Finance Committee on Feb. 25th, 2014

[The Chair, Conservative, James Rajotte]

I call this meeting to order.

This is the 20th meeting of the Standing Committee on Finance. Orders of the day are pursuant to Standing Order 108(2), continuing our study of emerging digital payment systems.

I want to welcome our witnesses here today. Thank you so much for being with us.

We have, in the order of presentation, first, as an individual, Monsieur Jacques St-Amant.

He is a professor at the Université du Québec à Montréal.

Next, from the Canadian Imperial Bank of Commerce we have the senior vice-president, Mr. Todd Roberts. Welcome.

From the Canadian Independent Petroleum Marketers Association, we have the president and CEO, Ms. Tricia Anderson.

From Rogers Communications we have Mr. David Robinson, vice-president, emerging business.

We have the chair of the Task Force for the Payments System Review, Ms. Patricia Meredith. Welcome.

Thank you, all, for being with us.

You will each have five minutes for your opening remarks and then we'll have questions from members.

We will start with Mr. St-Amant.

[Jacques St-Amant, Professor, Université du Québec à Montréal, As an Individual]

Thank you, Mr. Chair.

Progress is never possible without effort, nor without risk. If progress is to be beneficial, we must be able to look ahead. The growth of electronic payments in Canada is an excellent example.

Mr. Chair, members of the committee, thank you, first of all, for inviting me to appear before you today.

I would like to use these too-short minutes to speak to some concerns I have about the impact of the changing landscape of payment systems on Canadian consumers. I will focus my attention on two aspects among many others, specifically risk sharing and the participation of all stakeholders in the decision-making process. These are all of the questions that I have been looking at since 1990, particularly in the context of research undertaken in collaboration with consumers associations.

I participated in the creation of the Canadian Payments Association Stakeholder Advisory Council, of which I am currently a member. I have also had the pleasure of acting as an advisor on consumers issues to the Task Force for the Payments System Review, which is chaired by Ms. Meredith. I currently teach consumer law at the Université du Québec à Montréal, and in my work, I often discuss questions concerning the control of consumer payments, including those made using emerging methods.

In their day-to-day lives, consumers have no chance. They are unable to navigate the clutter of rules concerning the payments that they make. If they are the victims of fraud, for example, their rights are different depending on whether or not they paid with a credit card or a debit card, whether they used a PIN or not when paying with a card, or whether the fraud was committed at the ABM of a bank or another financial institution.

In the case of a pre-authorized payment, different rules apply if the withdrawal is made from a bank account or from a credit card. And all this is regulated by laws and regulations from both the federal and provincial governments, by codes of practice, by rules set out by the Canadian Payments Association, by the wording of the contract with the financial institution, by the policies of networks such as MasterCard, Visa or Interac—the list is endless.

It is total confusion, and believe me, I have no trouble convincing my students of that every year. Unfortunately, I do not have enough time to give you examples here, but I encourage you to look at an excerpt from Policy Paper A, which was published by the task force as an appendix to their final report, and which has possibly been included as an appendix to the text of my speech. It illustrates the problems we are facing.

If all of these rules were coherent and generally favourable to consumers, we could let it be and move on, but that is not the case. Let us look at a simple example: a consumer's responsibility for a fraudulent withdrawal made with their credit card at a bank's automatic teller is potentially unlimited. There is no ceiling, apart from the bank's own policies. This despite the fact that there is often no responsibility for a debit card, and that in general there would be a ceiling of $50 if the fraudulent withdrawal had been made, for example, at a Desjardins automatic teller. But who amongst you knows that, or could explain to me why the system works the way it does?

It would, however, be possible to put in place a legal framework based on coherent principles that take technological evolution into consideration and that adequately protect consumers. Other jurisdictions have done this, such as the United States and the European Union. And they all now have more clarity and certainty at the legal level, both for existing consumers and providers, as well as other stakeholders and those who wish to innovate, because everyone is playing by the same clear and predictable rule book.

We must hope that the code of conduct for the financial sector, whose implementation was recently announced by the Minister of Finance, will be a step in the right direction, but for the moment that is just a hope. It seems to me that Canada should have a comprehensive legislative framework for payments, particularly electronic payments, one structured around principles such as those that the task force has suggested.

