Industry Committee on Nov. 2nd, 2011

[The Chair, Conservative, David Sweet]

Good afternoon, ladies and gentlemen. Bonjour à tous. Welcome to the 12th meeting of the Standing Committee on Industry, Science and Technology.

We have witnesses here today, and I'll introduce them in the order in which our agenda states. That will be same order in which they'll speak.

From Visa Canada we have Michael Bradley, who's the head of products.

From Rogers Communications we have Kenneth Engelhart, senior vice-president, regulatory, as well as David Robinson, vice-president, emerging business.

From MasterCard Canada we have Don Lebeuf, vice-president and head of customer delivery.

From Canadian Payments Association we have Doug Kreviazuk, vice-president, policy and public affairs.

Each organization has six minutes.

Mr. Bradley, please begin.

[Michael Bradley, Head of Products, Visa Canada Corporation]

Thank you for the opportunity to speak before the House of Commons Industry Committee on the future of e-commerce and mobile payments.

My name is Mike Bradley and I am responsible for Products at Visa Canada.

It might be helpful to start with an overview of Visa. We are a payments network. Our job is to deliver payment products that help us with our mission to be Canada's best way to pay and be paid. Our solutions are designed to serve two groups of end customers—consumers and the retailers that accept Visa cards. We compete vigorously with other methods of payment—cash, cheques, and electronic funds transfer systems as well as other card payment networks such as MasterCard, American Express, and Interac.

In short, the payments market is highly competitive at all levels. Visa remains a global leader in the payments industry. We enable payments for financial institutions, merchants, governments, and consumers in more than 200 countries. We have one of the world's largest and most advanced processing networks, VisaNet, which can handle up to 20,000 transactions per second. Every day, VisaNet sustains 300,000 cyberattacks on average, not one of which has ever been successful. Visa has invested heavily in anti-fraud technology, such as the recent migration to chip technology, which I am sure many of you use regularly now.

Our efforts have kept fraud near historic low levels, enabling cardholders to use Visa with increasing trust and confidence.

While we are known mostly for credit card products in Canada, we also offer business-to-business solutions and prepaid solutions that are convenient, reliable, and, most importantly, secure. Visa debit cards were launched last year by CIBC. For the first time, Canadians can use their debit card to pay for pizza or flowers over the phone, do their Christmas shopping at a wide variety of retailers online, and shop at 30 million merchants outside of Canada that accept Visa. In a limited way, Canada has now joined the 160 countries around the world where Visa debit is available. We believe that making this offer available will improve the ability of Canadians to shop internationally and buy and sell online in Canada.

To go back to today's discussion, clearly the widespread adoption of Internet and mobile devices is changing the way people connect and transact across the globe. The numbers speak for themselves. Facebook has over 750 million members and millions of merchants, and now operates its own currency called “Facebook credits”. Google recently announced that it will also enter the payments space.

Yet in Canada and around the world, Visa has remained key to the growth of e-commerce. According to a StatsCan survey for online purchases, 89% of Canadians use credit cards. In 2010, e-commerce already represented 13% of Visa's total payment volume. After more than 40 years operating in Canada, we've remained relevant because our value propositions have met the needs of Canadian consumers and merchants. We offer zero liability that ensures that cardholders won't be held responsible if they are not using the card. Verification by Visa and the three-digit code on the back of your card protects merchants and consumers from fraud, and the e-promise offers cardholders an avenue to settle disputes when shopping online.

In May, Visa announced our digital wallet. The digital wallet and mobile payment services will deliver greater consumer choice, convenience, and control. It will assist our clients in growing their business and help e-commerce merchants by reducing abandoned shopping carts online.

How will it work? A consumer may receive a digital wallet from their bank, facilitated through a trusted relationship and through a secure channel such as online banking. The consumer may load multiple cards from multiple issuers and even multiple brands into the wallet. When the customer is ready to make a purchase from a participating merchant, there's no need to enter payment card and shipping information. It will be an easy “click to buy” shopping experience. The investments we are making in these new solutions will bring greater value to merchants, who are likely to see fewer abandoned shopping carts online and, ultimately, higher sales.

Our digital wallet solution also operates seamlessly with merchants across channels. When a person is ready to make a payment using a mobile device, the consumer can use their existing Visa account to pay through Visa payWave just by waving their phone near a device instead of inserting or swiping a card.

This is the same payWave technology that exists on millions of Visa cards today and is growing in volume at merchants such as McDonald's, Second Cup, and Petro-Canada.

Our mobile application....

Was that the six-minute bell?

[The Chair, Conservative, David Sweet]

No, I assure you, it was not.

