on their Maestro debit product in Canada. Let me reiterate that Interac operates today solely on a cost recovery basis, with very modest marketing budgets and almost no research and development. I'm not privy to the strategic approach that they are employing as they enter the Canadian market, and although it is tempting, I am not going to speculate. I can say, however, that this rate is dramatically lower than MasterCard and Maestro debit pricing in any other market in the world that I know of.

Interac's position in the Canadian marketplace is clear and rooted. Interac has a long-standing track record of being a low-cost provider. It has been our strategy and it will continue to be our strategy.

As you have heard from the merchant community—

10:15 a.m.

Conservative

The Co-Chair Conservative James Rajotte

You have about one minute, Mr. O'Connell.

10:15 a.m.

President and Chief Executive Officer, Interac Association

Mark O'Connell

—and the payment processors and financial institutions, there is a broad consensus that against the backdrop of a rapidly changing marketplace, Interac must also change. Our current association and cost recovery structures are outdated and are not sustainable. Since 1996, we've operated under a consent order that is tremendously constraining across all facets of our business. Throughout the world, it has been recognized that associations tend to be slow and ponderous, moving at the pace of the slowest. We are clearly at a competitive disadvantage.

The debit products that Visa and MasterCard are putting into the market today are similar to the Interac product, whereby your bank account is debited when you make a purchase using your debit card. These companies have tremendous experience in gaining market share rapidly at the expense of domestic providers. Through the debit wars in the United States this is evidenced, and we are seeing the same type of strategies being employed here, as they aggressively work to sign up issuers, acquirers, and merchants.

You heard directly from the acquirers that this was happening. They are receiving financial incentives to develop and market these products and applications and are now facing penalties if they do not. Time is of the essence. Change needs to happen, and it needs to happen quickly.

Arriving at this point, we are in discussions with the Competition Bureau regarding the consent order and changes to our internal structure. Our governance structure needs to change, and we need to generate organic capital for reinvestment in the business and to be governed independently from our participants.

Third, preserving Interac requires greater investment in infrastructure and innovation, and this means some changes to the pricing system for Interac products in a manner that meets the needs of the business but also respects our legacy and ongoing strategy of being a low-cost provider.

10:20 a.m.

Conservative

The Co-Chair Conservative James Rajotte

I'm sorry, but we are way over our opening statement time. Unless members want him to finish.... It's 10 minutes maximum.

Do members want him to finish his statement?

10:20 a.m.

Some hon. members

Yes.

10:20 a.m.

President and Chief Executive Officer, Interac Association

Mark O'Connell

Thank you.

10:20 a.m.

Conservative

The Co-Chair Conservative James Rajotte

The Minister of Finance did it in less than 10 minutes, I will say, however. But go ahead.

10:20 a.m.

Liberal

John McCallum Liberal Markham—Unionville, ON

Yes, but he has more to say.

10:20 a.m.

Some hon. members

Oh, oh!

10:20 a.m.

Conservative

The Co-Chair Conservative James Rajotte

Order.

Mr. O'Connell, please continue.

10:20 a.m.

President and Chief Executive Officer, Interac Association

Mark O'Connell

Thank you.

As I was saying, preserving Interac requires greater investment in infrastructure and innovation. This does mean changes to the pricing system for Interac products in a manner that meets the needs of the business but also respects our strategy of being a low-cost provider. This is important.

Without firm numbers, I know that this is a “trust me” statement, and I have faced questions about our intent in pursuing a for-profit status. I've heard clearly the concerns expressed about the potential for excessive profit-taking. I can tell you that we are committed to staying a low-cost provider. In this regard, I offer to make available our financial statements on an annual basis for scrutiny by the Department of Finance, and we are willing to enshrine this commitment. We will stand up and we will be accountable.

Interac needs to change, as you will see on slide 8. I hope this has been well established, but my point here today is that internal changes to our organization are not enough to ensure a healthy debit marketplace in Canada. The Canadian payments system is a national infrastructure and it should be viewed through that lens.

A level playing field is an essential foundation of any competitive market. This committee has heard testimony from all stakeholders about the need for transparency in cardholder choice, in merchant choice, and in having the same basic rules for all players in the game. I echo these sentiments, but unfortunately, this level playing field is not a reality today.

Clear information on service offerings and their associated costs and being able to act on this information with choice should be hallmarks of the Canadian debit market and of competition in this market. They are at the heart of our business model and our strategy. We are going to continue to be upfront with our customers about our service offerings and our fees, and we hope the marketplace can follow this example and provide consumers and merchants with clear and understandable choices.

When given the right foundations, and if this level playing field is in effect, competition can indeed be effective in delivering the best outcomes to all participants. When these foundations are not in place, however, the result will not benefit the users of the system, and Interac will not be successful.

In conclusion, let me restate that we welcome new competition, but we firmly believe that participants should operate on a level playing field and that transparency should be a hallmark of our debit system, where choice is given to its users. Interac competing against the Visas and MasterCards of the world does not mean that we will adopt their strategies. In fact, from consulting with and watching our counterparts from around the world, that is a no win approach. Interac will instead continue to operate true to its Canadian roots, capitalizing on and leveraging our differences, not seeking to eliminate them.

One of the strategic advantages for Interac comes from being a low-cost payment option with per transaction flat-fee pricing. Any changes to the pricing structure will be mindful of those principles, and we are committed to proving that by opening our books to the federal government.

Given the forces at play, however, the change that I have identified must happen. If it doesn't, if we are not allowed to compete on a level playing field with these U.S. competitors, Canada's only payment brand and network will be hobbled, and we will not able to provide Canadians with the services they demand and deserve.

