Industry Committee on May 14th, 2009

[The Co-Chair, Conservative, James Rajotte]

Thank you, Mr. McTeague.

We have about three minutes.

Mr. Carrier, three minutes.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

Good afternoon, ladies and gentlemen.

You are undoubtedly aware that last Tuesday, we met with people from the coalitions. These coalitions represent 250,000 businesses across the country. They are, therefore, not a negligible group.

The Canadian Federation of Independent Business has indeed asked for regulation to resolve its problems. CFIB representatives said that last year, 26% or 27% of credit cards used were premium cards, cards that incurred higher interchange fees, which they did not necessarily plan for in their budgets or prices. Therefore, this is a problem they are asking us to resolve.

In your presentation, you discuss the Australian model, which was also recommended to us. You claim that it has been a disaster for consumers because it has impacted credit card interest rates.

Do you have any data on that, since you claim in your presentation that there have been serious consequences on interest rates charged on unpaid balances, I presume? Do you have any documentation to support that assertion?

[Kevin Stanton]

As I stated earlier, there are some very good reports on that. We'll make sure they're submitted to the clerk. I think they were given to every member of Parliament. One more needs to be updated.

The general data shows that rewards went down, interest rates went up, fees went up, and prices did not come down to compensate for the reduced interchange.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

Can you get us that information?

[Kevin Stanton]

Absolutely.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

You say that in your opinion, the current system runs quite smoothly. You are opposed to the models that we are referring to. You do not seem to have any solutions to suggest to us to solve the problem being experienced by retailers. I personally did not see any solutions proposed in your presentation, nor hear any in your answers.

Ultimately, you are saying that as far as you are concerned, everything is fine and there is no problem.

[The Co-Chair, Conservative, James Rajotte]

Very briefly, Mr. Stanton, please.

[Kevin Stanton]

Quite the contrary. I do think there has been a breakdown in disclosure and education. And I think we need to make it clear that our debit proposition is flat fee and lower than Interac.

[The Co-Chair, Conservative, James Rajotte]

Merci.

Thank you very much, witnesses, for coming in and for your presentation and for answering our questions. I will have our clerks follow up with you with respect to all the information that it has been stated will be provided to us. As you can tell, members are quite interested in finding out some more information. Some more information is better than less.

But we do thank you for being here today and answering our questions. Thank you very much.

Members, we will suspend for a minute and we will bring Visa Canada forward as witnesses.

Thank you.

[The Co-Chair, Conservative, James Rajotte]

Mr. Wilson, you may begin at any time.

[Tim Wilson, Head, Visa Canada]

Thank you, Mr. Chair.

I appreciate the opportunity to appear before this committee today. I'm Tim Wilson, head of Visa Canada. With me this evening is Bill Sheedy, the regional president for North America and the head of our global interchange strategy team.

Bill will address the issue of interchange within the Visa system and the role it plays in facilitating commerce across Canada and globally. Following his comments, I would like to speak to Visa's operations in Canada and the introduction of Visa debit cards, which will give Canadian consumers and businesses choice while offering features and functionality not available today.

[Bill Sheedy, Regional President, North America and Head of Interchange Strategy, Visa Canada]

Thank you, Tim.

First let me provide some background on Visa.

Visa's fundamental role is to facilitate financial transactions between consumers and businesses. We are not a bank or a financial institution. We do not issue cards, make loans, or set rates and fees associated with card usage or acceptance. That's the domain of the Visa financial institution clients. Instead, think of Visa as a network for commerce.

In facilitating transactions, Visa connects 1.7 billion cards to 30 million merchants in 16,600 banks worldwide securely and reliably every second of every day. In making these connections, Visa creates value for all of the systems' participants. Cardholders receive a more convenient, secure, and widely accepted way to make payments. Retailers benefit from the speed, efficiency, reliability, and guaranteed payment that only electronic payments can bring. They also have the ability to take payment from any Visa cardholder regardless of their home country.

Today Visa operates in a highly competitive environment. There is robust competition between the payment types and various local and global networks well beyond credit cards. We also compete with an array of existing and emerging competitors, including cash, cheque, pre-authorized debits, Interac, retail-issued credit, PayPal, and higher-cost competitors such as American Express.

