Industry Committee on Nov. 2nd, 2011

[John Carmichael, Conservative, Don Valley West, ON]

Thank you, Mr. Chair.

Thank you to our witnesses for coming today.

I'm going to come back to the fees issue in a second. I'm curious to hear, from the Rogers perspective....

You're part of the Red Tape Reduction Commission and with what's going on there with Minister Bernier. Are we doing enough to truly reduce red tape and create an environment that's going to be more receptive and responsive to growth in your industry? Are we seeing the types of signals that would encourage you that we're truly serious about growing this part of our economy?

[Kenneth Engelhart]

I think, yes, we're seeing encouraging signals. There are still a few areas in the wireless business where we're seeing, I believe, some unnecessary red tape.

We have on our licence conditions a 2% requirement to spend on R and D. Now, we do spend 2% on R and D. That's just natural when you're a wireless company. But it means there are accountants to keep track of it all, and reports to be filed.

All of that is, in my view, unnecessary red tape. No other country in the world has a 2% R and D requirement like that on licences. I believe that's something the government could get rid of that would spare us a lot of red tape.

We're also seeing municipalities and provinces and other entities increasingly making it harder and harder for us to put up our wireless towers in the country. Part of it is that they're responding to concerned citizens, but it is getting very difficult now for us to deploy the infrastructure we need to provide Canadians with the services they want.

Industry Canada is very helpful, but I think more could be done to assert federal leadership in this area so that this infrastructure could get deployed.

[John Carmichael, Conservative, Don Valley West, ON]

Thanks, Mr. Engelhart.

Certainly that's part of what we as a committee hopefully are going to establish--some recommendations that will help create a better environment for doing business.

I come from a business background, Mr. Bradley. You talked about the fees, the interchange fees versus the transaction fees or the merchant fees, and as a business operator I don't differentiate. What we've heard from small and medium organizations, including the CFIB and others who have been here, is that the fee structure in Canada is a hurdle to growth in that part of business and the economy.

Just to follow up on what Mr. Thibeault and Madam Gallant said earlier, when you start talking about the fees as a whole, I'd like your opinion. I understand it's early, and we heard some exciting thoughts on technology, but if this is truly a hurdle and something that's going to impede growth and economic development, and something that we have to get our heads around, do you see, with the development of the technologies we're hearing about and the advances being made, that there is an opportunity that this will in fact reduce fees, the consolidated fees, the fees that business owners have to pay every day in order to do business with Visa or MasterCard?

Mr. Lebeuf, I might like to ask you the same question afterwards.

[Michael Bradley]

First off, I appreciate that, as a business owner, the end ticket price is all that would interest you. I think it is important to differentiate the two.

We work closely with CFIB and the retail council to try to address the concerns they have. The reason we do differentiate is that the interchange fee we are responsible for is a component that the acquirer, who typically has the relationship with the merchant, would then work into their package price. But many other factors drive how an acquirer prices to a merchant, including the length of term of the relationship, the types of services they provide, and the risk profile of the client. So a lot of different things go into the end price that a merchant pays that are distinct from the interchange fees.

It wouldn't be appropriate for me to comment on the acquirer relationship with the merchant, only insofar as to say that it is important for all merchants, and merchant associations, to shop around for the best deal. Competition exists at multiple levels. At our level, at the network level, we know we compete with the Interacs, with cash, with other electronic forms of payment, and of course with MasterCard and American Express. But at the same level, the merchant, in their relationship with the acquirer, those acquirers are competing with many of their peers for the merchant's business.

So I stand behind what I said, which is that interchange rates have been relatively stable for the last decade. Our interchange rates represent about a penny and a half on $100. I've heard some figures quoted that are substantially higher than that, in terms of the cost profile to end businesses.

Our recommendation would be that there is a very vibrant market for these services that are out there, and that merchants...it's incumbent to shop around to find the best deal.

