Thank you, Mr. Chair.
Good morning, ladies and gentlemen, members of the committee.
Good morning, and thank you for this opportunity.
Although the hearings to date have focused more on credit card issues, I am here to talk about the evolution of the debit market. This is an important topic, given that Canadians are the second highest users of debit in the world.
The debit market is changing, and how it evolves is going to have a significant impact on Canadian merchants and consumers well into the future. Let me be clear. There is a great deal of competition in the Canadian payments marketplace, and at Interac we welcome additional competition. That is not the core issue. The core issue is the need to have a level playing field.
I will address this issue as I talk about where we want to take Interac, a great Canadian gem, and what needs to happen to ensure that all stakeholders--issuers, acquirers, merchants, and consumers--continue to be well served in this debit marketplace. As I do so, I will also set the record straight about some comments made by others about our business, so that you can accurately understand who we are and why our continued viability is so important to the Canadian marketplace.
Without question, Canadians love Interac and Interac debit. It offers 24/7 convenience, reliability, and security. In short, Interac is a successful Canadian world-class debit payment system. Interac Association, which was first formed in 1984, 25 years ago, is responsible for the operations of the network.
Our members are not just the banks. Our membership also includes credit unions, other financial institutions, and payment and technology companies. We even have a merchant represented on our board. As a payment network, we do not issue payment cards or own or operate ABMs or merchant point-of-sale terminals, and we do not charge fees to merchants or consumers.
Interac is Canada's only domestically run, coast-to-coast debit payment network. We are the only home-grown payment brand. Interac operates on an efficient world-class national payments infrastructure with leading-edge security. We have the only debit payment product that clears and settles under the rules of the Canadian Payments Association and their built-in solvency and liquidity protections. Interac is Canadians' preferred and leading payment option, and we have a long-standing track record of being merchants' low-cost payment option. We offer a suite of trusted solutions for consumers and merchants across both the physical and the online space.
I'll turn to slide 3 and address that suite of solutions. Many of you likely know the first two, which are our main products. The first is shared cash dispensing, and this is the service upon which Interac was founded. It enables Canadians to withdraw money across the country at ABMs that do not belong to their financial institution. Our largest service by volume is Interac direct payment, which is a real-time, ubiquitous, PIN-based national debit service that allows Canadians to make purchases at retailers across Canada.
We also offer cross-border debit, which allows Canadian travellers to pay with their debit card at nearly two million point-of-sale locations in the United States through our partnership with the NYCE network, which covers about 80% of the US market. There are more partnerships in the plans and in the works.
Despite the views expressed by others, Interac is indeed in the online space. The first product is Interac e-mail money transfer. It allows Canadians to send and receive money across the country, in near-real time, from one bank account to another. Transactions are done quickly and securely through web banking, without the sender needing to know any of the recipient's banking information. All that's needed is the recipient's e-mail address.
The second is Interac Online, a unique solution that allows Canadian Internet shoppers to securely make online purchases directly from their bank account without providing any personal financial information to the merchant, not even a card number. It is offered by some prominent Canadian online merchants, including VIA Rail, the telecommunications companies—Rogers, Telus, Virgin Mobile—charities such as the Canadian Red Cross, numerous universities, municipalities, and other leading retailers such as Dell, which went live two days ago.
These are great products, but I will acknowledge that growing them has been hindered by the challenges that underscore our governance problems, which I will address shortly.
Having addressed the myth that we lack an online payment solution, let me turn to the security claims of our competitors.
Interac is and has been throughout its history a leader in the prevention, detection, and management of debit card fraud. We see investments in security as investments in the payment franchise itself. Our multi-layered strategy includes significant investments in consumer and merchant education, and of course, in our ongoing migration to chip technology, and we are delivering unique and powerful fraud management tools to our members. This investment has been ongoing, but it must be sustained and increased in the future.
In fact, this investment has played a part in the industry's enabling of its first overall declines in debit card fraud levels in many years. In 2008, debit card fraud declined by 3%, to $104 million, after years of steady growth. By contrast, according to the CBA's testimony before this very committee, our counterparts in the credit card industry saw fraud losses increase by 34%, to $500 million.
In the all-important web arena, the unique design of the Interac Online product I just described to you makes it one of the most secure electronic payment methods available anywhere, boasting a fraud loss ratio of one basis point, compared with 78 basis points for online credit card transactions and “card not present” transactions in the U.K., for example. I believe it is superior in this respect to the online debit options offered by the credit card companies.
I will turn to the matter of fees and of how Interac covers the cost of operating the Interac direct payment service.
As I noted earlier, Interac debit has always been a low-cost payment option for merchants. On a debit transaction, Interac receives a switch fee from acquirers and issuers to process the transaction. The association operates on a consent-order-mandated cost recovery basis, with these switch fees set solely to recover the operating expenditures of the association on an annual basis. The flat rate switch fee is currently 0.8¢ per transaction; historically our fees have varied from year to year, from about 0.4¢ to 0.8¢.
As you have heard in their testimony, MasterCard's switch fee is currently 0.5¢ per transaction on their Maestro debit product in Canada. Let me reiterate that Interac operates today solely on a cost recovery basis, with very modest marketing budgets and almost no research and development. I'm not privy to the strategic approach that they are employing as they enter the Canadian market, and although it is tempting, I am not going to speculate. I can say, however, that this rate is dramatically lower than MasterCard and Maestro debit pricing in any other market in the world that I know of.
Interac's position in the Canadian marketplace is clear and rooted. Interac has a long-standing track record of being a low-cost provider. It has been our strategy and it will continue to be our strategy.
As you have heard from the merchant community—