Retailers have also benefited greatly from billions of dollars in infrastructure investment that has increased security on business transactions. Other benefits to merchants include guaranteed payment, innovations like contactless cards that speed transactions, and improved access to international customers. Small businesses in particular benefit from the Visa system, in that they can compete on a more level playing field with large retailers. Small businesses can also dedicate their capital toward their businesses, as opposed to having to dedicate capital toward payment products.

Consumers benefit from payment choices such as credit or prepaid, the convenience of fast checkout, global acceptance, rewards, 24-hour customer service, and enhanced security protections such as zero liability and purchase protection. Consumers can obtain cards from financial institutions that meet their needs--from small local credit unions or large multinational banks--with the assurance that every Visa card will afford them the same security, protection, and access to global acceptance regardless of who issued it.

Visa uses a mechanism called interchange to maximize the benefits of the system, encourage participation in innovation, and ensure that the economics are appropriately balanced. Interchange makes the system run. It's the small amount of money retailers pay a cardholder's bank for every transaction. In part, interchange compensates the cardholder's bank for the value they provide to merchants and acquirers, and it motivates the cardholder bank to bring cardholders into the system. By helping balance the economics of the system, interchange is an effective incentive for banks to participate. It encourages investments in innovations that deliver consumer benefits like new products, rewards, and enhancements, while encouraging merchants to accept cards.

Visa's interest in setting interchange fees is to maintain the balance of the system. If interchange rates are set too high, merchants will stop accepting cards. If interchange rates are set too low, issuers will go uncompensated for the value they deliver to their cardholders, and the features that attract cardholders will be diminished. This in turn reduces cardholder participation and the value of Visa to merchants.

When setting rates, Visa considers a host of factors and sets rates to help promote overall system growth and growth in specific payment segments, and to reflect the value delivered to retailers and cardholders by payment type.

With that context in place, I'd like to address a few points about interchange and acceptance costs.

First, interchange is not the price a retailer pays to accept electronic payments. Retailers pay a merchant discount, and that rate is set by their acquiring bank or payment processor.

Importantly, interchange is not a Visa revenue stream. Visa's only goal is to set rates that maximize system participation from banks, cardholders, and merchants. Interchange rates paid by acquirers may vary based on type of card used, type of transaction, or type of retailer.

In 2008, Visa Canada introduced a change to its interchange structure that resulted in some transactions attracting a higher interchange rate and others attracting a lower rate. This was the first fundamental change we introduced to our rate structure in Canada in 30 years, and we provided more than a year's notice to our clients.

The overall effect of the change was neutral for the system, and Visa Canada's effective interchange rate has remained relatively flat for some time, at approximately 1.6%. Interchange rates in Canada are fully transparent and available on our website.

Some retailers argue that government intervention of interchange is needed. Visa believes that these attempts are not only wrong but are also harmful to consumers and other system participants, as I'm sure we'll discuss. The regulatory intervention sought by the retail lobby would unfairly pass merchant business expenses on to consumers. Such government intervention would result in fewer payment choices, a reduction in benefits for consumers, and possibly higher costs for consumers in their monthly statements or at the checkout counter.

This scenario has been tested in Australia, with harmful and unintended consequences for all parties. In Australia, where caps on interchange yields were imposed with the intention that the price of goods would go down, consumers have not seen the savings. What they have seen are fewer rewards and other benefits from their payment cards, along with the higher costs associated with surcharging at the checkout counter.

In addition, issuance of American Express cards increased because American Express was not subject to the same regulation as Visa and MasterCard. Not only did this create an unlevel playing field between American Express, Visa, and MasterCard, but ironically it resulted in more higher-cost American Express cards being used for payment at retailers. Government intervention in interchange is not the standard elsewhere in the world and should not be so in Canada.

[Tim Wilson]

Thank you, Bill.

As Bill discussed, interchange fosters competition and innovation. When it comes to debit, there is currently no competition in Canada, and without interchange, financial institutions have little incentive to invest in the system. The debit product offered today has served us well in some ways, but the dynamics of the global and Canadian payment landscapes are changing, as are the demands of the Canadian consumer.

