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

11:35 a.m.

Conservative

The Co-Chair Conservative James Rajotte

Thank you, Mr. Chong.

We'll go to Mr. Thibeault, please.

11:35 a.m.

NDP

Glenn Thibeault NDP Sudbury, ON

Thank you, Mr. Chair.

I want to finalize what we were talking about earlier. So we've figured out it's about 1.6¢ per transaction, 0.8¢ from either side, which is low cost--I'm not going to disagree with you on that. At about $4 billion worth of transactions, that's about $400 million, and it's all cost recovery, correct? Is all of the money you're getting back cost recovery?

11:35 a.m.

President and Chief Executive Officer, Interac Association

Mark O'Connell

I can't divulge. You're way off on the amounts.

11:35 a.m.

NDP

Glenn Thibeault NDP Sudbury, ON

No, but that's fine. The whole point is that it seems to be that you're successful in what you're doing. You're a successful organization, correct?

11:35 a.m.

President and Chief Executive Officer, Interac Association

Mark O'Connell

We have been successful in a single debit provider market with no well-financed U.S. competitors, when everyone was on the same page at the same time and instituted a national debit service, yes. As we've seen around the world, we are the last remaining association in North America, and one of a handful left in the entire globe, and that's for a reason. The market evolves too fast now. There are too many competitors. The technology has changed so much. If you think about where the card is going, you already have a chip on the card. Then you think about what happens to that in a mobile world with our cell phones. You can have multiple payment applications on your cell phone.

We need to react faster than ever before, and we're in a very different marketplace. That's why we need to change.

11:40 a.m.

NDP

Glenn Thibeault NDP Sudbury, ON

With that success, though, why do you think Visa and MasterCard and the financial institutions that were issuing these cards have--in your opinion, of course--decided to promote their debit products in Canada now, and at the same time? Can you give me your opinion on that?

11:40 a.m.

President and Chief Executive Officer, Interac Association

Mark O'Connell

Okay.

Visa and MasterCard, although MasterCard a while ago, five years ago.... Visa is newly public. It has shed its association status. It is aggressively penetrating many markets around the world. With 3.6 billion transactions, it's an attractive piece of business. When you layer on other things like chip technology, with Canada moving to chip, it required a wholesale infrastructure change out to the terminals and it enabled somewhat the ability for multiple applications to more easily sit on the same card. The terminals were being updated anyway, so they could come in. And as you've heard from testimony, they sent the acquirers to make sure those terminals are all set up to accept their transactions.

So it was the confluence of factors that really is a perfect storm with respect to.... They have tried to get into this market before, but both in their own internal capability and in addition to some of the market imperatives, they're here. They are active. There are cards in market, there are transactions in market, and they're actively trying to take my customers and members away from me.

11:40 a.m.

NDP

Glenn Thibeault NDP Sudbury, ON

If you can bear with me for a second, the picture that has been painted for me over the last little while is that we have a debit system that the consumers perceive as working well. I know you've mentioned there are some things that you need to change, and I respect that, but consumers see a system that's working well.

11:40 a.m.

President and Chief Executive Officer, Interac Association

Mark O'Connell

I would agree. I would agree that the system itself works well.

11:40 a.m.

NDP

Glenn Thibeault NDP Sudbury, ON

I totally love debit. I rarely carry cash in my own pocket, but it's a system that people rely on right now. We then hear about Visa and MasterCard wanting to come in, and they're using the word “competition”. We all know the word “competition” usually lowers costs, but what we're hearing more and more now is that this competition is actually going to increase the costs for SMEs--small and medium-sized enterprises--and consumers, potentially because merchants will have to raise their costs if the fees go up.

I've heard you speak about the need to make this a level playing field. I agree. How do we make it a level playing field for you? Maybe you can give me some of the specifics. In your opinion, will this benefit the small and medium-sized enterprises, and ultimately the consumers, down the road?

11:40 a.m.

President and Chief Executive Officer, Interac Association

Mark O'Connell

Interac's viability will benefit the small and medium-sized businesses. I can't comment on their strategies or any fee trajectory that they have demonstrated in other markets, but I can say--and we're willing to stand up and be accountable--that I'm not going to adopt that fee strategy.

11:40 a.m.

Conservative

The Acting Co-Chair Conservative Michael Chong

Thank you very much, Mr. O'Connell, and thank you, Mr. Thibeault.

Mr. Garneau.

11:45 a.m.

Liberal

Marc Garneau Liberal Westmount—Ville-Marie, QC

Thank you, Mr. Chair, and thank you, Mr. O'Connell.

I want to focus on the level playing field as well. You mentioned that it's in all our interests to have a level playing field. You talk about transparency for all users. In fact, I believe you said you would be prepared to enshrine in your operating rules that you would open your books. What I would be interested in knowing is, do the banks, which are part of your membership, if you like, support that as well?

11:45 a.m.

President and Chief Executive Officer, Interac Association

Mark O'Connell

You'd have to specifically talk to each of the banks. It depends on which aspect. Are you specifically asking about cardholder choice or merchant choice, because there are differing views as to what constitutes cardholder choice, as we've heard. You heard from the Bank of Montreal, which believes there's cardholder choice in the customer choosing which financial institution and which debit card they're going to use. They have the choice. If they don't like the brands that are part of that debit card strategy, they can choose away from that institution. Others would have differing views, but I cannot comment on their specific views.

11:45 a.m.

