Evidence of meeting #28 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 interac.

A recording is available from Parliament.

On the agenda

MPs speaking

Also speaking

Mark O'Connell  President and Chief Executive Officer, Interac Association

10:45 a.m.

President and Chief Executive Officer, Interac Association

Mark O'Connell

We are. They take their statutory duty to protect the interests, but--

10:45 a.m.

Conservative

Mike Wallace Conservative Burlington, ON

Maybe I misinterpreted. How are the banks not in a conflict of interest when they are customers of Visa Debit and Debit MasterCard and they're on your board? How is that not a conflict?

Do you foresee that you'll need a different governance structure if the consent order requests that you're making do come through and you're able to compete in the marketplace?

10:45 a.m.

President and Chief Executive Officer, Interac Association

Mark O'Connell

I've been very open as to our governance challenges and the challenges of any association model where an organization is governed by its very users. It's tremendously difficult to gain consensus, and it moves at the pace of the slowest. I think it's important to note that the board itself has acknowledged this in their recommendation and support of the proposal to restructure the organization, which could be managed by an independent board. They've also had the foresight to set up an independent board that is now looking at many of the aspects of the future restructuring.

Now, let's remember that the Interac Association's board was instituted by the consent order itself. Under our memorandum of association, each board member has a contractual duty to operate in the best interests of the association. We regularly remind them of this obligation, and under the governance model I have, I must operate under the belief that they are adhering to this obligation and that they take it seriously.

10:45 a.m.

Conservative

Mike Wallace Conservative Burlington, ON

I have one more question. You may not have thought that anybody would ask this question, but the concern around here has been that the credit card industry, which basically has two big, big players, is trying to get into the debit marketplace. They've done it elsewhere, but they're trying to do it here.

Is there any discussion at your end about getting into the credit side of the business and be another player in the credit marketplace as part of your future as Interac?

10:45 a.m.

Conservative

The Co-Chair Conservative James Rajotte

Be very brief, Mr. O'Connell.

10:50 a.m.

President and Chief Executive Officer, Interac Association

Mark O'Connell

I can't divulge our strategies fully, but I would say that if we are able to restructure and this level playing field is instituted, that is a product we would strongly have to consider.

10:50 a.m.

Conservative

Mike Wallace Conservative Burlington, ON

Thank you very much.

10:50 a.m.

Conservative

The Co-Chair Conservative James Rajotte

Thank you.

We'll go to Mr. Thibeault, please.

June 16th, 2009 / 10:50 a.m.

NDP

Glenn Thibeault NDP Sudbury, ON

Thank you, Mr. Chair.

Thank you, Mr. O'Connell, for coming here today.

Just a little bit off from what Mr. Wallace was talking about, maybe you can clarify something else for me. You're looking for a level playing field. So if MasterCard and Visa were not considering introducing debit cards in Canada, would Interac still be considering restructuring or higher fees?

10:50 a.m.

President and Chief Executive Officer, Interac Association

Mark O'Connell

Yes, in a word, we would still be considering restructuring. The fact of the matter is the governance is challenged in reacting to the market and to product innovations, infrastructure, and so forth. I think Interac needs to evolve, because we're also competing on a world stage.

10:50 a.m.

NDP

Glenn Thibeault NDP Sudbury, ON

So if we're looking then at interchange fees and an increase in the cost of payment transactions to merchants, then the merchants have to pass these increases off to the consumers. If debit services by Interac are increased, what benefits will consumers see, if any? Or will they just be seeing higher prices?

10:50 a.m.

President and Chief Executive Officer, Interac Association

Mark O'Connell

You have to remember that the debit market is changing. Visa and MasterCard are here, and that market is going to change whether or not Interac changes. So if Interac is not able to restructure, this market is going to be left with a duopoly of those two competitors. So I believe we have to change for the merchants—and I believe that passionately. I started that two years ago. We are already seeing the countervailing force that Interac is with respect to pricing, if you look at MasterCard's strategy. So I think it's imperative in fact to keep prices down, that Interac is a viable player in this industry.

10:50 a.m.

NDP

Glenn Thibeault NDP Sudbury, ON

Okay. Then to what extent do you agree with the suggestion of the CFIB—the Canadian Federation of Independent Business—and the Stop Sticking It To Us Coalition that merchant fees related to debit transactions should be a fixed amount per transaction, rather than a percentage of the value of that transaction?