If the payments ecosystem is to see healthy growth in Canada, it is imperative that all stakeholders be able to actively participate in the decision-making process. To do otherwise is to ensure that certain people will not be happy and that they will not be quiet about it. We need the payment mechanisms that meet the needs of stakeholders and the economy, and they must be created in cooperation with all stakeholders.

The Canadian Payments Association's processes exemplify that, as illustrated by the challenges that we currently have in Canada bringing on line an extremely rapid payments system, while other jurisdictions have already done this or are getting ready to do it.

In closing, this is an immense area and there are many challenges. We must better manage risks in everyone's best interest, and it is imperative that dialogue between stakeholders be encouraged. To that end, I will be happy to answer any questions that you might have.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. St-Amant.

We will now hear from Mr. Roberts, please.

[Todd Roberts, Senior Vice-President, Payments Strategy and Innovation, Canadian Imperial Bank of Commerce]

Thank you very much for the opportunity to speak before the committee.

My name is Todd Roberts. I'm the senior vice-president responsible for payments innovation and growth at CIBC. As well, the payments system, its regulation, and the factors that lead to innovation and success have been a significant part of my professional career.

I will focus my remarks this afternoon on observations that I hope the committee will find helpful regarding what has enabled the payment system to be effective, the need for sustained innovation to continue to evolve payments for Canadians, and some observations for consideration to guide the successful evolution of payments.

The Canadian payments ecosystem is one of the most advanced in the world. It is advanced in part because of the very effective relationships between industry players, as well as Canada's effective supervisory system. The players, pre-mobile, included consumers, merchants, card issuers, merchant acquirers, and the card networks.

In the world of mobile, one adds to this list our wireless telcos, new security software developers, trusted security managers such as G&D and EnStream, electronic wallet providers, and others who need to work in perfect harmony to ensure a seamless experience for merchants and consumers.

This view has been reinforced by a number of leading global organizations such as the World Bank, and industry players such as Visa and MasterCard. Compared to the United States, our system provides better security through pin and chip, and our readiness to deploy new technologies, such as mobile payments, is considerably more advanced. As a case in point, CIBC, along with its partners at Rogers and Telus, have deployed credit cards onto smartphones, whereas Isis, a consortium of various players in the U.S., still struggles today with its deployment.

Our ecosystem has been effective in large part due to the close collaboration between participants, the existence of clear standards and protocols governing payments, as well as very productive working relationships with regulators. The Canadian payment system works well for Canadians in our view, as it delivers on the core expectations of its users: trust, security, affordability, ubiquity, and efficiency.

While there can always be opportunities for improvement, we have built an ecosystem that we believe we can justly be proud of. My point here is that as we look to the future and evolve the ecosystem to embrace digital payments we need to ensure that new payment methods continue to develop effectively. Canadians expect that banks, networks, telcos, and other players will enable digital payments to be made through more methods than conventional plastic. They expect that payments can be made through tablets, smartphones, and an increasing array of connected devices. They will expect these devices to be as trusted and secure as traditional methods. They will also expect to be able to use these devices wherever traditional payment methods work. Also, they will expect that whether they deposit a cheque or take an image of it, it can be processed just as quickly and not cost them any more to do so. In short, Canadians will expect the new world of digital payments to deliver on the core requirements that the current system currently delivers for them.

To that end, we believe the payments ecosystem will need to evolve in a manner that continues to facilitate innovation while ensuring a robust and secure environment for payments. With that in mind, we'd submit the following perspectives for considerations.

Partnerships between banks, networks, telcos, technology providers, and other organizations will need to be encouraged to ensure that solutions designed for Canada continue to thrive. Common standards and protocols will need to be put in place to enable digital payments, as well as digital identification, to remain secure, trusted, and efficient. Clear minimum operational expectations around elements such as security, privacy, and anti-money laundering will be required, which apply commonly across all participants who provide payment services, to ensure that Canadians are protected similarly when they make a traditional or digital payment.

[The Chair, Conservative, James Rajotte]

One minute....

[Todd Roberts]

The interests of both originators and receivers of payments will need to remain balanced so as to ensure that Canadians continue to have the flexibility to use the payment methods that they prefer. Sustained investment will also be required across players in the payments ecosystem to allow it to modernize and evolve. A standards-based regulatory model will provide the ability required for multi-year investments. Continued partnership between payment ecosystem participants and regulators is absolutely essential. This spirit of partnership will need to embrace the fast pace of change that characterizes the digital era.