[John Carmichael, Conservative, Don Valley West, ON]

Yes, I've seen that; in an industry that I've been involved in in the past, the industry will go and try to find best value and best opportunity for reducing those overall costs for their organization and related retailers.

I guess the question is, longer term, if this is a hurdle, what are we going to do about it?

Mr. Lebeuf, do you have any thoughts on that?

[Don Lebeuf]

I would echo some of Mike’s statements. I mean, you deserve an answer. No, there would be no additional fees for mobile payments. Hopefully that satisfies that question.

But from an interchange perspective, we feel that with interchange there needs to be a balance, to bring more consumers into the system and more merchants. If we're out of balance, we lose merchants or we lose cardholders, and the system starts eroding.

So it's a balancing act. We feel that the interchange rates, as they are today, are commensurate with the value that merchants get. I'm assuming we're specifically talking about online merchants, given the topic of the committee.

As was noted in my opening remarks, credit cards enable merchants to do e-commerce and make the savings of not having brick-and-mortar infrastructure, leasing and whatnot. Sure there are expenses with e-commerce, but there are significant savings for merchants to open up an e-commerce environment. Credit cards, quite frankly, facilitate that.

There is competition in the marketplace. From an acquiring perspective, certainly with element one of the code of conduct, it adds a layer of transparency never seen before—for merchants to understand the pricing that acquirers are providing to them, shop around, and get a better deal. There are better deals to be had. They just have to negotiate and understand it.

[The Chair, Conservative, David Sweet]

I'm going to have to interrupt you now, Mr. Lebeuf.

That's all the time we have. We went a bit over for your answer.

We'll now move on to Mr. Regan, for seven minutes.

[Geoff Regan, Liberal, Halifax West, NS]

Thank you very much, Mr. Chairman.

To carry on with that note of shopping around, the concern that I think some of us have is that merchants shop around and they may or may not locate in this country. When they choose where to locate or when they consider their ability to grow in one jurisdiction versus another, one of the things they look at is their costs, obviously.

We had a witness here a few weeks ago, Mr. Samer Forzley of the Ottawa Centre for Regional Innovation, who said as follows:

It's very hard for small or medium-sized merchants to actually set up in Canada, and once they do, their cost for a credit card transaction is about 3.5%, which is high. Let's compare that to the U.S. As a mid-tier merchant in the U.S., I actually don't have to chase the credit card processor. What I do is go to one of the many sites and submit my volume online. They bid on my process, the way you get a mortgage here, and I get a rate. For DNA 11, I'm giving you actual data: it's 3.5% in Canada and 1.9% in the U.S. It's the same business, with the same customers. It's almost unfair. So because the price is so high just for payment transactions, they can't be competitive.

Is Mr. Forzley wrong, or should we consider this a problem in terms of people shopping around about where they're going to locate?

[Don Lebeuf]

If I may, the interchange rates in Canada, specifically for MasterCard, are lower. I read the statement from that witness. That is incorrect. The interchange in Canada is lower than in the United States, and that is a fact.

I can't speak to the end price that they negotiate with the acquirer. There are seven acquirers. Certainly the market can't bear hundreds of acquirers as in the U.S., a very large market, but there is opportunity for merchants to negotiate rates. It depends on the type of business they're operating.

[Geoff Regan, Liberal, Halifax West, NS]

When you say the “acquirer”, would the typical acquirer be a bank, for example?

[Don Lebeuf]

It's a financial institution that provides services to merchants. That would be Moneris, Global Payments, First Data, Paymentech, Elavon; there's a list of them.

[Geoff Regan, Liberal, Halifax West, NS]

Mr. Bradley, you mentioned earlier that your transaction numbers are quite low. To me, the question is what is the number for the actual merchant? We certainly have a concern in this country, or we've seen merchants being concerned, about fees going up on credit cards--the cards that offer the consumers a variety of “pluses”, let's say. That's a concern by itself. If it becomes a concern to the extent that we're not having e-commerce businesses locate and thrive here, that's a problem.