The Visa debit card builds on the utility currently offered, and like today's bank card, it will be issued by a financial institution. It will allow you to withdraw money from a bank account at an ABM and buy goods at points-of-sale in Canada. But unlike today's bank card, Visa debit also allows you to use your debit card when shopping online, by telephone, or mail-order, or when travelling internationally.

I think it's also important to stress how the concept of choice applies to Visa debit in Canada. A competitive debit product that offers features and functionality not currently available in Canada will succeed because financial institutions see value in issuing cards, cardholders want to use it, and retailers choose to accept it.

Merchant groups campaigning for the regulation of interchange and against the introduction of an alternative debit product want to reduce their business costs. We respect the desire of any business to manage their expenses, but we do not believe that government intervention is the right solution in a functioning industry. Visa believes that the best way to balance the interests of merchants and consumers is to provide them with an array of payment options in an open and competitive market.

Ultimately we believe you are being asked to regulate what is fundamentally a business-to-business matter, and government intervention is inappropriate for this purpose. We recognize the importance of engaging with merchants and merchant associations, and over the past year we have made changes to the way we operate our business in Canada that have addressed many of the concerns highlighted by merchants.

We have heard the calls for disclosure and believe that Visa provides transparency through the publishing of our interchange rates and our operating regulations on our website. We have met with and continue to meet with the CFIB, the RCC, trade associations, and hundreds of individual retailers—both large and small—to help them understand our system and the value it provides, and to help them more effectively manage their costs of accepting payments.

We have also heard retailers' feedback regarding choice. In recognition of the unique environment in Canada, we have changed our rules so that retailers can choose not to accept Visa debit without impacting their acceptance of other Visa products, such as Visa credit.

Our interchange rates for Visa debit were reduced last year to reflect market feedback. They are now about half of what they would have been previously, and about one-fifth of our current rates on our credit products. The Visa debit rates also now include a fixed component, which Canadian retailers are accustomed to, and a reduced variable component that is less than one quarter of one percent.

I would also like to highlight that the financial institutions on either side of a Visa transaction are already subject to oversight, either federally or provincially. In addition, Visa itself is subject to the provisions of Canada's Competition Act. The Competition Act has recently been bolstered by a number of amendments that will enhance and strengthen the protection offered by competition law in Canada. The overall trend in Canada has been toward more deregulation of industries, with competition law increasingly recognized as the appropriate protector of both consumers and businesses.

Thank you. We are now happy to answer any questions you might have.

[The Co-Chair, Conservative, James Rajotte]

Thank you very much, gentlemen.

We'll go to Mr. McTeague for a first round of seven minutes.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Mr. Chairman, thank you. I hope it's not used against my time—

[The Co-Chair, Conservative, James Rajotte]

I'm sorry, I had Mr. McTeague, but it's Mr. McKay first.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Thank you for coming tonight.

What was Visa Canada's profit last year?

[Tim Wilson]

I don't believe that's a number we are permitted to disclose, according to SEC regulations.

[John McKay, Liberal, Scarborough—Guildwood, ON]

SEC regulations?

[Tim Wilson]

I'd like to answer the question, but it's not a number that we disclose in our annual financial statements or quarterly statements.

[John McKay, Liberal, Scarborough—Guildwood, ON]

It's a publicly traded company?

[Tim Wilson]

Yes. We disclose profit and financial information down to the North American level, I believe, but not down to the level of the individual country.

[John McKay, Liberal, Scarborough—Guildwood, ON]

That's interesting. What kind of expectation would you have for return on equity?

[Bill Sheedy]

If it's helpful, we tend to not think about the company on a return-on-equity basis. There are a number of measures that we look at, earnings per share, revenue growth. I think the guidance that we provided to investors on a global basis is that we, on a long-run basis, expect to grow revenues 11% to 15% and grow earnings per share 20%.

As with most companies at the moment, the current economic challenges are depressing our results. But we're managing our expenses and doing what we can to continue to invest in the payment system and in opportunities, as Tim has laid out, such as debit and chip in Canada.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Would that expectation of 11% to 15% or 20% return on shares apply to Canada? Would Canada be above that or below that?