Industry Committee on May 14th, 2009

[Tim Wilson]

What we can disclose is that our profit up to the year 2006, I believe.... Or what I can say is that up to that point we were a not-for-profit. Visa Canada was a not-for-profit association. Our goal was to break even. In some years we made a little bit of money by accident; in other years we lost a little bit of money by accident. That's the last year for which we can disclose the numbers.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

Is it not passing strange that you can only disclose figures from before 2006? The retailers who appeared before us are saying that it's been a little over a year and with the arrival of premium cards that rates have increased very clearly.

It seems strange to me that you can't at least tell us whether your company profits have increased since you've been part of the system and are no longer a non-profit corporation.

[The Co-Chair, Conservative, James Rajotte]

Be very brief.

[Bill Sheedy]

Thank you.

There may be some confusion, in that when a transaction moves from a basic credit card to a Visa Infinite card, it's a different value proposition for the consumer. We've already established that it's a slightly different interchange fee, about 20 basis points higher. But the transaction, if it comes through our network, is the same revenue to Visa.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

That does not answer my question. Have profits...

[The Co-Chair, Conservative, James Rajotte]

Monsieur Laforest, unfortunately, we're over your time.

We'll go to Mr. Van Kesteren, please.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Thank you, Mr. Chair.

Thank you for appearing before us today. I don't think there are many questions left. We've beaten this thing up pretty well to death. But I have a few.

Indulge me, in case it's been asked before, but who assumes the risk of card theft?

[Tim Wilson]

The risk of fraud associated with card theft is borne by the bank that issues the cards—and that's the same for debit as it is for credit.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

I see. So just one more time, you get paid then through that transaction, that 2¢ or that 1¢ or whatever. Is that basically how you get paid?

[Tim Wilson]

The business model for Visa is that for every transaction that comes across the network, we get a click fee. There's also a portion of our revenue stream that comes from licensing fees, which banks pay us for the amount of volume that hits their card-issuing portfolio or hits the merchant portfolio.

But to reiterate, the interchange fee is not a portion of our revenue.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

I mentioned this on Tuesday, but I think it bears repeating: plastic has revolutionized the retail industry. Mr. Dechert asked a similar question, but I'm looking for something a little bit different. Do you have statistics to show how the increased use of plastic has affected the marketplace?

[Tim Wilson]

One interesting statistic we can share is from a 2006 study done by the economics firm Global Insight. In that study they looked at growth in Canadian GDP from 1996 to 2006. They estimated that $122 billion of GDP was contributed by electronic payments, which represented 20% of total growth during that period.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

That's the one I'd like to see. I wonder if you could provide us with that as well.

Mr. Bernier was alluding to the fact, hypothetically speaking, that this is somewhat of a schoolyard brawl. Is this something you can straighten out amongst yourselves? Is there a real desire to do that from your industry?

[Bill Sheedy]

There is a real desire. As I believe I testified previously, we understand that there's an issue here. When you have a client base of merchants who are not pleased and are coming to Ottawa to discuss with you the problems with our industry, that's a sign it's not working.

That being said, I think there are other signs that can be looked at. Over the last decade we've seen that more and more merchants are accepting cards, and more and more consumers are using them. There are also signs, via the Global Insight study my colleague referenced, that electronic payments are driving economic benefit and efficiency.

I think there's an opportunity to work more cooperatively with the merchants. We will continue to look for ways to improve our transparency and business practices to meet their needs. However, I'd like to be clear that at the end of the day there is a commercial tension here. A value is being provided to merchants, and there's a cost associated with that value. In the realm of business, I don't think the merchant community will ever say they're happy with the fees they pay for that value.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

I come from a retail business myself, and every year we wrote off literally thousands of dollars of bad debts. That was probably the case, depending on the type of business, but that has pretty much been erased. So in your defence, I think we all agree that the service you provide is incredibly important to our economy. We would very much like to see that sort of resolution take place.

There was a concern about Interac, in that the new cards would have the ability to completely overtake it. What assurances do we have that this is not the direction Visa and MasterCard are going in?

[The Co-Chair, Conservative, James Rajotte]

Please answer very briefly.

[Tim Wilson]

We're planning to offer choice at multiple levels. The way our product is designed, Interac and Visa are on the same piece of plastic. Consumers will have the choice with every transaction, whether they want to process it over the Interac network or the Visa network. But they will only have that choice if the merchant where they're shopping has agreed to accept Visa debit. So we've also built in a level of choice for merchants. They can opt out of Visa debit and decide not to accept it, again without impacting their acceptance of other Visa products.