A critical requirement in our view is an integrated approach to regulation and supervision of the broadening landscape of payments system participants. Gaps in how we regulate certain players need to be addressed. We need to ensure that as the digital payments expand there is a broader range of participants who are involved, and that those participants meet the same standards that we would expect of traditional participants.

I very much appreciate the opportunity to address any questions that the committee may have, and applaud the committee's commitment to stewarding the successful evolution of digital payments in Canada.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Roberts.

We'll now hear from Ms. Anderson, please.

[Tricia Anderson, President and Chief Executive Officer, Canadian Independent Petroleum Marketers Association]

Good afternoon. Thank you very much for having me here today.

My name is Tricia Anderson, and I'm president and CEO of the Canadian Independent Petroleum Marketers Association, also known as CIPMA.

CIPMA is a national not-for-profit association representing the unique interests of independent, non-refiner marketers of petroleum products. Our members are key distributors and marketers of petroleum and renewable fuels to the commercial, agricultural, industrial, wholesale, and retail markets in every part of Canada. Approximately 80% of CIPMA members have retail operations and therefore will very much be touched by the growing changes in the mobile marketplace. They are the small and medium-sized fuel companies that are the backbone of Canada’s fuel distribution and marketing industry.

As it currently stands, a key issue for our members is that of credit card fees, which is quickly transcending into new territory with the rapid introduction of mobile payments.

Currently credit card fees in Canada are among the highest in the world, with Canadian retailers paying approximately $5 billion per year in hidden credit card fees as the price of accepting credit cards. These credit card fees are eroding retail margins for Canadian business owners and pose a real and tangible threat to the sustainability of independent businesses in Canada.

CIPMA members know that in order to remain appealing to consumers, they must embrace new technology and keep up with the rapidly changing payment sector. We understand that for our customers, speed of payment is of key importance, and we recognize that mobile payment apps facilitate a faster transaction. However, as mobile payments continue to gain prominence, merchants fear this will pave the way for new costs on top of the already crippling credit card fees.

CIPMA members report that close to 50% of customers use credit cards for purchases. It's estimated that members are paying up to a third of their operating margins on these sales just to cover the costs of processing the credit cards. All our other operating functions must be covered from the remaining margins, leaving little or sometimes no profitability for the businesses when all of these expenses are paid—no funds for new staff, important training, or business expansion.

Beyond this, independent petroleum marketers suffer even more severely when fuel prices increase. With relatively fixed operating margins our members do not benefit from higher gas prices, but we do pay more in credit card processing fees as prices rise.

New fees for processing and new equipment that could be introduced with mobile payments would further erode retailer profit margins and could result in reduced competition as businesses on the edge of survival ultimately close their doors.

As you all know, the code of conduct for the debit and credit card industry in Canada was introduced in 2010 to promote transparency and choice for merchants in regard to payment schemes. In September 2012 the federal government announced its plans to extend the voluntary code to include mobile payments.

In theory, CIPMA continues to support various elements of the addendum to the voluntary code of conduct and its provisions relating to mobile payments. We support that merchants should have sole authority to determine what forms of payment they choose to accept, that competing domestic apps be stored on the same device provided they are distinct apps, and that consumers should have the ultimate choice in the default settings and applications they wish to use.

We also recommend that express written consent for each mobile product offering be added to the proposed addendum, including express consent for each individual payment option within a mobile wallet. However, while we certainly commend the government for recognizing new payment-sector technologies, we feel that a voluntary code of conduct is simply not enough. Many of our retailers have expressed that the current code is not working for them. They are not being protected from the burden of high credit card fees that threaten their very existence.

A code that is currently not working for retailers in regard to credit card fees is even less likely to work for retailers with the introduction of mobile payments. Mobile payments involve an intricate system of stakeholders. What used to be a payment system that primarily involved credit and debit networks, issuing banks, and acquirers now also includes mobile telecom companies and several other players.

CIPMA recommends that government review the best practices and lessons learned in other jurisdictions more advanced in this sphere. Equipped with this knowledge, we can develop policy or potential regulation rooted in education and experience to protect the interests of consumers and businesses nationwide.