[Voices]

Oh, oh!

[Michael Bradley]

An angel just got her wings?

[The Chair, Conservative, David Sweet]

That was a close encounter, that's all I can tell you.

[Voices]

Oh, oh!

[The Chair, Conservative, David Sweet]

Go ahead. We'll give you some time to make up for that.

[Michael Bradley]

I just have another couple of comments.

The mobile payment application has all the security features that you would expect from Visa and your bank.

Finally, let me touch on the regulatory environment. While Canada has a robust regulatory framework, the phenomenal advances we've seen in the marketplace were not driven by regulations or mandates, but rather through collaboration and market-based competition.

The recent adoption of the voluntary code of conduct for the credit and debit card industry was the result of exhaustive consultations with all stakeholders in the payments industry. The code has only been in place for just more than a year, and it has already had its intended effect in a number of areas. Visa has seen the increased transparency that the code has provided for merchants and consumers.

In our view, the Canadian payments system is fundamentally working. Having said that, there may be ways to improve upon the code, and we're actively working with government stakeholders to identify these improvements.

We need to be cautious about the application of the code to new technologies. For example, if two of the provisions of the code were to apply beyond cards, to mobile payments, a customer might require three cellphones to enable the different payments of their choice--that is, one for Visa credit, one for Interac, and one for Visa debit.

In conclusion, Visa has been operating in Canada for over 40 years. We've played a lead role in a lot of the progress that has been made to make Canada a world leader in electronic payments, and I am hopeful we can operate as effectively for the next 40 years.

Thank you. I'd be happy to answer any questions.

[The Chair, Conservative, David Sweet]

Thank you very much, Mr. Bradley.

Mr. Engelhart, will you be the one with the remarks, or Mr. Robinson?

[Kenneth Engelhart, Senior Vice-President, Regulatory, Rogers Communications Inc.]

Mr. Robinson.

[The Chair, Conservative, David Sweet]

Please go ahead, Mr. Robinson, for six minutes.

[David Robinson, Vice-President, Emerging Business, Rogers Communications Inc.]

Thank you very much, Mr. Chairman.

I'm joined by Mr. Engelhart. My name is David Robinson. I'm vice-president of emerging business at Rogers Communications, where I've worked since about 1990. Since about 2005 I've been leading our initiatives in the area of mobile commerce, including the area of what we call mobile proximity payments.

You all have a deck in front of you. I'm going to walk you through that. You have our written submission for the record, but I'll talk through those slides.

Please move to the slide that says “Mobile proximity payments is a subset of mCommerce”. What we're trying to do in mobile proximity payment specifically is actually very simple. We're trying to make a cellphone look, to the payment system as it exists today, like a card—nothing more, nothing less.

To do this is no small feat, however; you need a few really important things. You have to have a mobile version of the card on the phone and you have to make changes to the phone. This is something that started six years ago at an association that we belong to, the GSM association. There are over 800 carriers alone in that association.

What we tried to do was determine methods and technology that would allow that mobile phone—the ones that are globally available, that are GSM-technology phones, the ones that virtually the entire planet uses—to pretend to be a card. To do that, you have to get antennas into these things and get security software into them.

The good news is that this part is more or less done. Many of the phones that you're buying today, including the one I have in my hand, actually have the capability built into them today to be a card. A year from now I'd expect that millions of Canadians will already have the hardware that they need in their phones, and that comes from work that started over six years ago. It should be as normal to get a card on a phone as it is today to get a camera on a phone. That was outrageous only a few years ago and is as normal as can be today.

Turning to the next page, having a card on a phone is rather pointless if there's no acceptance of contactless cards. Mike spoke to you about what Visa is doing in that area. These card phones are really thin, but they're not thin enough to swipe. So there has to be infrastructure to accept that phone as a contactless card or a credit card.

We're in a pretty good state here in Canada. There are important pieces. The banks, or the issuers, as we call them, are starting to send out cards in tens of millions, to this day, with that really important piece of technology on them. The little wave on the side of the Visa card—I'll pull out a MasterCard, if you'll feel better—says this can be accepted.

That very same technology is what is going into these phones, and the issuers are sending out the plastics. The retailers are starting to put up these contactless terminals. Go into McDonald's. Go into Tim Hortons. You will see the little reader that allows you to tap that card. You'll be able to use that exact same infrastructure to tap your phone; there's absolutely no change required from that point back. And that was the objective of the GSM association from the very beginning: just make it look like a card; don't change anything else.