[The Co-Chair, Conservative, James Rajotte]

Thank you.

I'll go to Mr. Garneau, please.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

Thank you, Mr. Chair.

We don't know what your profit was in Canada last year, but it seems to me it's an important part of understanding the whole equation. I'd like to have your reaction to the following proposition.

Perhaps I have it wrong, but it seems to me you currently have enough control over the fee structure that, by knowing the number of transactions to reasonably expect in the coming year, their value, and essentially working backwards, you can achieve a certain profit level by setting the transaction fee accordingly. I'd like to have your reaction to that, given that we don't have a highly competitive situation here in Canada and you and MasterCard essentially dominate the market.

[Tim Wilson]

If you'll allow me a liberty for a moment, I think what I'm hearing behind a lot of these questions is a connection between the fees that merchants pay or interchange and Visa's profitability. I think we need to reiterate that Visa charges fees to acquirers and issuers for the services they receive from us and for transactions.

Interchange is separate. It's outside of that. We don't take a cut. If the concern is about interchange rising as Visa went public and that's the reason for probing behind the profitability, what I can refer you to is a graph that was distributed showing that from 2001 through 2008, and even in the latest monthly data we have on interchange, our rate has remained effectively flat at 1.6%. According to our data, there are no skyrocketing interchange fees. There's no increase in interchange tied to the timing of our IPO.

So ultimately, our profitability doesn't directly impact acquirers or pricing to merchants per se, if that is the line of questioning.

[Bill Sheedy]

I'd like to add to my colleague's response.

As private company, a for-profit company, we believe we've been able to be more efficient. We've been able to move capital in investment into the network that was impossible before, and we are driving more services that reduce risk and drive more functionality to cardholders and merchants than we were able to before as an association. So the resources available to us are greater, and to operate as a global company, it's also incredibly important for us to continue to maintain a Canadian presence with a Canadian management team.

So we think the model works better today. And on Tim's point, interchange rates have been flat, and we don't see that changing.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

Thank you very much.

You said in your opening remarks that the regulatory intervention sought by the retail lobby would unfairly pass merchant business expense on to consumers. You also say there'd be few payment choices, a reduction in benefits for consumers, and possibly higher costs for consumers in their monthly statement or at the checkout counter, and you talk about the Australian example.

Certainly, statistics we have here show that the number of credit card accounts has continued to increase in Australia, the number of credit card interchanges has continued to increase, as has the value of credit card transactions. So I'm having a little bit of a problem with that.

You go on to say that there would be fewer rewards. I'm not sure what fewer rewards really mean to the average person who has the card and how important that is to them. You say there would be fewer benefits from their payment cards—and again, I'm not sure how tangible that is to the person—along with higher costs associated with surcharging at the checkout counter.

I'd like to have a little bit more meat on the bones as to why you're making all these assertions.

[Bill Sheedy]

Australia is a great example, and I appreciate that it's a confusing one. Even though there has been regulation that we think is bad—and I'll talk about the downside of the regulation in Australia—there continues to be a secular shift as consumers change their spending patterns away from cash and cheque to electronic payments. That has occurred in Australia, no question. We have continued to see transaction growth. But what has happened is that our higher-cost competitor, who has not been regulated, is growing faster now. Consumers are seeing higher fees from their banks, and there has been a change that wasn't anticipated by the RBA when they rolled out these changes, where the value proposition, the features associated with those cards, has diminished.

We were only trying to point out that through price controls in Australia you have seen an unlevel playing field, where a higher-priced competitor is getting a leg up. You've seen consumer features go down and fees go up, and you've seen certain merchants introduce surcharges where they're trying to earn profit through the surcharge. We think all of that is bad for the payment system and we think it would be an odd set of objectives for regulation.

[The Co-Chair, Conservative, James Rajotte]

Thank you, Mr. Garneau.

Monsieur Bernier, s'il vous plaît.

[Maxime Bernier, Conservative, Beauce, QC]

Thank you, Mr. Chairman.

I would like to take this opportunity to ask a question about the competition in your sector.

Are there any barriers at the outset for a new player who might offer Canadian consumers the same products? Are there any significant obstacles to any company that wants to enter your industry?