Finance Committee on June 16th, 2009

[Mark O'Connell]

Right. So the 0.8¢ is to process a transaction--and I won't get into the details--in a single-message transaction set. So it's 0.8¢ for each message, if you will. It's processing the transaction from the merchant terminal into the Interac member network, etc., 0.8¢, and then on the issuer side processing the transaction from the account through into the Interac member network and so forth.

[The Co-Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. Thibeault.

We'll go to Ms. Coady, please.

[Siobhan Coady, Liberal, St. John's South—Mount Pearl, NL]

Thank you very much, Mr. O'Connell, for appearing before us today and bringing your viewpoints to the table. We certainly appreciate it.

These are going to be rapid-fire questions, because I only have five minutes, so forgive me for asking a lot of questions in a brief period of time. I want to start by following up on a couple of themes that are going here, just for clarity.

You currently have the opportunity to levy interchange fees, but you will not do so, correct? You currently have the opportunity to levy interchange fees, but you do not. You use a switch fee instead.

[Mark O'Connell]

We have not done so and have no plans to do so, because interchange is not the problem here. The change is that Interac cannot be responsive in its current structure.

[Siobhan Coady, Liberal, St. John's South—Mount Pearl, NL]

Okay, great. Thank you.

I want to talk about the situation in the United States with the STAR Network, for example. I think it is or was your equivalent in the United States. As you know, Visa and MasterCard are now dominant in that market, for example.

What do you think was the challenge for the STAR Network in facing the Visa/MasterCard surge in debit card?

[Mark O'Connell]

It's a great proxy. It underscores the urgency that we have here before us, the fact that Visa and MasterCard are already in the market. STAR Network was arguably the closest thing to Interac you're going to get in North America. They basically invented the PIN debit network in the United States and then, through many years of expansion, five years ago STAR Network had close to 60% market share of the United States PIN debit market--in the high fifties. That's when Interlink or Visa PIN debit aggressively entered the market. At that point they had 10%.

They employed their strategies. It was a free-for-all, unlevel playing field and so forth. Today STAR Network is, I think, at 25% and Visa is in the high forties, if not 50%, of that market.

[Siobhan Coady, Liberal, St. John's South—Mount Pearl, NL]

What was the result of Visa/MasterCard taking the predominant lead? What was the end result to consumers and to merchants?

[Mark O'Connell]

This is what I meant in my opening remarks, as we've consulted and we've learned from history. Unfortunately, the STAR Network and the NYCE network decided they were going to play a price-matching game with respect to interchange with Visa. They were different from Interac, however. Visa already had acceptance at all the merchants in credit and they played the honour-all-cards. You remember that whole fight where, if you took a Visa credit, you had to take a Visa debit.

Visa didn't have the impediment they have today here in Canada whereby Interac debit is accepted across the country. What ended up happening was a spiralling of interchange to where I think the United States is the highest interchange market in the world today.

[Siobhan Coady, Liberal, St. John's South—Mount Pearl, NL]

Thank you. I have two more quick questions.

One, you're currently regulated by the Canadian Payments Association. We're all aware of that. What would be your understanding for Visa and MasterCard? Would they be settled here through the Canadian Payments Association or are they going to be settled through the Bank of America in the United States?

[Mark O'Connell]

You are correct, we settle through the Canadian Payments Association and we believe that the rules framework and a fully Canadian settlement option meets our needs. It's important for the debit system that we operate here in Canada. Our items are safe and secure and in Canada.

I must say that as far as commenting on the others goes, after reviewing the testimony of my counterparts at Visa and MasterCard, I'm not sure I understand their clearing and settlement well enough to form an opinion of its safety and soundness or of its risk.

[Siobhan Coady, Liberal, St. John's South—Mount Pearl, NL]

Do you understand that they'll be settled through the United States' Bank of America? Is that your understanding? Just yes or no.

[Mark O'Connell]

Again, the testimony was confusing, but I do believe that, yes, they settle through the United States and the bank balance sheets therein.

