Finance Committee on March 4th, 2014

[The Chair, Conservative, James Rajotte]

I call this meeting to order. This is meeting 22 of the Standing Committee on Finance.

I want to welcome all of our guests who have joined us here this afternoon. Thank you so much for being with us.

Our orders of the day, pursuant to Standing Order 108(2), are for our continuing study of emerging digital payments systems.

We have five witnesses here this afternoon. First of all, from BlackBerry, we have the senior director, product management, mobile payments, Mr. Frank Maduri; from the Canadian Payments Association we have the president and CEO, Mr. Gerry Gaetz; from the Canadian Wireless Telecommunications Association we have the director of regulatory affairs, Mr. Kurt Eby; from Flow Inc. we have the CEO, Ms. Amy ter Haar; and from Interac Association we have the head of external affairs, enterprise strategy, Ms. Caroline Hubberstey.

Welcome to the committee, and thank you so much for being with us. You will each have five minutes for an opening statement, and then we will have questions from members.

We'll start with Mr. Maduri, please.

[Frank Maduri, Senior Director, Product Management, Mobile Payments, BlackBerry]

First off, thank you for having us and inviting BlackBerry. This is a topic that's very important to our company. It leverages some of our strengths that we've forgotten about over the past few years—namely, security and management of mobile devices. We're taking that expertise and we're leveraging that in mobile payments.

I won't go through everything now, but we're deeply involved in mobile payments in Canada and abroad. We're actually taking a lot of the products and services that we're deploying beyond BlackBerry devices. Currently, as an example, in the Canadian market, we run and operate the EnStream platform. I think they spoke at one of your previous sessions. Those services, in terms of managing the security and deployment of a credit card on a device, we actually operate. It is not limited just to BlackBerrys but to any type of device.

So for BlackBerry this is an important topic. It leverages some of our key strengths, and we're taking the best of those capabilities and deploying them on other types of devices, including Android, iOS, and Windows.

[The Chair, Conservative, James Rajotte]

Thank you very much for that opening statement.

We'll now hear from the Canadian Payments Association, please.

[Gerry Gaetz, President and Chief Executive Officer, Canadian Payments Association]

Thank you very much.

Good afternoon.

The Canadian Payments Association, as you know, is Canada's main financial market infrastructure. We design and operate Canada's national clearing and settlement systems for payments. While the CPA is a little-known commodity to most Canadians, it plays an essential role in their financial lives and in the day-to-day operations of financial institutions and businesses across the country.

The CPA systems ensure that payments between financial institutions, which represent the aggregation of payments made by Canadians and businesses and governments, are safely and securely completed each and every day. The value transferred across our systems each day is over $170 billion.

We're guided by the public policy objectives of safety, soundness, efficiency, and the interests of users. These objectives are enshrined in the legislation. Financial institutions that are engaged in the business of payments are required to be members of the Canadian Payments Association and they fund our operations. We're overseen by the Bank of Canada because of our importance to the stability of the overall financial system.

We do not operate at the retail end of the payments chain where the emerging digital payment technologies are conceived. Our focus is at the macro level and is concerned with ensuring that the financial claims between financial institutions can be settled efficiently and without risk. That's very important. However, in consultation with members and stakeholders we maintain a robust set of rules and standards that facilitate the deployment of emerging payment products and services, and existing payment products and services.

Obviously the national payment infrastructure needs to be responsive to the changing environment and the needs of users. If you'd permit me I'd like to offer a perspective of some of the trends from our vantage point. Like this committee, the CPA has been taking a hard look at the evolving payments environment. It is changing rapidly, creating both challenges and opportunities for industry, regulators, policy-makers, and of course the end user.

There are a number of emerging and important trends that certainly inform our view of the future and our direction. The emergence of online and mobile payments is a relatively recent phenomenon, although we're all talking about it a lot, and as such it represents a very small share today of overall payment volumes and value at the aggregate level. That said, the growth is there and certainly is expected. Most of consumer spending, as you know, is done using non-cash methods and consumers rely almost completely on electronic payment options at point of sale.

