Evidence of meeting #17 for Industry, Science and Technology in the 40th Parliament, 2nd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was merchants.
A recording is available from Parliament.
5:40 p.m.
NDP
Glenn Thibeault NDP Sudbury, ON
So if I'm a small merchant, I can choose right now to say a 2% reduction on product X if you pay with cash. And that wouldn't infringe on any of the contracts they've signed to have credit cards.
5:40 p.m.
Regional President, North America and Head of Interchange Strategy, Visa Canada
We certainly can't speak to the contracts that merchants have with their banks. I can speak to the rules that Visa has, as a network. And we do not prohibit a bank and a merchant to have a relationship where they discount transactions for cash.
5:40 p.m.
Head, Visa Canada
Perhaps I'll just add to that. I've also spoken with all of the major acquirers in the Canadian market about those contracts, asked them that question, and as I understand it, none of the contracts out there currently prohibit them from offering discounts on cash.
5:40 p.m.
NDP
Glenn Thibeault NDP Sudbury, ON
We've also heard that it might be viable for businesses not to take credit cards. On Tuesday, many of the witnesses said that wouldn't be a good idea, that the world is not set up that way anymore.
How can businesses say they're not going to accept credit cards--94% dominated by you and MasterCard? So 70% of the customers are coming in, but they have no choice when it comes to the rate they're going to pay when consumers use premium cards. Where is the fairness for both the consumer and the merchant in that? They have no choice.
5:40 p.m.
Regional President, North America and Head of Interchange Strategy, Visa Canada
On the 70% statistic, I suspect it's possible that there are merchants out there who see that kind of concentration. Clearly, merchants who decide to set up shop on the Internet are able to do so because of the billions of dollars of investments that have been made in the card networks...so a high concentration of their business because of a high concentration of value.
If we look at other segments, like the quick service restaurant category, fast food, our penetration of that business is 2.7%. But we've heard publicly from McDonald's, as an example, that they like to accept cards because consumers spend more and they move quicker at the point of transaction.
It's difficult for us to respond to any particular merchant who expresses an appetite to accept or not accept cards. But our experience is that we have different penetration levels and different value propositions by the merchant segment, and that's reflected in the products that we bring to market and the interchange rate structures we've discussed.
5:45 p.m.
NDP
Glenn Thibeault NDP Sudbury, ON
Very briefly, could a merchant, if they so decide, leave a contract early? Or is there a penalty if they were to leave, and what would the penalty be?
5:45 p.m.
Regional President, North America and Head of Interchange Strategy, Visa Canada
I think we've mentioned that our relationship is with the banks. They are our clients. The merchants and the cardholders are important constituencies, but the contracts that merchants have are with their banks. We, as a network, don't impose any restrictions or any penalties as they relate to merchant contracts.
5:45 p.m.
Conservative
The Co-Chair Conservative James Rajotte
Thank you.
We'll go now to Mr. McTeague, for a five-minute round, please. It'll be Mr. McTeague, and then Mr. McCallum.
5:45 p.m.
Liberal
Dan McTeague Liberal Pickering—Scarborough East, ON
Mr. Chair, thank you.
I just received information here from my researchers, as well. The MasterCard interchange rate is not as public as stated. In fact, it requires you to fill in an e-mail. For those interested in learning, it'll take several weeks for it to get back to you. I'm very concerned about that.
And on the issue of transparency, while it was nice and refreshing to see you have those made very public, the reality for most merchants is that they have no idea what those rates mean when that card is presented. I believe all of our colleagues here have talked about this. This is part of the frustration.
Visa happens to be not simply an important player, it happens to be, for many people, the player as far as credit cards are concerned. I appreciate your comments about Amex, but I have a feeling that Visa is infinitely bigger. It has a substantial chunk of the market. And therefore, in many respects, you're the leader.
Mr. Sheedy, earlier in discussions, with reference to the question by Mr. McKay, you had suggested that credit is sometimes more competitive than cash, and of course, you had suggested as well, arrangements. I have a discussion paper, “Merchant Acceptance, Costs, and Perceptions of Retail Payments: A Canadian Survey”, from December 12. On a $36.50 transaction, the cost to the merchant is 25¢ for cash, 19¢ for debit, and at that time 82¢ for credit. I'll leave you to look at that. I realize this is a lot to provide, but I thought that was a rather startling comment by you, given the facts of the Bank of Canada.
I want to ask a question. Visa Inc. is your parent company. Is that correct?
5:45 p.m.
Regional President, North America and Head of Interchange Strategy, Visa Canada
That's correct.
5:45 p.m.
Liberal
Dan McTeague Liberal Pickering—Scarborough East, ON
I believe you may recall the former vice-president and assistant counsel for Visa International and Visa U.S.A., Broox Peterson, who described the system in the following fashion. You're probably familiar with the quote, but for those who have not heard this before, it might come as something of a surprise: “Issuers began to view the interchange reimbursement fee not as a revenue allocation mechanism to ensure success of the system, but as a demand-driven pricing scheme to collect as much revenue from merchants as the market would bear.” Do you agree with that characterization?
5:45 p.m.
Regional President, North America and Head of Interchange Strategy, Visa Canada
I wouldn't describe interchange fees that way. As I think we've testified already today, there are many objectives and many considerations that we look at in setting interchange fees.