[Siobhan Coady, Liberal, St. John's South—Mount Pearl, NL]

I have one final question.

What would happen if we do not intervene in this particular situation? If nothing is done coming out of this and we let market forces bear, what do you think will be the outcome?

[The Co-Chair, Conservative, James Rajotte]

Very briefly, please, Mr. O'Connell.

[Mark O'Connell]

I want to reiterate that I'm not prescribing a solution, legislated or otherwise, but if the marketplace either doesn't step up and follow our lead for transparency, choice, and the same rules for all three competitors in this market, and if Interac is not allowed to change its internal structure, then we will go the way of the STAR Network, the NYCE network, and so forth in the United States. We will no longer be a countervailing force and there won't be a Canadian option in the debit infrastructure in Canada, in my opinion. We just will not be successful.

[The Co-Chair, Conservative, James Rajotte]

Thank you.

Mr. Bouchard, you have five minutes.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

Thank you, Mr. Chair.

Welcome, Mr. O'Connell. You have told us that in the past, your debit system has always been a low-cost provider. You say that you wish to change from being a non-profit association to a commercial entity. You are even ready to make a commitment.

What sort of commitment are you ready to make? Can you guarantee to us that costs will remain low, as they always have been in the past?

[Mark O'Connell]

As I said at the outset, the commitment that we are here making and willing to enshrine is that we will open our books on the revenues and costs of these lines of business to the Department of Finance, or to the government, to ensure that my statements about being a low-cost provider are not hollow. They are not “trust me” statements. You will be able to see the returns inherent in our business, and we're willing to be accountable to that. We realize we do need to change to a commercial structure in this competitive environment against two very well-financed commercial companies that have long ago shed their association of governance and other status. We're willing to be accountable that there will not be excessive profit-taking in this endeavour. That is not why we're doing this.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

I would like to get back to the issue of your change in status. Why do you wish to change status? Is it to serve the interests of consumers, staff, or owners? Is it to make more money? What is your real motive?

[Mark O'Connell]

The driving force is to survive, and to survive on the behalf of merchants, consumers, and the entire marketplace. The viability of Interac is a benefit to the marketplace. We're seeing it even today with how Visa and MasterCard are operating to try to penetrate this marketplace.

I think it's important to be a merchant economy going forward, to have a countervailing Canadian force. It's important to Canada. After 9/11, the United States elevated payments to the status of a national infrastructure. Here we are talking about the debit infrastructure, Canadians' access to their accounts. I think it's important that we continue to have a Canadian option in this area and we're not outsourcing our debit retail payments market to the United States. I think this restructuring will allow Interac to benefit all users of the system—the issuers, the merchants, and the consumers—with a fair and balanced value proposition.

[The Co-Chair, Conservative, James Rajotte]

You have one minute remaining.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

Mr. O'Connell, you talk about the market and the Canadian option. In your opening statement, you say that Interac is present from coast to coast. In your 25 years of operation, your growth has been phenomenal, or quite profitable, and you forecast very positive growth in the future.

Are your forecasts based on the assumption of your status as a non-profit association, or on your new status? I would like to hear you speak to us some more about your real motive. You stated that it is the market which is of concern to you, and that is driving you.

[The Co-Chair, Conservative, James Rajotte]

Mr. O'Connell.

[Mark O'Connell]

My main motivation is ensure that Interac survives as a viable choice for merchants, consumers, and issuers in this marketplace. The success that you're talking about and the consent order was enshrined about 15 years ago in a very different marketplace.

Visa and MasterCard have proven in almost all jurisdictions around the world that they take over the market at the expense of the domestic debit provider, usually because that debit provider is hindered in these ways. We are standing up and saying no, we need to restructure and there needs to be a level playing field in this market. We can compete and succeed against Visa and MasterCard owing to our products.

[The Co-Chair, Conservative, James Rajotte]

Thank you.

Mr. Lake.