Thank you for the opportunity to present our perspective. Our industry very much appreciates the opportunity to be consulted, to communicate our challenges and concerns, and to propose recommendations.

[The Chair, Conservative, James Rajotte]

Thank you very much, Ms. Anderson.

We'll now hear from Mr. Robinson, from Rogers.

[David A. Robinson, Vice-President, Emerging Business, Rogers Communications Inc.]

Thank you, Mr. Chairman.

My name is David Robinson. I am vice-president of emerging business for Rogers.

As my title implies, my role at Rogers is to lead the company into the new, non-traditional areas of business. Today I am here to describe Rogers' efforts in mobile commerce, an area in which Rogers is a new entrant, not an incumbent, as we have virtually zero revenue in this category today.

Rogers' vision is to transform commerce by placing the smartphone at the centre of everyday transactions. With or without Rogers—or any mobile operator, for that matter—this transformation is inevitable and will allow consumers and merchants to take greater control of how they make and accept payments.

Today, smartphones are used to price compare, to find deals. Sometimes consumers learn that it's cheaper online and order the product right then for later delivery, using online mobile payment products. Consumers download applications from their favourite coffee shop, adding money to an online account, and pay at the till. If they opt in, they may be rewarded for their business, which provides the merchant with valuable information about their customer, sometimes bypassing traditional payment networks altogether. The carrier has no role in these transaction examples other than being the mobile Internet service provider.

So what value-added role can we play?

What carriers can do is offer solutions that are simple, scalable, and secure. By doing so, consumers win, as do issuers and merchants of every size.

Let me break that down for you.

“Simple” is just that, but I propose that a simple transaction is also a familiar transaction. “Familiar” does not mean the same—just not wildly different than what has come before. A simple transaction means no retraining of the retail staff, no requirement for new equipment or reintegration, and importantly, minimal retraining of the consumer. “Simple” is also readily available and easily discovered.

Scalable solutions include the largest number of consumers and merchants. While the coffee shop example is impressive, it is not scalable. Only the largest coffee chains can afford such a solution. Scalable means that the local diner is included in mobile payments, not excluded. Scalable means vast number of consumers can partake, not just those with smartphones from a particular supplier.

Every mobile commerce payment solution should be secure. The best mobile payment solutions do not compromise security for convenience. The best mobile payment experiences do it all: simple, scalable, and secure, without compromise.

A mobile payment made using a smartphone with a payment card stored in the SIM is all of these things. It is simple in part because it is familiar. While the form of the payment card may have changed, by every other measure it is the same payment product.

From the consumer's perspective, the service is provided by the financial institution of their choice and accepted in the same places as their contactless payment cards. From the merchant's perspective, if they have agreed to accept contactless payments and have the card readers in place, when a customer presents a smartphone to the reader, the payment just happens. No additional equipment, systems integration, or training are required.

So how are we doing here in Canada? Today, two of the largest Canadian banks and the three largest carriers have the ability to securely distribute and store virtual payment cards in the SIM inside select smartphones. By the end of the year, we are forecasting that a majority of Canadian payment cards will be available for download on the majority of new smartphones on virtually all carriers in Canada.

While there is still work to do, that majority is available. This is due in part to EnStream, the partnership of Rogers, Bell and Telus, whose role it is to reduce the technological barrier between issuers and carriers who really want the same thing—the ability for Canadians to get all cards, on all phones, on all carriers in Canada. There is no country in the world with the potential for such scale in such a short period of time.

To further accelerate mobile payments, Rogers has developed a mobile wallet application called “Suretap”. This application allows consumers to organize their virtual cards like they do their physical cards today. Suretap is not just about credit cards.

Canadians love their debit cards. We are among the most enthusiastic adopters anywhere, and merchants are keen to accept it for its affordable fee structure. While issuers ultimately decide which payment products are made available, Suretap is ready and willing to deliver mobile versions of Interac.

Suretap also comes with a virtual gift card store in which the customer can discover, compare, buy, gift, re-gift, and reload gift cards, all from inside the wallet. It offers merchants, including small merchants, new opportunities to communicate directly with their customers. This will help level the playing field between small and large merchants and offer cost-sensitive retailers the opportunity to promote low and non-interchange payment options.