What do you say?

[Michael Bradley]

I would add that there is one other key differentiating factor between the Canadian and U.S. environments. I would stand behind what Don said about credit card interchange rates in Canada comparing very favourably with those in the U.S. But one factor that's missing there is debit card acceptance online.

I spoke in my opening remarks about CIBC's launch of a Visa debit card last year. Our interchange rates for debit are considerably lower--upwards of 35%--than our credit card rates. So in a U.S. environment, for example, where the blended average of the number of Visa cards that are used on the merchant site is as much debit as credit, you can imagine it would be a substantially lower price if debit were as big a piece of that merchant's business as it is in the U.S.

As I said at the outset, I think it would be helpful for merchants in terms of cost of acceptance as well as the ability to be able to do business with a new group of customers who may not qualify for credit cards, or who may be using PayPal at a different cost profile, or a credit card, to start accepting Visa debit products.

We think that will help drive e-commerce, and drive it at more affordable rates than you described.

[Geoff Regan, Liberal, Halifax West, NS]

Mr. Lebeuf, you said that Canada's debit system gives a monopoly to Interac, and that's an obstacle. How would you remove that barrier, and what would be the impact of removing it?

[Don Lebeuf]

If the code of conduct were amended to allow issuers to issue, as in every other market around the world, what are called co-badge cards, you could have multiple debit networks on the same card. You would have MasterCard debit on the same card that also has Interac.

[Geoff Regan, Liberal, Halifax West, NS]

It's a voluntary code, right?

[Don Lebeuf]

It is a voluntary code, but it is backstopped by the Payment Card Networks Act that the Minister of Finance can put in legislation. So we treat the voluntary code quite seriously, and we want to adhere to it.

If the debit market were allowed to open up and we were permitted to enter it in a commercially meaningful way, Canadian cardholders would have access to the entire globe online--in Canada and internationally--to use debit.

As Mike alluded to, debit and credit transactions are completely different, with a completely different risk profile, and the pricing for debit is substantially lower.

[Geoff Regan, Liberal, Halifax West, NS]

So this requires the minister to say that he's open to changing this, and to work out that change with you.

[Don Lebeuf]

Yes, basically to address the issue of e-commerce availability for consumers in Canada.

[Geoff Regan, Liberal, Halifax West, NS]

Are there any discussions of that sort going on right now? Has the minister asked for that kind of discussion?

[Don Lebeuf]

Those types of discussions are happening at the payment task force that's been commissioned. We've certainly made our views known to the CFIB, the RCC, the minister's office, and the Department of Finance. So there are ongoing discussions, but the code is what it is for today.

[Geoff Regan, Liberal, Halifax West, NS]

As for the regulations that prohibit having a credit and debit function on one card, it seems to me that if I'm waving a smart phone in front of a device to make a payment, I'll look at the phone and select which card. It seems to me you would have regulations prescribing that there has to be a virtual separation between the cards. I pick which one I want, and I set the different functions for debit versus credit.

Is that how you see it evolving? What's holding that up?

[Don Lebeuf]

I don't think anything is holding it up, per se, outside of what David was saying about the migration in Canada to NFC and mobile technology.

But I think you're accurate, in that as a consumer you might have your MasterCard, Visa, Interac, Diners Club, JCB and American Express cards on your mobile phone. You would make a choice the same as in the physical world, where you pull out of your wallet whichever card you want to tender for the sale. Then the transaction is completed with the payment card you choose.

[The Chair, Conservative, David Sweet]

Thank you, Mr. Regan, that's all the time we have there.

We've finished our seven-minute round and will go to our five-minute round.

Up first is Mr. McColeman for five minutes.

[Phil McColeman, Conservative, Brant, ON]

Thank you, Chair.

Thanks to all for coming today.

Mr. Kreviazuk, are there ways you see that your organization could drive more efficiencies to lower the cost to consumers and merchants?