Industry Committee on June 9th, 2009

[Prof. Barry Scholnick]

I believe the answer is actually quite simple: the money came from the interchange fee that the retailer pays. What you have is a completely predictable outcome that economic arguments would lead to, based on the notion of a platform. It's based on the notion of a two-sided model. If you recall, I gave you examples of Google, the Yellow Pages, or the mall, where one side is subsidized, usually the shopper, and the other side pays, usually the provider. So what you—

[Thomas Mulcair, NDP, Outremont, QC]

Right. We understand each other, Mr. Scholnick, that if you say the $2 has been the interchange fee paid by the retailer, he passes that on in the form of more expensive groceries.

[Prof. Barry Scholnick]

Sometimes, if he can. But sometimes he can't, and it depends on the market situation of each retailer.

[Thomas Mulcair, NDP, Outremont, QC]

But where does it come from? The two bucks didn't fall from the air.

[Prof. Barry Scholnick]

If the retailer is in a competitive market and can't pass on the retail fee, that cuts into his profit. If the retailer has monopoly power, in the way economists describe it, then he can pass it on and it comes from the consumer.

[Thomas Mulcair, NDP, Outremont, QC]

Mr. Ware, do you want to take a kick at this one?

[Prof. Roger Ware]

Yes. I agree with my colleague Jack Carr, actually. The answer is that cash is a high-cost form of payment, so the consumer who pays cash pays $2 more for the good, as it should be, because he—or she, rather—is using a costly form of payment.

[Thomas Mulcair, NDP, Outremont, QC]

So you have a study that you've modelled that shows there's a 2% increased cost for paying cash. You can prove that to me. My name is Thomas. I like having stuff proven to me.

[Prof. Roger Ware]

No, I cannot, but I'm a believer in competition. I don't have a study, but you're talking about—

[Thomas Mulcair, NDP, Outremont, QC]

We're not here for wishful thinking about what we believe in. I want you to prove to me that the cost is there. Do you have a study? Have you worked on this?

[Prof. Roger Ware]

We look at prices. One of the things economists do is believe in competitive markets. Prices will move to costs.

[Thomas Mulcair, NDP, Outremont, QC]

Politicians talk about what they believe; I want you to prove it to me. You just said to me that paying with cash is so expensive for the merchant, oh me, oh my, and the other one's getting $2 back because she was kind enough to pay with a credit card, but you can't prove it to me.

[Prof. Roger Ware]

See, I would turn this around to you and say that in every single market we see in our economy, which we believe to be competitive, we would believe that prices correspond to costs. So why would you not believe that in this case?

[Thomas Mulcair, NDP, Outremont, QC]

But you still can't prove it. You don't have a study. You don't have a validated economic study that proves what you've just said, that the cash is costing them at least 2% more.

[Prof. Roger Ware]

I cannot cite one for you, no.

[Thomas Mulcair, NDP, Outremont, QC]

Okay, thanks. That's what I thought.

[The Co-Chair, Conservative, Michael Chong]

Thank you.

Mr. Mulcair, do you have any further questions?

[Thomas Mulcair, NDP, Outremont, QC]

Mr. Scholnick wants to have another shot.

[Prof. Barry Scholnick]

One addition to my point is that, very interestingly, a few months ago the European Union, in a major anti-trust case against MasterCard on this identical issue, resolved the issue precisely in the way that Mr. Mulcair is discussing. The European Union decided that the interchange fee should be related to the extra cost of carrying cash. That was the test the European courts put in place. They've done the studies and they've figured out a number—I don't know what the number is—and that has become the interchange fee in Europe.

[Thomas Mulcair, NDP, Outremont, QC]

Since we can ask you such a thing, perhaps you could provide to the greffier of the committee the study in question from Europe and we'll all be able to get a copy of it.

[The Co-Chair, Conservative, Michael Chong]

Yes, Mr. Scholnick, if you could provide the clerk of the committee, at some future date, with the reference to that study or a copy of the study, it would be appreciated.

Mr. Lee, and then Mr. Carr.

[Prof. Ian Lee]

I just want to answer Mr. Mulcair's question very directly. He said, “Where's the study?” AEI-Brookings Institute, 2006, Washington, D.C., an empirical study showing cash is more expensive than any other payment instrument. I presented it on my slides.

[Thomas Mulcair, NDP, Outremont, QC]

What's the percentage?

[Prof. Ian Lee]

It's on the slides.

[Thomas Mulcair, NDP, Outremont, QC]

What's the percentage?