Rogers believes that Suretap will be a catalyst for simple, scalable, and secure mobile payments in Canada. I look forward to demonstrating the application for you so you can see for yourself the value that an open mobile wallet can bring to consumers, merchants, and issuers of all types and sizes.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Robinson.

We'll now hear from Ms. Meredith, please.

[Patricia Meredith, Chair, Task Force for the Payments System Review]

Thank you.

I have to operate two of these.

First of all, I just want to show you the mandate for the task force, which directed us to “ensure that the framework supporting the payments system remains effective in light of new participants and innovations”. Mobile payments were a very important component of our mandate.

As Clayton Christensen described in The Innovator’s Dilemma, from time to time industries are disrupted by new technologies.

This is exactly the situation that we face in payments. The top line in this graph is the old technology. It has served us well for the last 40 years. But it has been continuously improved through innovations such as Interac debit and more recently cheque imaging. But with the convergence of computing power onto mobile smartphones and tablets connected to the Internet, it is now possible for parties to transact directly with each other bypassing the traditional networks and the legacy mainframe systems.

For example, you can download the Starbucks app onto your phone, pre-order your drink, and leave the store without standing in line to pay. Or you can download a game onto your phone and upgrade it while you are actually playing the game. These are mobile-enabled payments most of which are supplied by technology companies and retailers. While wireless carriers and traditional FIs have a role to play, payments are being embedded into the retailing experience.

Canadians have been early adopters of smartphones and tablets. We are among the world's heaviest users of online banking and shopping. According to the World Bank 83% of Canadians use the Internet regularly. According to the CBA, 67% of Canadians prefer online banking, up from 8% in 2000. Canadians have embraced smart devices with data plans. These have grown exponentially from 33% in 2010, to 48% in 2011, to 57% in 2012 as phone contracts come up for renewal. Mobile banking, which was introduced while the task force was in play, increased to 5% in 2011 and 22% in 2012. Rapid adoption of mobile computing technology is already disrupting the payments industry. At the current rate, it will be fully penetrated by 2020.

What does that mean? Essentially disruptive technologies usually disrupt the business model. So the traditional four-party business model that has been in effect in payments for many decades is likely to be disrupted.

Roles are changing. The companies that are disrupting so many other industries are also disrupting payments. Those companies are Apple, Amazon, Google, Facebook, and PayPal, along with a myriad of much smaller players. These companies come into the payments arena with entirely different business models from the existing ones.

To illustrate, this is a slide from PayPal. What it reflects is the fact that people shop very differently. Certainly my 17-year-old son shops very differently than I do. He pulls out his phone, he searches for the item that he wants, he does comparison pricing, he checks with his friends, he reads the reviews, he sees whether or not the item is in stock, and often he purchases it without ever stepping into the store.

For a retailer to be successful in today's environment they must be integrated into this end-to-end shopping experience, provide advertisements and inducements, just-in-time coupons, and track loyalty. Payments are an important part of this end-to-end process for two reasons: first, to ensure the transaction does not get dropped at the checkout counter; and second, and more importantly, to get all of the necessary data to support the marketing and loyalty engines.

As the slide on PayPal illustrates, the new model is forcing players like Amazon, PayPal, Apple, Google, and hundreds of other new technology companies into the payments business, not necessarily to make money on payments but to fuel their advertising, marketing, and information-based business models.

[The Chair, Conservative, James Rajotte]

Ms. Meredith, could I just have you conclude, then we'll go to members' questions?

[Patricia Meredith]

On the next slide I just want to draw your attention to the prepaid card lines, which is essentially growing at 30% compound annual rate. These are essentially mobile payments. The Starbucks app is supported by prepaid gift cards, so money is moving out of the traditional payment system into the mobile world through prepaid cards.

I'll skip the next slide because both Todd and David have talked about that one.

When the task force looked at mobile payments, the conclusion we came to was that the industry would clearly evolve rapidly over the next decade. As commerce converged onto the mobile phone, what was important was that the system for governing payments be flexible and adaptable. We realized that regulating a moving target—which is clearly what we're looking at for at least the next decade—was not only undesirable because it would stifle innovation, but in all likelihood it was impossible.

