Finance Committee on Feb. 25th, 2014

[Patricia Meredith]

Yes, we studied many other countries. Particularly, we studied Australia, the European Union, the U.K., the U.S., and to a lesser extent countries like South Africa, Switzerland, and Kenya.

What can we learn? First of all, payments split between personal payments, in which as Todd and David have said, Canada is quite advanced—historically with credit cards and debit cards we were one of the leaders, although we have been falling further in the rankings for the last five years, but we were one of the leaders in digital—and business-to-business payments, in which we are one of the worst in the world. Essentially small and medium-sized businesses make 80% of their payments with paper cheques largely because they have no digital alternatives.

Countries like Australia, the U.K., and the U.S. even, have reduced their dependence on cheques dramatically over the last decade. The U.S. is half as dependent on cheques as Canada, which is something that surprises most people. Countries who are as dependent on paper as Canada are countries like Romania, countries we don't normally associate ourselves with.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you very much.

My next question is for Mr. Robinson from Rogers. Can you tell us where will we be five to ten years from now, and when will credit cards stored on a SIM card become the norm?

[David A. Robinson]

It depends what you mean by the norm. What I said is at the end of this year I expect the majority of the Canadian card product to be available for download to the majority of the new phones. That means the new phones we're selling across all carriers.

Handsets in this country tend to turn over on about a two-year cycle as they are largely postpaid subscriptions between the carrier and the customer. So you can see a situation where over about a two-year period, the vast majority of handsets in the hands of Canadians should be able to do this. So at the end of 2014, end of 2016, it should be a very normal situation for a Canadian to use a mobile phone at a contactless payment terminal.

[Andrew Saxton, Conservative, North Vancouver, BC]

Five to ten years from now, what's your prediction? Where are we going to be at?

[David A. Robinson]

Jetpacks and laser beams, I can only assume.

[Andrew Saxton, Conservative, North Vancouver, BC]

Buck Rogers, okay.

Finally, for CIBC, Mr. Roberts, we have credit cards, debit cards, prepaid cards. What is the trend? Which ones are going to be the winners and which ones are going to be the losers at the end of the day, five to ten years from now?

[Todd Roberts]

We have not seen significant shifts over time in the use of credit cards versus debit cards.

Prepaid cards have not been as significant in this marketplace. I think you will find this year that a range of banks will be providing prepaid cards to their clients as well. Stored-loop prepaid cards, which is what Pat was describing earlier, which are only for use at a certain merchant, that's where the growth has been.

We believe that clients pick debit and credit for very specific reasons, which are about how they choose to live their own lives. We do not expect to see significant change in debit versus credit. What we do expect to see is people using them on their phones more frequently and using them in mobile commerce more frequently.

[Andrew Saxton, Conservative, North Vancouver, BC]

What I find hard to comprehend is that it seems that a lot of the younger generation are using debit cards rather than credit cards and they don't get all of the benefits, like the points and all that, with debit cards.

Why are young people using debit cards versus credit cards? Also, why is it taking so long for them to check out at retailers?

[The Chair, Conservative, James Rajotte]

You have about 30 seconds.

[Todd Roberts]

What you will find is that, typically, people start with a debit card because they're actually not creditworthy. Over time, after they build up their creditworthiness, then they will apply for credit cards because, as you note, sir, you're right, they have access to loyalty and they can get additional rewards, get additional points. That's when they tend to upgrade to a credit card.

[Andrew Saxton, Conservative, North Vancouver, BC]

Can you tap a debit card?

[Todd Roberts]

Yes, you can.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Saxton.

Mr. Dubourg, you have the floor for five minutes.

[Emmanuel Dubourg, Liberal, Bourassa, QC]

Thank you very much, Mr. Chair, and welcome to all of you.

My first question is for Mr. St-Amant.

You spoke about risk sharing and about involving stakeholders in the decision-making process, but my question is specifically about consumer protection. You also mentioned, concerning credit cards, several details that consumers should be aware of. You also said that there is total confusion in this area.

What would you suggest that we do to establish a legislative framework that would better protect consumers?