Liberal

Marc Garneau Liberal Westmount—Ville-Marie, QC

Okay, I was simply interested in knowing overall if they support what you have said on page 8.

Talking about retailers, I can understand their wanting to understand and have a level playing field, so they have a better appreciation of how it's going to impact them, depending on which system they choose to go with.

From a consumer point of view, I have a little more difficulty. I can understand what you're suggesting, but I've never met a consumer who was particularly preoccupied with knowing what payment system.... In fact, most of them are totally ignorant; they know they can do certain things with their card, but they don't really build into their thinking that there are different ways to pay and that they can make an informed choice. Whether it's presented to them or not, they tend to be incentivized by things such as reward programs and others.

So are you hoping the consumer is going to somehow make a decision about which system is better, for whatever reason, other than possibly their own personal gain?

11:45 a.m.

President and Chief Executive Officer, Interac Association

Mark O'Connell

There are certainly segments of the consumer base who have no understanding of networks and what they mean—this Visa card versus that Visa card, or Interac. But there are different terms and service features ascribed to these products. In debit we're not cognizant, because our history has been that debit is just debit. It's your bank card. We have a lot of information that people have an affinity for Interac, understand that it's Canadian, and understand that it's safe and secure. You can imagine the marketing blitz they're going to be doing to get Canadians' heads around the idea that they're not just credit—they're debit or super debit. You're going to start to get these distinctions in the marketplace. Consumers are going to be bombarded and there are going to be different terms of service within the payment vehicle. It's important that they understand what they're choosing. It may not be Interac on the back and it may look like a Visa card on the front. These are important things that will allow us to compete and succeed.

11:45 a.m.

Liberal

Marc Garneau Liberal Westmount—Ville-Marie, QC

As I understand it, you also want to change from a not-for-profit to a for-profit independent commercial entity. The arguments are related in part to modernizing your governance, and I think I understand what you're talking about. The other has to do with generating additional capital for investment in your business. Do you not have that latitude already through your option to increase the switch fee?

11:45 a.m.

President and Chief Executive Officer, Interac Association

Mark O'Connell

We don't have it in any efficient fashion, given the governance challenge, the consent order prescriptive rules around everything from voting levels and areas in which we.... The switch fee is one of the only ways to raise fees. It's really about putting in place an independent board that can make decisions based on competitive realities and have the retained earnings to invest in the business on a timely basis. This cannot be done today. To agree to a uniform switch fee, you have to have everyone on the same page at the same time in the same budget cycle. This has many elements to it, and consensus building is Herculean. It didn't used to matter when Visa and MasterCard were associations and also took four board meetings to go through a single decision item, but now on a relative basis we are the only ones remaining under this structure, so we are at a severe competitive disadvantage.

11:50 a.m.

Conservative

The Co-Chair Conservative James Rajotte

Monsieur Carrier.

June 16th, 2009 / 11:50 a.m.

Bloc

Robert Carrier Bloc Alfred-Pellan, QC

Thank you, Mr. Chair.

Good morning, Mr. O'Connell. I commend you on your presentation and for agreeing to be in the hot seat for two hours. I wish to talk to you about problems concerning credit cards. Retailers greatly deplore the fact that credit card issuers are billing higher interchange fees for the use of premium or rewards cards, specifically. That is one of the issues we are currently studying.

You are seeking to enter into greater competition with credit card companies, which are also seeking to issue debit cards; however, have you considered that in order to attract new clients, those very same companies could begin offering debit cards in return for rewards or bonuses, similar to their credit cards? To be truly competitive, will you not be forced to go the same route? I would like to know how you would prepare for such a possibility.

11:50 a.m.

President and Chief Executive Officer, Interac Association

Mark O'Connell

Not from the network level, no. Those points programs and so forth are the purview of the issuing bank and how it deals with its customer base.

You are correct that in other jurisdictions around the world, the United States being a prime example, when you look at Visa or MasterCard debit, there are indeed points and rewards and different features and so forth put around those cards. That's one of the elements of competition. I cannot comment on whether that would be the case in Canada or what the future holds, but you're correct that there's certainly a precedent for that.

11:50 a.m.

Bloc

Robert Carrier Bloc Alfred-Pellan, QC

If I understand correctly, you are saying that as concerns your current debit card, costs are low for retailers and consumers. If there were to be no change to the system, would debit-card issuing banks be able to bill higher interchange fees in return for bonuses or rewards? Is this allowed under the legislation?

11:50 a.m.

President and Chief Executive Officer, Interac Association

Mark O'Connell

In the debit market and under our current association model governed by the consent order, yes, the consent order does allow the interchange fee to be set by the Interac Association board, if there's a majority vote to do so. It's currently set at zero and has always been kept at zero for the past thirteen years.

11:50 a.m.

Bloc

Robert Carrier Bloc Alfred-Pellan, QC

Thank you.

However, by converting your organization to a profit-making enterprise, you would be competing with companies such as Visa and MasterCard, who in turn may choose to issue debit cards as a way of increasing their market share, keeping their client base, or stealing from yours. You are saying that this is possible, but that it is not the case now because you are the only player on the market. As far as I am concerned, I do not believe that you will be spared. You may not be able to boast any longer about being a low-cost provider. You would become a company just like the others, and seek to make as much profit as possible.

11:55 a.m.

Conservative

The Co-Chair Conservative James Rajotte

Make it a brief response, Mr. O'Connell, please.