In Canada we're in a pretty good position, and the carriers have pushed technology forward over the years, frankly by subsidizing phones. These things cost $700; you pay maybe a couple of hundred bucks on a term contract. That helps move the technology forward. Every couple of years, people typically get new phones, and in Canada they get smart phones more than in almost any other country in the world. And that's where this is going to start, in smart phones. As I look at phone adoption, next year the outlook is good that we'll have millions of these phones in place.

Now, on the next page we talk about EnStream. This is how we're going to do this. We have the phones, people want to use them, the banks are issuing the contactless cards, the terminals are starting to proliferate at retail, but how are you actually going to get all those cards onto all those phones? That's what EnStream was created for in 2005.

It's a joint venture of Bell, Telus, and Rogers that was designed to forward the interest of mobile commerce in this country. In the area of proximity payments, what it's going to do is act as someone in the middle who will say: if you're a bank, or you're a public library, or you're a transit pass, or you have an access card for a building, plug it into this EnStream thing in the middle, and we'll help distribute that virtual card to all of the phones in the country. That's the objective.

The next page says “Rogers supports the SIM”. That's where the card will be. You might ask what a SIM is. In the case of every GSM phone in the world, if you take the battery off you'll find a little thing on the back that looks exactly like what I'm showing you. That's the SIM. It's where we as carriers put our phone number, which identifies you, with your phone number, and allows us to make the calls happen.

That is where we put our really important information securely, and we've done it for dozens of years and billions of times quite effectively and without a security incident. That is the location where we are recommending to the industry globally that, through this same standard developed in the GSM association, all the payment cards should go—because it's a wonderful thing.

First of all, it's secure. It has to be. At the end of the day, MasterCard will have to say this is secure; Visa will have to say this is secure. When you see those logos show up on a mobile phone, it matters; they mean something.

It's also a wonderful thing because it's portable. One of the attributes that we believe is critical is that there are things about this leather wallet that are not broken. You have to be able to pick what it is that you put in your wallet, and we endorse that. And you should be able to move your cards from wallet to wallet. This SIM is what is going to enable doing that: all your cards will be in this. You'll get a new phone, you put it in, and it works.

The wallet software, discussed on the next page, is how this is all going to happen. I won't bore you with it, but that's how you actually make this virtual wallet on the mobile phone look like the leather wallet that you have in your pocket today.

The next page looks at benefits to the consumer. This is a wonderful thing. Think about it. You always think, what if I lose my wallet? It's a terrible thing. First of all, you're powerless; second of all, you have to recreate and replace all this stuff. In a world where you lose your mobile phone, first of all, it's locked. My leather wallet is not locked; anyone can pull out and steal my identity. This will be locked.

Then, you give us one phone call and all the cards are killed—your ID cards, everything. Then you get a new phone, and it will replace them as quickly as we can, in mere moments. The issuer will be able to get all these cards out over the air in real time. The people who I think are going to benefit the most are going to be the smaller issuers, because now the barriers to distributing a card are lower. It's going to cost less, we can do it in real time, we can do it over the air, and we can do it to millions of phones almost simultaneously rather than mailing them out.

[The Chair, Conservative, David Sweet]

I'm sorry, but I have to interrupt you, Mr. Robinson. That's all the time we have. You can fill in the rest of this when we get to the question period.

[David Robinson]

Very good.

[The Chair, Conservative, David Sweet]

Mr. Lebeuf, please; you'll have six minutes.

[Don Lebeuf, Vice-President and Head, Customer Delivery, MasterCard Canada]

Good afternoon, and thank you for the invitation to appear today.

As mentioned, my name is Don Lebeuf. I'm the head of customer delivery at MasterCard Canada.

By way of introduction, MasterCard is part of the financial services world, but we are essentially a technology company. Globally our technology connects over 24,000 financial institutions with over one billion cardholders and over 30 million merchants globally. It gives people in every corner of Canada and indeed the world the ability to conduct commerce in a fraction of a second.

For the purposes of this study and our presentation, I will start with a broad definition of e-commerce, that being any financial transaction that is not using cash or cheques. If you consider that definition, one could argue that e-commerce has been a reality for decades.

What has changed and what continues to evolve is how credit cards are used, with the latest innovations being chip and PIN technology, contactless applications like MasterCard PayPass, and the movement to link payments to smart phones. Regardless of the medium, however, the function remains the same: a short-term extension of credit to the consumer to make a purchase.

Coupled with these advances, there have been innovations outside the financial sector that have opened up new frontiers, with the Internet being the most obvious example. Our payment system allowed merchants large and small anywhere in the world to open their doors to a global customer base. It is not an exaggeration to suggest that online commerce would not have happened without credit cards. At MasterCard we like to say that we are at the heart of commerce, and nowhere is that truer than in the online marketplace. Revolutionary online distribution models such as iTunes and Netflix simply wouldn't exist without online payments.