[Jacques St-Amant]

First of all, founding principles that are acceptable to all stakeholders would have to be established. This is certainly possible. Then—and here we are touching on problems linked to the Canadian reality—a mechanism to apply the regulations to all providers would have to be found. The federal government certainly has the necessary jurisdiction over banks and certain other providers, but this is less clear, or more open to debate, when it comes to other providers. It would be possible to create a fair framework, which would apply to everyone and which would allow the application of clear, universal rules. To do this, however, all stakeholders would have to collaborate.

[Emmanuel Dubourg, Liberal, Bourassa, QC]

Thank you very much.

My next question is to CIBC, Mr. Roberts. You talked about money laundering.

Your text deals with money laundering. We are talking about consumers, but also about the possibility that money laundering might be committed.

How could we ensure, with a system like the one we are looking at, that such situations are prevented?

[Todd Roberts]

I think the starting point is ensuring that there is a common standard. If I look at today, there are federal regulations that we need to adhere to as a bank to ensure that money laundering and terrorist financing isn't occurring. If you look at other players that enter the space you can set up the ability to move money from one account to another account without any regulatory oversight, without the need to hold capital such that there is actually protection for the client.

In our view, as payments go more digital, you create a new set of risks, so that both the consumer is left unprotected, and the state is also left unprotected in that it's in no one's interest to see money laundering occur or to see terrorist financing occur. Ergo, we would recommend standards and policies that are designed to uniformly counter that.

[Emmanuel Dubourg, Liberal, Bourassa, QC]

Do I have two minutes? Okay.

Thank you, Mr. Chair.

My third question is to the representative from Rogers.

Mr. Roberts has just spoken about how the risk to the system is more and more digital. According to your brief, the profit margins for retailers are very slim, and it is important that this system not require new investment in equipment.

Does the fact that we are told that the risk could be higher confirm your opinion that this will lead to increased costs for retailers, particularly given that margins are already slim when it comes to credit cards?

[David A. Robinson]

If I understand the question correctly, let me say that I don't believe there is incremental risk being added with mobility. In fact, in many cases the mobile device can add authentication or other factors to the equation that can actually reduce risk. One of the attributes of a mobile device is that by definition it knows where you are and that therefore, if a payment is being made in another jurisdiction and the device is not in that jurisdiction, there is an indicator to the issuer that this may in fact be a fraudulent type of card.

There are also other authentication methods, using fingerprint scanners and biometrics, that are being added into the equation. These can all be added to the system over time as additional elements that help reduce these sorts of risks.

[The Chair, Conservative, James Rajotte]

Merci, monsieur Dubourg.

We'll go now to Mr. Keddy, please, for your five-minute round.

[Gerald Keddy, Conservative, South Shore—St. Margaret's, NS]

Thank you, Mr. Chairman.

Welcome to our witnesses.

There were a couple of questions raised in the first couple of rounds of questioning here on which I want to get some clarity.

The first point is on the pin-and-chip technology in the U.S., and the fact that we appear, at least at this point in time, to be ahead of them. But we are behind the U.S. in business-to-business transactions. What's the root cause of that? Can anyone respond?

Patricia?

[Patricia Meredith]

I think Todd might be able to provide a better answer.

The root cause of being behind in B-to-B is the lack of a low-cost small payment system that essentially allows one business to pay another business electronically with enough information so that they know what the payment is for. The invoice number, the date of the invoice, that type of information, has to come with the payment in order for the business to receive it and reconcile their receivables or payables.

The U.S. system, ACH, has virtually an unlimited amount of space in the file to carry information. Our system can carry 80 characters, which is probably insufficient.

[Gerald Keddy, Conservative, South Shore—St. Margaret's, NS]

Mr. Roberts.

[Todd Roberts]

I think it's unequivocal that the Canadian system for retail payments is far ahead of the U.S. system. I was speaking at a conference I was at in Salt Lake City literally two weeks ago, explaining that there is a range of factors accounting for why our retail payments infrastructure is demonstrably better than the Americans'. I would put it frankly at the top of the heap globally and I would agree with the statements from MasterCard, Visa, and the World Bank in terms of the relative positioning of Canada on retail payments.

With respect to business payments, some of the issues that Pat has noted are correct. That is what the CPA is working on with respect to ISO 20022. There is also not enough penetration of such effective services as Interac money transfer, which is a perfectly useful solution for small business remittance.