Certainly there is the value proposition to the merchant community relative to cash. We have a General Accountability Office study that looked at the processing of payments in the postal service in the United States and found that we were lower cost. I think the value proposition versus American Express is important to look at. But there's also the cost structure that our issuers incur, not only in funding rewards, as we've talked about, on premium products, but also the credit risk exposure and the costs of marketing and customer service, and the infrastructure investments made to lower costs, to lower risks, and to lower fraud. All of these things are factored into interchange. But if we step back, it really isn't a mechanism to try to extract value.
Visa, as a for-profit company, is trying to drive as many transactions over our network as possible. We establish an interchange fee not with the issuers in mind, not with the merchants or the acquirers in mind, but we set interchange rates to try to drive as many transactions over our network. And if we could do that through lower interchange rates, we would do that; and if we could do that through higher interchange rates, we'd have the incentive to do that.
Right now, we think our current interchange rate structure works. It could change tomorrow, based on market dynamics, and that's our concern as it relates to regulation—our ability to respond to market dynamics with our interchange structure.
5:50 p.m.
Liberal
Dan McTeague Liberal Pickering—Scarborough East, ON
Our concern is small business going in the very opposite direction to what you had suggested, that they're going to lose their shirts, given the margins and the way consumers are being impacted. The introduction of Infinite cards may be of benefit to people who can afford them, but consumers ultimately wind up paying for these. Why should a person buying a bag of milk or a can of Spam somewhere have to pay for someone else's rewards? I think this is the concern that Canadians and merchants are bringing to bear as a result of the changes you've offered.
5:50 p.m.
Liberal
Dan McTeague Liberal Pickering—Scarborough East, ON
On the issue of debit, your company justifies and wants to look at the issue of ad valorem fees. The Interac system in Canada is the second most used Interac system in the world after Sweden, so why do you believe the system is not working? More importantly, why would you introduce ad valorem fees when in fact there really isn't much involved other than opening and shutting an account?
5:50 p.m.
Conservative
5:50 p.m.
Head, Visa Canada
We think the system is working in some ways with the current debit products in Canada, but we think there are additional ways that consumers could use those cards. For example, they could use them online and when travelling around the world.
We also think there is an issue with fraud on the cards. If we benchmark Interac's fraud rates against our experience in other markets, we see material differences in those fraud rates.
5:50 p.m.
Liberal
Dan McTeague Liberal Pickering—Scarborough East, ON
Chair, I just want a clarification from you.
We've heard from previous testimony that in fact the liability on debit would be changed to the merchants. I don't understand how fraud and liability questions really play in here, when in fact it's the merchants who are ultimately going to have to play this.
Thank you, Chair.
5:50 p.m.
Conservative
The Co-Chair Conservative James Rajotte
It's a fair point, Mr. McTeague, but we will have another round for the Liberal Party.
Monsieur Laforest, s'il vous plaît.
5:50 p.m.
Bloc
Jean-Yves Laforest Bloc Saint-Maurice—Champlain, QC
Thank you, Mr. Chairman.
Good afternoon, gentlemen.
In response to a question by Mr. McTeague earlier on, the representative for MasterCard said that their company will make a special offer solely to members of the Canadian Federation of Independent Business. These are not members of the coalitions of Quebec and Canadian merchants who came here in great numbers and who represent 250,000 businesses.
Is Visa considering proceeding the same way, that is making special offers, reducing rates, but only for members of the Canadian Federation of Independent Business? Or will you be making that offer to all merchants, and among others, those of the Canadian and Quebec coalitions?
5:50 p.m.
Head, Visa Canada
Thank you for the question.
It's not in our current plans to offer a preferential rate to members of the CFIB. It's something we could evaluate down the road. We always take into account what's happening in the market, the feedback we're hearing, and then incorporate that into future rate plans.
What I will point out vis-à-vis the RCC is that ultimately what a merchant pays is a function of the agreement they have with their processor. Both the RCC and the CFIB have used their aggregated buying power to negotiate preferential rates with one of the acquirers in the market.
5:50 p.m.
Bloc
Jean-Yves Laforest Bloc Saint-Maurice—Champlain, QC
What I mean is that MasterCard seems to have taken advantage of its dominant position in the market to say that it will offer a preferential rate solely to members of the Canadian Federation of Independent Business. That organization, among others, did not call into question the various procedures used by Visa and by the system. There are two major companies in the market. There's also American Express. However, on the whole, there is Visa and MasterCard.
When MasterCard responds in this way, it more or less twists the arm of people who came here to ask questions about the system in a very legitimate manner.
Will you also be taking a similar course of action? For my part, I feel that what MasterCard referred to earlier is indecent.
5:50 p.m.
Head, Visa Canada
Again, it could be in our future plans. We will take into account the feedback we hear in the market in determining future interchange rate changes.
What I would point out is that the system already delivers significant benefits to small merchants, in that it creates what we like to refer to as a level playing field. So a small merchant who sells $500 a year on Visa products attracts the same interchange rate as most of the major merchants in the country do. It's one of the benefits of our system that small merchants are able to realize.
5:55 p.m.
Bloc
Jean-Yves Laforest Bloc Saint-Maurice—Champlain, QC
I have another question for you.
Earlier, Mr. McKay asked you what your annual sales were. You're saying that you can't make all these figures about your company public.
Can you at least tell us whether your profits have increased these past few years, and if so, by how much?