Thank you very much.

10:25 a.m.

Conservative

The Co-Chair Conservative James Rajotte

Thank you.

We'll go to questions from members.

We'll start with Mr. McTeague. You have seven minutes.

10:25 a.m.

Liberal

Dan McTeague Liberal Pickering—Scarborough East, ON

Thank you, Mr. Chair.

Mr. O'Connell, thank you for being here. You have certainly addressed a number of issues that this committee has been looking forward to tackling.

I will go very quickly to the underlying concern that I have and that I think many of us around this table share. You already have the power, under the mandate given to you, to set interchange rates as well as to set fees high enough to generate revenue for the kind of innovation you are referring to, which you tend to believe is hobbling you.

My question to you is, why do you need the ability now to make profit? Do you not see that as an opening for your competitors to come in and offer in the credit system exactly what they may have proposed to do in the debit system, which might ultimately lead to your no longer being in business?

10:25 a.m.

President and Chief Executive Officer, Interac Association

Mark O'Connell

So you are correct in your first assertion that even under the association model, interchange is currently set at zero. Under the consent order, a majority vote of the board could change that rate, but I think that underscores that we're going through this restructuring, because it isn't about interchange. It's about an organization that has been frozen in time for 15 years, in a model that has proven around the world to be slow and ponderous.

That gets to your second point, and I would challenge the assertion that under our governance structure we actually have the ability to respond in a timely fashion to a very quickly changing marketplace--and you have heard through testimony how fast this marketplace is changing--with respect to the required investment that the organization needs and in raising those funds. I think that's what we are trying to do here. We are trying to get an independently governed organization that has the ability to raise organic capital pools to invest in the business as it sees fit and in a manner that is not taking five board meetings to decide whether we are going to respond to a certain market event, and that allows outcomes to be dictated by competition and not any other factors.

10:25 a.m.

Liberal

Dan McTeague Liberal Pickering—Scarborough East, ON

On that point, Mr. O'Connell, I appreciate that. You are in many respects governed by and have worked with credit unions and the banks. They're also being competed with on the credit side by the MasterCards and Visas of this world. They of course have an advantage on the credit side, which you simply do not have on the credit side, and that's the issue of priority routing. In that kind of scenario, given that you are currently governed by banks that may be enticed, induced, interested, or entreated by higher rewards or higher incentives, how do you find you're going to be able to compete when priority routing leaves you literally out of the loop?

10:30 a.m.

President and Chief Executive Officer, Interac Association

Mark O'Connell

With respect to priority routing--does everyone understand priority routing?

Priority routing starts with the financial institution that issues the debit card. If a financial institution chooses to offer two competing networks on the same debit card, the financial institution can either predetermine which network is processed first at the point of sale or they can allow the cardholder to choose the option they prefer. So when a financial institution predetermines that option, that's priority routing. If a merchant, for example, accepts all of the networks that are on that card, the terminal will automatically preselect the predetermined option and process the transaction in that way.

10:30 a.m.

Liberal

Dan McTeague Liberal Pickering—Scarborough East, ON

Mr. O'Connell, I think we understand that. I want to know how Interac is going to respond, how they're going to handle that in the onslaught of competition should it come forward, as you suggest, through non-profit.

10:30 a.m.

President and Chief Executive Officer, Interac Association

Mark O'Connell

I just wanted to make sure that everyone understood it first.

I do have significant concerns with priority routing. It is contrary to my stated strategies and beliefs of consumer choice and of merchant choice. So we are working through those things with the board, but I do have issues with it from a competition standpoint.

10:30 a.m.

Liberal

Dan McTeague Liberal Pickering—Scarborough East, ON

So let me ask, if you're looking at certain plans, what will happen to Interac if priority routing becomes commonplace, as some of us here feel perhaps it will?

10:30 a.m.

President and Chief Executive Officer, Interac Association

Mark O'Connell

I think we're certainly going to have to look at our strategies. It would have some detrimental effects on those. We are putting our strategies and our pricing in the hands of merchants and consumer choice. If that choice is not available to them, then we would have to revert back and look at our strategies.

I think it would be very detrimental to Interac's future. I'm the CEO of Interac and the custodian of the brand, and priority routing also causes confusion with respect to the brand. A consumer may think they are doing an Interac transaction when in fact they are using a competing brand, with all of its different terms and services, and so forth. I think the Interac brand is very strong in the Canadian marketplace. I know it is very strong with respect to the merchants. We have a history of partnership and clear and transparent dealings with the merchants. Our strategy is based on merchants being able to choose and or influence the choice of consumers.

10:30 a.m.

Liberal

Dan McTeague Liberal Pickering—Scarborough East, ON

I appreciate that, Mr. O'Connell.

This is my last question to you, and my colleagues will follow up. Do you envision having your own policy or practice of establishing your own priority routing to meet that competition?

10:30 a.m.

President and Chief Executive Officer, Interac Association

Mark O'Connell

We believe in fair competition. We are working through this issue. It's a very complex issue when you're talking about multiple debit networks on the same card. It is an important competitive imperative for us going forward.

10:30 a.m.

Conservative

The Co-Chair Conservative James Rajotte

You've got 30 seconds.

10:30 a.m.

Liberal

Dan McTeague Liberal Pickering—Scarborough East, ON

We've heard from a number of retail groups in particular who have approached the committee members asking that debit fees be mandated as flat. We know that one of the competitors has already proposed to go into the debit system on an ad valorem basis. What's Interac's position on mandating a fee that would be structured in a way where there is no suggestion of ad valorem?