10:50 a.m.

President and Chief Executive Officer, Interac Association

Mark O'Connell

I think that has a lot of merit. Ad valorem, or percentage of value, emanated from the credit business, where there is risk inherent in the transaction. That's not a good funds model transaction. Interac has a flat switch fee, because there is much less risk in that transaction as far as an unsecured loan is concerned. So whether it's for $100 of groceries or whether you have enough in your bank account for a $1,000 TV, we see the argument—and Interac lives it. We're here today with a flat-fee, single-fee switch fee.

10:50 a.m.

NDP

Glenn Thibeault NDP Sudbury, ON

So in your opinion, sir, what would it take to prevent Interac from adopting the debit fees as talked about, at ad valorem or a percentage of the cost of purchase, as proposed by Visa and MasterCard?

10:50 a.m.

President and Chief Executive Officer, Interac Association

Mark O'Connell

Could you ask that in a different way?

10:50 a.m.

NDP

Glenn Thibeault NDP Sudbury, ON

What can we do to avoid the ad valorem or the percentage of the purchase? We're hearing loud and clear from many of the consumer groups and merchants that it's what they're concerned about—going away from the flat fee to the percentage fee. How can we prevent that? What are the steps we can take to ensure we're keeping things fair?

10:50 a.m.

President and Chief Executive Officer, Interac Association

Mark O'Connell

Well, we're going to be clear and transparent with all of our fees. As I've said, we're going to open up our books to the federal government on an annual basis. As I've said, we are respecting the flat fee history of Interac in our pricing in order to preserve our relationship, which is so important in our strategy, with the merchant community. We need the merchant community somewhat to be architects of their own cost future in debit. We are going to put a balanced value proposition out there, as we've always done. It will be clear and transparent.

We need that acceptance community, because that's a strategic bastion we have today. We have acceptance from coast to coast. Visa and MasterCard are attempting to do that. You heard from MasterCard that they are trying, on a business case by business case basis, to gain merchant acceptance. We believe we need to put a balanced value proposition out there, and we need to listen to the merchant community's concerns about ad valorem, because we need to appeal to that side of this two-sided market.

10:55 a.m.

NDP

Glenn Thibeault NDP Sudbury, ON

You talked a little bit about something, a 0.5% switch fee by MasterCard, I believe, in your opening statements. I think you said it's larger than any other MasterCard fee that you've seen in the world. Can you clarify for me? Did I hear that incorrectly?

10:55 a.m.

President and Chief Executive Officer, Interac Association

Mark O'Connell

Yes. In fact, it's the opposite. I was commenting on MasterCard's testimony that their current rate in the Canadian market is a 0.5¢ switch fee. I believe they currently have interchange set at zero basis points. We've seen that before.

What I was saying is that while it's tempting to comment as a cost recovery organization that knows the economics of this business, that has very little marketing or R and D on the sustainability of that, I was just pointing out that in all other markets that I know of around the world that is drastically lower than the Maestro and MasterCard debit pricing.

10:55 a.m.

NDP

Glenn Thibeault NDP Sudbury, ON

Obviously we're not going to get into assumptions as to why they're doing that, but thank you for clarifying it for me.

If it's cost recovery and we're hearing the merchants worrying about their costs increasing and consumers will ultimately see these costs, what do we tell consumers? What are we telling them about the work we're doing right now, where we're hearing more and more people saying, or more and more organizations are going to be saying, that their costs are going to be going up?

Right now, we all know that we're in a downturn. What do we tell them when corporations like...I'm trying to do some math here. You're saying you're getting approximately 2¢ or just under 2¢ per transaction for about four billion transactions?

10:55 a.m.

President and Chief Executive Officer, Interac Association

Mark O'Connell

Interac does not. Interac just receives the 0.8¢. The acquirer has various contracts and pricing agreements with their merchant base, and I think 8¢ per transaction is the average debit merchant cost, which is a payment to the acquirer.

10:55 a.m.

NDP

Glenn Thibeault NDP Sudbury, ON

So you get 0.8¢ from the acquirer. Do you get anything from the issuer as well, then, just for clarification?

10:55 a.m.

President and Chief Executive Officer, Interac Association

Mark O'Connell

Yes, the same 0.8¢.

10:55 a.m.

NDP

Glenn Thibeault NDP Sudbury, ON

You add those two together and it gives you about 1.6¢, correct? So it's just under 2¢ per transaction.