Essentially what the task force recommended was the creation of a payments industry—

[The Chair, Conservative, James Rajotte]

Ms. Meredith, we are way over time here, so can I get you to conclude, and we'll go to members' questions, please?

[Patricia Meredith]

Sure.

We recommended a governance model that would recognize payments as an industry, include all of the players, as Jacques suggested, and be largely self-governing, lightly regulated, and principles-based. So trust, accessibility, and good value would govern the system.

[The Chair, Conservative, James Rajotte]

Thank you for your presentation.

We'll begin members' questions with Mr. Thibeault, please, for five minutes.

[Glenn Thibeault, NDP, Sudbury, ON]

Thank you, Mr. Chair.

Thank you to all the witnesses for being here today. We have so many great witnesses and so little time. Five minutes will go by so quickly, so I do apologize if I step in and ask you to stop and then move on to someone else.

Ms. Meredith, I'll start with you.

The payment task force review presented its final report to the Minister of Finance in late 2011. There were a number of recommendations made. We are talking about the report stating that EU countries—and I believe there were over 20—and BRIC countries are outpacing Canada's transition to digital payments, with obvious negative implications for Canada in terms of global competitiveness and interoperability.

Maybe you can talk about a couple of those recommendations. As well, to your knowledge, have any of the recommendations that you put forward in the report—I believe it was called “Moving Canada into the Digital Age”—been acted upon?

[Patricia Meredith]

I believe what you're referring to is our first recommendation for the federal government to adopt electronic invoicing in payments, which Public Works and Government Services has been working very hard to move forward.

The thinking behind the recommendation was that, based on our discussions with other countries, it takes leadership on the part of a significant player in the system to actually move the system forward to using digital payments, so electronic invoicing payments. The federal government certainly qualified in that regard.

The challenge, however, is that the infrastructure—the payment systems that the Canadian Payments Association operates, ACSS and LVTS—does not carry sufficient information for companies or governments to do reconciliations of their accounts receivable and payable. So many of the benefits, which we estimated directly at $8 billion annually—and for the economy overall, assuming that once the payment component had been automated, the service could be delivered electronically—that European countries in particular expect are equivalent to 1% to 2% of GDP, which for Canada means $16 billion to $32 billion in annual savings. It is a dramatic productivity improvement. It is also absolutely essential for Canada to become a full participant in the global digital economy.

[Glenn Thibeault, NDP, Sudbury, ON]

Your conclusion talks about how Canadians want to participate fully in the digital economy. It goes through some very good points there, which would lead to a question I would bring to Monsieur St-Amant.

You appeared before the industry committee in 2011, and you were talking about the importance of regulating the electronic payments sector for the same reasons we have implemented traffic lights and lines on the pavement. There have to be some clear rules for the road, for example, which everyone complies with to reduce risk, sustain trust, and facilitate involvement and participation.

We know we have Canadians chomping at the bit to get into this, but we're seeing that there's still a lack of rules out there for many of the players involved.

With that, do you see, for example, making the voluntary code of conduct for credit cards mandatory as requested by the Canadian Chamber of Commerce?

With one minute, I'll hand that over to you, sir.

[Jacques St-Amant]

I am rather skeptical about voluntary codes. We have one in this country regarding debit cards, which is mostly observed in the breach, and nobody knows about it.

I believe we need a clearer, firmer framework, but as Ms. Meredith mentioned, we also need the infrastructure to support the new payments.

There was an informal consultation done last fall on the implementation of a faster payments mechanism in Canada. All of the stakeholders and the users said we need this, and we want it in this country. The only stakeholders who were reluctant were the incumbent providers, essentially the bankers, because they do not see a short-term business case. The consequence is that the negative externalities are borne by everybody. In order to....

[The Chair, Conservative, James Rajotte]

Thank you. Just wrap up, please, sir.

[Jacques St-Amant]

We do need a clearer framework, a firmer framework, and a governance framework that would enable us to provide solutions.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. Thibeault.

We're going to Mr. Saxton, please.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you, Chair.

Thanks to our witnesses for being here today.

My first question is for Ms. Meredith at the Task Force for the Payments System Review. Did you study other countries and other markets, and can you tell us which ones are the most advanced, and what we can learn as far as best practices are concerned?