As an active global player, Canada is contributing to the harmonization of international payment standards. This is important because global standards for payment processing and payment messages will over time enhance Canada’s global interoperability and help better meet the needs of Canadian businesses for data to accompany a payment. Increasingly governments and central banks are becoming much more active in the payments ecosystem around the world as they seek to ensure greater levels of efficiency, safety, soundness, and the satisfaction of end-user needs.

Clearly payment methods are increasingly complex and they can create risk exposures for participants and users. Today we see, for example, new non-traditional and unregulated players in the payments space. We see the demands for faster payment processing, faster settlement and funds availability, and new delivery mechanisms, such as the mobile phone. All of these need to be carefully considered.

I'd highlight four interesting challenges for Canada, again from our vantage point: consistent and comprehensive user protection, understanding and managing risks, concerns with security and cyber-risk, and ensuring continued innovation in payments.

The digital revolution is transforming almost all industries and businesses today. These transformations have brought about significant efficiencies and capabilities. However, they introduce new challenges for policy-makers, regulators, and the industry.

As the payments industry undergoes this transformation, there will be an increased reliance on industry collaboration and coordination. By working together, we can ensure that the public policy objectives underpinning the Canadian payments system are respected.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much for your opening statement.

We'll now hear from Mr. Eby, please.

[Kurt Eby, Director, Regulatory Affairs, Canadian Wireless Telecommunications Association]

Thank you.

I'm very pleased to be here representing the Canadian Wireless Telecommunications Association.

The CWTA is the authority on wireless issues, developments, and trends in Canada. We represent more than 100 members, including wireless service providers and companies that develop and produce products and services for the industry, including handset and equipment manufacturers, content and application creators, and business-to-business service providers.

Although our members comprise a diverse range of competitors, they all share one common goal: more Canadians and businesses using the wireless network to do more things. First and foremost, we stand for the growth, expansion, and use of Canada’s digital infrastructure to enhance social, commercial, and personal prosperity. Not only do our members respond to the demand for wireless bandwidth, they help generate that demand.

Mobile payments provide a perfect example of this shared goal. The widespread rollout of point-of-sale proximity payments from mobile devices requires collaboration from multiple stakeholders, including mobile operators, device manufacturers, issuers, global payment networks, and secure software providers. Because of our world-leading status in all of these industries, Canada has been identified as one of the most advanced markets in the world for mobile payments.

It is therefore timely of the standing committee to undertake this study of digital payment systems. There is a very real opportunity for Canada to drive the global mobile payments agenda, resulting in job creation and R and D benefits not only from domestic industry development but also from export opportunities. The regulatory climate could play a significant role in determining whether Canada’s first-mover promise in mobile payments is realized.

Wireless technology has spawned a communications revolution. By uniting the two most important enabling technologies of the 21st century so far—mobile communications and broadband Internet—wireless networks and devices have transformed not only the way we communicate but the way we work, inform, navigate, collaborate, and entertain. Canadians have embraced this revolution more than virtually anyone else in the world. In 2013, the average Canadian mobile consumer used more than one gigabyte of mobile data per month. This number is forecast to be nearly eight gigabytes per month by 2018.

To meet this demand, Canada’s wireless carriers have made world-leading investments to provide the fastest and most reliable network technology commercially available in the world. In 2012, the wireless industry invested $2.6 billion in network infrastructure, which ranks Canada third among OECD countries in terms of capital investment per subscriber. It is also predicted that by 2016 almost 80% of the smartphones in Canada will be NFC-enabled devices, increasing the potential base for mobile payments. Canadians’ demand for data over smartphones and the investments by network operators and device manufacturers to meet this demand provide part of the foundation for the widespread adoption of mobile payments in Canada.

Canada’s payments industry and retailers have also deployed the necessary infrastructure to support mobile payments. Approximately 5% of card-accepting merchants in Canada are accepting NFC transactions, more than double the percentage in the U.S., which is only 2%, and 19 of Canada’s 25 largest retailers accept or plan to accept NFC payment functionality.