From our perspective, Canada is among the leaders in e-commerce. For example, according to Stats Canada, in 2010 51% of Internet users ordered goods and services, and in Canada Canadians placed nearly 114 million orders online valued at approximately $15.3 billion. As Mike noted, 89% of these transactions were completed using a credit card.

I would like to stress that adopting these technologies remains a choice for merchants and consumers. Some merchants have expressed concern that new payment technologies might be forced upon them. I can reassure everyone in this room that the plastic in your wallet is not going to disappear. It will remain a payment vehicle for as long as merchants choose to accept credit cards and consumers want to use them. Some consumers may gravitate to payments through smart phones or other technologies, and some merchants may choose to accept that payment option, but the choice will always be theirs.

I want to add a caveat, though, to my comment that Canada is not a laggard in e-commerce. What I've been discussing thus far deals with the merchant-to-consumer relationship. According to research conducted by the Canadian Federation of Independent Business, such areas as business-to-business, government-to-government, and government-to-business still have a heavy reliance on cheques.

These are areas where MasterCard can play a role; for example, as part of the government's strategic and operating review to save 5% in overall government spending by 2014. If we can play a role as a facilitator of electronic options for these transactions to reduce the manual processing costs, and if businesses and governments want electronic options, we welcome that discussion.

Let me now turn to security, which is a critical underpinning of the world of e-commerce. Consumers need to have confidence in the security of the transactions, as do merchants. For online payments, MasterCard has developed several solutions to meet the unique needs of these transactions. The card security code confirms that the actual card issued is in fact being used for the purchase; AVS, address verification service, allows the merchant to ensure that the address they are shipping to is in fact the same as the one used by the card issuer; and SecureCode provides online authentication of the cardholder. Additionally, cardholders are protected by MasterCard's zero liability protection.

I know you are interested in the future of e-commerce and any potential barriers to further innovation and growth in this area, and there are at least two that I'd like to bring to your attention.

First is Canada's debit system. Regulatory structures and voluntary codes have been put in place that effectively give Interac a debit monopoly for transactions in Canada. Online debit in Canada is extremely limited, and there is no global interoperability for Interac debit. In other words, you cannot make an online debit purchase using Interac anywhere outside Canada and at only a handful of merchants in Canada.

It doesn't have to be this way. MasterCard's global debit system allows cardholders to use their debit card anywhere in the world, either at the point of sale or online. Online debit is a widely accepted form of payment throughout the world, and we believe it is a payment option that Canadians would embrace if available. This is one area where Canada is sorely lagging behind the rest of the world.

Second, while MasterCard supports the Code of Conduct for the Credit and Debit Card Industry in Canada, and agrees with the CFIB that it is working well, there are some elements that may be at odds with the evolution of electronic payments in Canada.

For example, there is a provision in the code that states that debit and credit card functions cannot reside on the same payment card. As payments become an option through smart phones and digital wallets, it begs the question how this position will be interpreted.

Will it be possible to have credit and debit functions on the same phone, given that, as David suggested, the phone is essentially duplicating your physical wallet? If we want Canada to play a leadership role in e-commerce, policy makers must ensure that regulatory structures are sufficiently flexible to adapt to and encourage these innovations.

To sum up, MasterCard's role in e-commerce is largely as a facilitator in the consumer-merchant relationship. Merchants, understanding the global utility and benefits of credit cards, created the online marketplace, and we provided the payment solutions to help everyone prosper from it.

Thank you. I look forward to your questions.

[The Chair, Conservative, David Sweet]

Thank you very much, Mr. Lebeuf.

Now we go on to Mr. Kreviazuk for six minutes, please.

[Doug Kreviazuk, Vice-President, Policy and Public Affairs, Canadian Payments Association]

Thank you, and good afternoon.

I'd like to thank the committee and the members for the invitation to give the CPA the opportunity to come here and contribute to your study.

By way of background, the Canadian Payments Association was created by an act of Parliament in 1980. Our membership stands at 136 members and includes the Bank of Canada, all chartered banks, trust and loan companies, credit unions and caisses populaires centrales, and cooperative credit associations, among others.

Parliament gave us a specific mandate to establish and operate the national clearing and settlement system and to facilitate the interaction of our system with others and facilitate the development of new payment methodologies and technologies. Parliament further set out clear public policy objectives to promote the efficiency, safety, and soundness of our systems, taking into account the interests of users. As such, the CPA plays a leadership role in providing safe and efficient clearing and settlement of payments for Canadians, processing on average more than 24 million payments daily at a value of $170 billion, which translates into six billion transactions annually and $42.8 trillion of value.

