Thank you. Then I'll include those.
I'm a professor of economics at Queen's University, and I have had an interest in payment cards for quite a long time now, certainly dating back to when I was involved in the Interac hearing in the mid-nineties, which led to the creation of the current debit card system in Canada.
I'm going to begin by talking about interchange fees, as my three colleagues have, but I don't think you need to hear anything more about two-sided markets. Interchange fees, though, are set to balance the incentives of merchants to accept the card with the incentives of the issuer to issue it and the card holder to use it. The interchange fee, in effect, is paid from the merchant—strictly speaking, it's paid from the acquirer—to the card issuer and is not a conventional price.
This is a point, although my colleagues have been over this ground a little bit.... We think of high interchange fees as hurting merchants, because it's a price, and high prices hurt the people who have to pay them. But of course because it's a two-sided price, it's really not that simple. As I said, the interchange fee is designed to balance these networks, which have a joint interest in maximizing the acceptance by merchants, and of course merchants, who have an interest in large numbers of cards being available—as do card holders, so that when they go to buy a shirt they can find a merchant who will accept their card.
There are some theoretical conditions under which the interchange fee is completely neutral, in fact. Changes in the fee are balanced by changes in surcharges and in card fees, so that all parties are indifferent as to the actual level of the fee. Most academic economists who have studied this don't believe that we necessarily have that theoretical situation. The problem, though, in my opinion, is that we do not know enough yet about how the state of competition in acquiring and issuing really interacts to determine what that interchange fee is in the absence of regulation--in other words, from an economic welfare point of view.
You've heard quite a bit, both from my colleagues here and earlier I think about the Australian experiment. As we know, and we just saw some data on this, one thing we do know about it is that the reduction in interchange fees through regulation in Australia led to an increase in card fees and to a reduction in value of rewards to card holders.
There is a subtle and important question, which Jack Carr hinted at. That is, do the various prices and fees in these payment networks distort the pattern of payments? That is, if we think about credit cards, debit cards, and cash—and again my colleagues have talked about this—is there a tendency for, let's say, a higher percentage of payments to be made via credit cards relative to some kind of social optimum? It's an interesting question, and there are some academic discussions of this. My view is that we just don't know the answer yet. I would agree with my colleagues very much that in a case in which we don't know the answer, it's too soon to rush into regulation. Regulation is desirable when we have a clearly identified market failure and understand in which direction our intervention is going to improve things.
There is an important question on which Canada's situation is a little different from that of other countries, and that is the question of whether the credit card network is acting solely as a joint venture of the member banks or whether it's acting as an independent corporation in its own right in order to pursue its own profits. In Canada, as you know, the credit card networks have recently restructured themselves in order to be the latter, partly as a result of prompting from the Competition Bureau, which wanted that change in order to approve the duality—the change to allowing banks to offer both card networks, or to issue cards from both MasterCard and Visa.
Again, in the academic studies, one of the things that's likely to influence interchange fees is whether or not there's more imperfect competition at the issuing end or more imperfect competition at the acquiring end. There have been some studies suggesting that it's likely to be more at the issuing end, and the reason for that lies in the idea of switching cost. For the consumers who hold those cards, it can be difficult to change one card to another card, because first of all, you quite likely have a balance on it, and second, you have a bunch of card numbers in your online shopping networks—if you're me, you have, anyway. So consumers face some switching costs.
But again, I would say we do not know the answer to this. This is an interesting academic question, but we don't know the answer from the policy point of view.
Another question, which again my colleagues touched on, concerns “no surcharging” rules. There are some international differences here that are interesting. For example, in the U.K., where these issues have been studied quite a lot, the no-surcharging rule was abolished in the early 1990s, and yet there has been very little surcharging. As my colleague here pointed out, there's also very little cash discounting.
However, in Australia—at least, my understanding is—since they abolished their no-surcharging law, which was just about five years ago, I think in 2003, there has actually been quite a lot of surcharging. The number I saw is that 23% of credit card transactions through what are called large retailers are now surcharged, if you use a credit card. That's a pretty big number. I throw that out there to say that this is something that is interesting and possibly important, and we don't know a lot about it.
In conclusion on credit cards, just to restate what I've said earlier, I think it's much too early for us to have a definitive conclusion about any form of regulatory intervention in this market. I don't think we understand it well enough. We have the Australian example, and it's not at all clear that it was a success. It's possible there will be some intervention in the U.K. soon, and we may learn something from that.
Let me make just a few remarks on debit cards, if I may. We've had an unusual situation in Canada whereby we've had a single debit card network now for more than ten years—the Interac network. It's been regulated so that it's a not-for-profit organization. The question is, which system is preferable, a regulated natural monopoly, if it is a natural monopoly, or a competitive system in which merchants and consumers choose the debit network they want to use for each transaction? Ideally, a merchant could choose to subscribe to one or more debit card networks, and a buyer might have the choice, for any given transaction, to route it through network A, which might be Interac, or network B, which might be the new Visa debit network that is going to be rolled out, I believe, sometime in the near future.
Natural monopolies have the property that because of network economies and scale economies, a single supplier is the most cost-effective organization within which to supply the market. However, this conclusion is essentially a static one and ignores all the dynamic economies and incentives for innovation that come from a competitive system in which networks compete.
The policy concerns with debit cards mostly have to do with merchant fees, and to some extent with interchange fees. Interchange fees in the Interac debit network are currently set at zero. The concern I've heard is that when Visa debit enters, and possibly MasterCard debit as well, the cost to the merchant will go up.
One of the ways this has been expressed is through the concern that the current fee to a merchant for using an Interac debit card is about 12¢. It's a flat per-unit fee. When Visa debit comes, in I believe they're going to be using a more complicated fee structure, which is partly value based. It's partly a percentage of the value of the transaction.
To just finish up, my view of this is that competition is good. We have to start from where we are. Where we are is we have a monopoly. We should not be throwing up our hands and expressing alarm that we're going to get entry here. Entry is a good thing; entry is going to create competition. It's most likely that entry will create benefits for consumers, because that's what entry does. The concern has been expressed that somehow Visa debit will become a dominant firm in the debit market. It seems to me to be very premature. At the moment, Interac is, of course, the dominant firm.
Thank you.