Indeed, Canada is poised to pioneer the mobile payments industry, providing a unique opportunity to drive the global agenda for an entire sector. The advantages of such first-mover status would be widespread. Canadian consumers and retailers would benefit from the immediate efficiency of mobile payment options, and Canadian developers would have the opportunity to export their knowledge and technology worldwide.

Considering the substantial benefits inherent in Canada’s position as a world leader in mobile payments, there would be significant consequences to unnecessarily suppressing deployment. The CWTA has noted some reticence from stakeholders, largely based on misguided beliefs about the nature of mobile payments, particularly with respect to potential fees and security issues. Neither concern is based on the reality of mobile payments.

As I mentioned, the top priority of all CWTA members is the growth, expansion, and use of Canada’s digital infrastructure. The increased ubiquity and utility of mobile devices is motivating Canada’s wireless service providers to offer mobile payment options. Global experience has demonstrated that attempts by wireless service providers to extract a cut of mobile payment transactions only stall the rollout and delay the overall benefits of mobile payments.

In fact, from a technological standpoint, the NFC payment terminals are unaware if a payment is from a contactless card or an NFC-enabled mobile device, so no additional fee could be assigned to proximity payments made from mobile devices. Similarly, wireless service providers have no record of what payment transactions their subscribers have made from wireless devices.

Proximity payments from mobile devices are also secure. Mobile payment options build on the existing security of contactless cards by requiring the active initiation of the NFC functionality from both the payment terminal and the mobile device. Because the payment is coming from a hand-held computer, issuers can customize security features for each mobile payment option.

The mobile payment ecosystem only truly works when a critical mass of consumers has access to the majority of existing payment options on a wide variety of devices and from most wireless service providers.

[The Chair, Conservative, James Rajotte]

Can I just get you to wrap up, please?

[Kurt Eby]

Sure thing.

It is in industry's best interests to ensure that this happens. CWTA respectfully submits that the government should ensure that market conditions currently supporting the broad deployment of mobile payments remain in place in Canada.

Thanks.

[The Chair, Conservative, James Rajotte]

Okay.

Thank you very much.

We'll now go to Flow Inc. for their presentation.

[Amy ter Haar, Chief Executive Officer, Flow Inc.]

Thank you, Mr. Chairman, and thank you also for inviting Flow Inc. to the committee.

Flow is a Toronto-based company that develops technology to enable people to purchase with cash online and be rewarded for doing so. Flow is not a bank. It is not a digital wallet. Flow is an independent closed-loop system compatible with Interac. Today, I'll outline how mobile payments can serve as the foundation of a business model in a closed-loop system and how Flow adds value to all constituents of the payment ecosystem.

Flow is unique and different from any other existing or emerging payment system. At Flow we believe that an emerging payment system should move beyond the mobile or digital wallet. Wallet solutions are siloed into two categories as you know: namely, hardware solutions like those provided by the credit card companies and banks; and software or cloud solutions like PayPal and Google. Presently, there are no emerging solutions that bring these sectors together into one cohesive ecosystem. Doing so is part of our goal.

In its recent research report on mobile payments, Morgan Stanley acknowledged the importance of an ecosystem approach. This approach outlines the criteria to successfully accomplish this. These criteria include the following: universal acceptance, reduction of transaction friction, protection of consumers' interests and security, driving sales with targeted marketing, and lowering merchants' cost of acceptance.

Consistent with this approach, Flow uses payments as the foundation of a new business model to achieve these five goals. The Flow system encompasses a whole value chain, but it starts with payments and flows from there. We start with mobile payments sitting at the intersection of both hardware and cloud-based technologies and we move forward from this starting point. Flow begins with a mobile application that enables people to search, shop, purchase, pay, and receive loyalty rewards. This, in turn, then enables a number of other relationships and transactions.

Once you get into the Flow stream, there are a number of other things you can do. The circular stream keeps feeding itself. Along its path it does several things. You get into it by funding it and using it to carry out transactions such as peer-to-peer or retail.

One of the things that it does, in this stream, is to give both merchants and consumers a less expensive and more secure payment alternative, providing not just an additional payment choice for consumers and merchants but also an excellent payment choice. I'm sure that we collectively agree that we need to encourage Canadian choice and Canadian solutions. We need to empower Canadian companies to compete, innovate, and succeed in the global marketplace.