The change drivers in the payments system are common the world over. We see significant advancements in technology that result in new payment products and services, but that also make the payments we do today faster, better, and hopefully less expensive. Also, new players and service providers are making it more convenient for Canadians to shop, trade, and transact over the digital highway.

In terms of volume of payments processed through the systems of the CPA, the move towards electronic is significant, but some barriers remain to processing all commerce and all payments electronically. It wasn't too long ago, even back in 1990, that approximately 80% of all payments through the CPA were paper-based. Today this has fallen to less than 18%. While this sounds like a great success story, the reality is that there are still almost 3.6 million cheques processed each and every day through our systems, and that doesn't include cheques issued in cases when the buyer and seller are at the same financial institution. Taking those into consideration, Canada has approximately 1.6 billion cheques still in annual circulation.

One of the largest users of these instruments is small to medium-sized business. The reasons for this are several. Key is the fact that reasonable payment alternatives to provide the small business with complete remittance data or invoice data that can be automated into their accounting processes are not readily available. In other words, straight-through processing is not an option for them today.

Similarly, for parents who need to send money to schools or organizers of their children's events, choices are few, so they send in the cheque.

Finally, for online shoppers, the need for shoppers to make payments in an online manner gave rise to payment service providers such as the PayPals and the Googles, and certainly gave a boost to the credit card companies. Online debit options that are linked directly to personal deposit accounts need to be pursued and advanced as viable options to the credit card.

In 2009 the CPA embarked on a comprehensive strategic plan exercise, which was coast to coast and involved business, consumers, and government, to understand their needs and their challenges. In the end, we developed our Vision 2020, which presented a detailed road map of the future, closing many of the market gaps. The CPA, working with the broad industry, is now developing and implementing solutions that facilitate straight-through processing between corporate users and the payments system and enhancing its standards to ensure that remittance data required by corporate users is in fact provided.

The CPA is now undertaking a review and potential adoption of international payment standards that will continue to drive efficiencies both domestically and internationally.

Finally, the CPA is active in developing clearing rules that will allow the marketplace to develop mobile payment applications. By reducing barriers to clearing, and improving the transparency and efficiency of our rules, the market will be free to innovate, and the CPA will be prepared to clear and settle all payments.

I would be remiss if I did not also acknowledge the work of the task force for the payments system review. This seven-person task force, appointed by the Minister of Finance, has been examining Canada's payment industry for the past year and a half. Their final report is due in December and will address many issues related to competition, innovation, efficiency, and industry governance.

The task force, together with a broad community of interest, has been studying the issues and impediments to Canada's becoming leader in the digital economy. The CPA has been working closely with the task force and their several subcommittees dealing with issues of digital ID, authentication, payment standards, and bill presentment and payments. The transformation to a new payments ecosystem and a truly digital economy is a large and expensive proposition, and many groups have been engaged in ongoing policy discussions.

Before the CPA introduces any new policy or rule change, we undertake a rigorous public consultation process. In the development of these rules and policies, we rely heavily on the advice provided by specialized committees comprising members and stakeholders alike. After a new rule is presented to their stakeholder advisory council and our consumer group, we then submit it for general public consultation. We are very proud of the relationships we have forged and the collaborative nature in which our policies are developed.

We are all well aware that the payments landscape continues to change, and the future shows no sign of slowing. To that end, the CPA will continue to play a leadership role in providing a safe and efficient clearing and settlement system to meet the current and future needs of Canadians.

Thank you very much.

[The Chair, Conservative, David Sweet]

Thank you, Mr. Kreviazuk.

Now we're going to move on to our questioning time. The first is a round of seven minutes.

The first questioner is Madam Gallant.

You have seven minutes.

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

Thank you, Mr. Chairman, and through you, thanks to our witnesses.

Looking to a time when Canadians may be dependent on their wallet forms, first of all, cellphone service providers do not necessarily have agreements with every country in the world for sharing that phone.

First of all, to the cellphone providers—Rogers is here—are you opposed to Canadian consumers being able to use SIM cards from other countries where you don't have that co-agreement for service in place?

[David Robinson]

Do you mean if you buy a SIM card from somewhere else and use it in our phones?

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

I mean in another country where you're not available.

[David Robinson]

We allow people to unlock their phones if they are subsidized. The market provides for open devices into which you can easily insert a SIM from another country.

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

So if a new SIM card is being put in, how would that affect, if at all, the mobile payments system? If you have your Visa card or MasterCard on there, would it be impacted?