We already know that increasing efficiencies in the payments space are driving costs down. In the next evolutionary phase of emerging payment systems, we need to help merchants and consumers to also benefit from these increased efficiencies. At Flow, we not only provide a method of effecting payments in an efficient manner but also add value for Canadian consumers and merchants. Flow adds value by providing a consolidated loyalty program, and this resonates with Canadians. Indeed, loyalty is a primary motivator, and this is why Canadians have so many disparate loyalty programs.

A solution like Flow gives smaller merchants the tools that larger merchants already have and the ability to present products and services to those consumers looking for them. Flow takes it to the next evolutionary stage. Rather than focusing on how one completes the payment, we need to focus on adding value for the merchant and consumer. It is security, convenience, and loyalty that add value and resonate with buyers and sellers. Existing systems are great, but not a great deal. Flow puts the merchant back into the picture.

Other emerging technologies are aimed at serving FI and consumer needs at the expense of the merchant, but at Flow, we believe we can all engage in and benefit from what we refer to as fair trade.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We'll now hear from Interac Association.

[Caroline Hubberstey, Head, External Affairs, Enterprise Strategy, Interac Association]

Good afternoon, Mr. Chair, members of the committee. We certainly thank you for this opportunity.

We've always appreciated and respected the collaboration between Interac and the members of this committee to help advance the needs of merchants and consumers, as well as to ensure that we have a healthy, competitive, and very innovative payments marketplace in Canada.

Interac is Canada's leading payment brand. Our organization operates a low-cost and world-class debit system that is embraced by Canadians. Our brand is chosen an average of 12 million times daily to pay and exchange money. We securely connect people to their money at the ABM, at retailers across Canada and the U.S., and online through web-based services, Interac online for online e-commerce purchases, and Interac e-transfer for person-to-person payments, which has growing business use as a cheque replacement solution, particularly among smaller businesses.

In addition, Interac Flash, the secure, contactless enhancement of Interac Debit, is in widespread use at retailers across Canada, and provides the platform for mobile NFC proximity payments. We are also a leader in the prevention and detection of fraud, and consumers are fully protected for fraudulent transactions with our zero-liability policy.

We are experts in debit products, the products that allow customers to securely access the funds they have in their bank accounts. Canadians love using our products, and getting these payment solutions accessible through mobile channels is a given for us. In fact, last year we successfully completed the first NFC mobile debit transactions in Canada, and among the first globally from a domestic debit network. As you heard in recent testimony from RBC, the RBC wallet, powered by RBC Secure Cloud, is enabled with Interac Flash, so RBC customers can use the RBC wallet to make payments anywhere Interac Flash is accepted.

In addition, our leading Interact e-transfer P2P solution is also widely offered through financial institutions' mobile banking platforms. We are actively working with financial institutions to support their mobile implementations, and ensuring that customers will have the choice to use debit to pay with their mobile device, whether their financial institution chooses NFC SIM-based solution or a cloud-based solution.

Ultimately, we will continue to innovate and go where there is consumer and merchant need and where it makes sense.

Canada has a highly competitive and innovative payments environment, and additional competition is constantly emerging. Curiously, on February 15, in testimony before this committee, one of our competitors claimed that government has sought to limit competition within Canada's debit system, which has resulted in a lack of innovation. I think you can see that this is not the case. We are and will remain an active and innovative player in the arena.

I would also add that financial institutions have always been free to offer different competitive debit products with different features and functionality to their clients. The government's code of conduct for the credit and debit card industry in Canada does nothing to change that fact. Other payment networks are free to sell their domestic point-of-sale value proposition to financial institutions and merchants alike, as companies like American Express and Discover have done to build their respective businesses in Canada. By developing the code of conduct, the government clearly recognized the need for stronger checks and balances to address the obfuscation and other tactics that have potential to create an unhealthy competitive environment. We firmly believe that the code of conduct and underlying public policy objectives should be maintained for all emerging payment technologies, including mobile, and should be considered a foundation for future efforts.

We believe that a successful, open mobile payment solution, one that can manage and present multiple payment applications, and other applications such as loyalty and coupons, must be one where consumers can clearly and transparently choose the secure payment methods they're using and accepting. Payment schemes and application issuers should not dictate these terms. While payment delivery technologies will evolve, this should not alter the right of merchants to make informed and conscious choices about the payment solutions they wish to accept.

In summary, we are focused on bringing innovations to the payments marketplace, and believe that new products and enhancements should derive a tangible value to end users. With this forward-looking focus, it is our view that the regulatory framework should continue to evolve and alleviate competitive inequities where they exist, and allow a smooth path for payments innovation.

Thank you. I look forward to your questions.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We will begin members' questions with Mr. Thibeault, please. You have five minutes.

[Glenn Thibeault, NDP, Sudbury, ON]

Thank you, Mr. Chair.

Thank you, witnesses, for being here today.

I'd like to start off with Ms. Hubberstey. To start, what is the cost of accepting a payment through Interac Flash?

[Caroline Hubberstey]

We set the wholesale rate. The wholesale rate for Interac Debit or Interac Flash is currently 0.6362 of a penny. So it's under a penny a transaction. Acquirers then, depending on the contract with the merchant, set the price. On average it's around a five to six cents per transaction flat fee regardless of the ticket price.

[Glenn Thibeault, NDP, Sudbury, ON]

So for a $100 purchase that's considerably cheaper than accepting a payment via any type of credit card?

[Caroline Hubberstey]

Looking at the credit card costs—you're studying those too—I would say it's one of the lowest cost options, often lower cost than cash.

[Glenn Thibeault, NDP, Sudbury, ON]

Excellent, thank you.

So I guess because Interac offers a convenient and cost-effective means for accepting a payment, throughout the study we have heard from merchant groups and others that Interac's mobile payment application, Interac Flash, is not yet available through the apps of all financial institutions, even when they are able to offer mobile credit card payments for all major credit cards. Would you be able to answer how many financial institutions allow Interac Flash to operate in their mobile wallets?

[Caroline Hubberstey]

I'll start with card-based Interac. We have three financial institutions who are offering Interac Flash on cards, larger FIs, and we have credit unions as well. So that's the basis on which we've developed the mobile solution.

I will say that we're working with a number of financial institutions to ensure that we can have that Flash functionality enabled on phones. As I mentioned in my opening remarks, we did our first transactions with RBC and McDonald's on a BlackBerry device in March of last year. So it is coming and I would say, stay tuned.

[Glenn Thibeault, NDP, Sudbury, ON]

So I guess looking for an announcement on when universal acceptance....

[Caroline Hubberstey]

I think it will be much like we've seen with debit when it first came out. This will be an evolution. Whether you'll see it widespread at one time, I think you'll see announcements as we did with Flash itself where RBC and Scotiabank were the two Interac Flash issuers on cards, followed by TD, other credit unions, Sunova Credit Union and others. I think you'll see that same evolution in the mobile area.

[Glenn Thibeault, NDP, Sudbury, ON]

In terms of business to business payments, we've been hearing about some concerns and some hope for some action on this. Does Interac offer an online solution for businesses looking to transfer payments?

[Caroline Hubberstey]

Interac e-transfer is the P2P solution. That's how it started. It is taking off. It started at Interac about six years ago and I think there were about 40 financial institutions offering it. Today there are over 200. It is near ubiquitous. We're seeing a lot of particularly smaller businesses using it for a P2B, sometimes a B2B solution for transferring funds. We've seen financial institutions really gravitating towards the product where some of them are offering it and extending it out to their business clients. We're seeing a good change there and we continue to look at options to enhance the functionality, particularly for the small business sector.

[Glenn Thibeault, NDP, Sudbury, ON]

Is there a fixed cost to this or is it on a percentage basis?

[Caroline Hubberstey]

Much like Interac Debit and Flash we set a wholesale rate and then the financial institutions then price it to their clients. I would say it's incredibly competitive. RBC, for example, has just repriced their packages for Interac e-transfer. Some packages offer free unlimited.