Industry Committee on Nov. 16th, 2011

[The Chair, Conservative, David Sweet]

Good afternoon, ladies and gentlemen. Bonjour à tous.

Welcome to the 13th meeting of the Standing Committee on Industry, Science and Technology. Today we have witnesses before us from Interac Association, Kirkland Morris, vice-president, enterprise strategy; and CANARIE Inc., Jim Roche, president and chief executive officer, and Harry Sharma, policy analyst.

As well, we have the Retail Council of Canada, Diane Brisebois, president and chief executive officer; and also the Canadian Bankers Association, Terry Campbell, president and chief executive officer, as well as David Revell, senior vice-president, business support and strategic initiatives, CIBC.

We'll follow the order that is on our agenda here in front of us. That means we'll begin with Kirkland Morris.

Just one speaker per organization for six minutes, please. Mr. Morris.

[Kirkland Morris, Vice-President, Enterprise Strategy, Interac Association]

Thank you very much.

Good afternoon, Mr. Chair and members of the committee.

Thank you, indeed, for the invitation to appear before you today to discuss the e-commerce market in Canada.

I will start out with a brief overview of who we are and what we do, the services that we offer, and then focus on the key elements of our business that relate more specifically to your study. I will also comment on the importance of having a healthy, competitive payments market to facilitate commerce, both physical and electronic.

You have a brief deck in front of you and we'll follow along through there.

Interac is Canada's leading payment brand. Our organization operates a world-class, economical debit system that serves Canadians well. We are also Canada's only domestically run, coast-to-coast debit payment network, handling about 57% of all card payment transactions in Canada.

Canadians paid with Interac nearly four billion times last year. Indeed, we are among the world's most active users of debit cards on a per capita basis. Interac also has a strong and rooted history of being merchants' economical, flat-fee-per-transaction payment method.

We are a leader in the prevention and detection of debit card fraud, and consumers are fully protected from fraudulent transactions via our zero-liability policy.

We securely connect Canadians to their money at the ABM, at retailers in Canada and the United States, and online through web-based services: Interac Online and Interac e-Transfer. We are currently rolling out Interac Flash, a contactless enhancement of Interac Debit, and are moving our payment solutions forward into the mobile space.

With that introduction, I'll provide a little more detail about some of these products and enhancements, the ones that relate most directly to your study today, including our extensions into the mobile environment.

Let's start with Interac Flash. It is an enhancement of Interac Debit and Canada's first contactless debit payment solution. It also provides the platform for mobile NFC proximity payments. In fact, we plan to be in market with a mobile solution in 2012.

We estimate that Canadians make roughly $90 billion in purchases under $20 using cash and coin each year. Interac Flash allows cardholders the choice of paying for these smaller purchases faster than ever before by simply flashing an Interac chip debit card at a reader that supports Interac Flash, rather than inserting the card and entering a PIN. This increased speed helps merchants improve customer throughput by reducing the time they spend processing payments, particularly handling cash.

Interac Flash is secure and protected against tactics such as electronic pickpocketing. It leverages EMV-based secure chip processing, existing chip debit infrastructure, strong consumer protections, zero liability, and other features unique to Interac Association.

Scotiabank and RBC are the first financial institutions issuing Interac Flash cards.

In the online space, Interac Online is a unique solution that allows web-banking customers to securely make payments on the Internet directly from their bank account without providing any personal financial information to the merchant or service provider, not even a card number.

Despite what one of our competitors asserted at your last meeting, Interac Online is offered by more than a “handful” of merchants. Indeed, it is a growing service available at more than 750 Canadian online merchants, including Indigo, Cineplex, Roots, VIA Rail, telecommunications companies such as Rogers, Telus, and Virgin Mobile, and numerous universities, municipalities, and government agencies, including the Canada Revenue Agency.

Interac e-Transfer 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 or mobile banking without the sender needing to know any of the recipient's banking information.

Available to more than 10 million web-banking customers through over 70 financial institutions and with a growing list of institutions offering e-Transfer through their mobile banking apps, this rapidly growing service represents a quick and cost-effective alternative to cheques and wire transfers.

While primarily a person-to-person solution, the service is also gaining popularity among small businesses, as an inexpensive and guaranteed way to received funds from customers. With future enhancements, e-Transfer also offers the potential to extend into the business-to-business and electronic-invoicing space.

Finally, having given you a sense of our role in the e-commerce arena, I want to close by discussing the importance of having a healthy competitive payments market to facilitate commerce. The payments landscape is changing rapidly, and how it evolves will have a significant impact on Canadian consumers, merchants, and businesses.

For the benefit of all stakeholders, including government, I believe that we must ensure that the payments marketplace in Canada remains healthy, competitive, innovative, safe, and secure, and that the system works for all participants. Sound regulation plays an important role in this outcome.

The code of conduct for the credit and debit card industry in Canada introduced by the Minister of Finance in April 2010 is an excellent example of a pragmatic solution to marketplace problems that has helped to promote more effective and fair competition. Despite what some market participants have argued, the code of conduct is not anti-competitive. On the contrary, debit competition at point of sale remains open, fair, and transparent. In fact, the code of conduct has helped to push competition into the open and to force payment networks and service providers to demonstrate value to end users as a condition to winning their business. As such, we believe that the fundamental public policy objectives of the code of conduct, most notably its focus on transparency and choice for merchants and consumers, can and should be maintained and applied to other payment technologies, including mobile.

Thank you. I look forward to answering your questions.

[The Chair, Conservative, David Sweet]

Thank you very much, Mr. Morris.

Now, for six minutes, we will move on to Mr. Roche.

[Jim Roche, President and Chief Execuive Officer, CANARIE Inc.]

Good afternoon. Thank you very much, Mr. Chair and committee members.

My name is Jim Roche, and I'm the president and CEO of CANARIE Incorporated. Thanks very much for the opportunity to speak with you today about CANARIE and its importance in fostering e-commerce in Canada. My presentation will focus mainly on the digital infrastructure required for developing and commercializing new e-commerce products and services to ensure that Canada is at the leading edge of a global digital economy.

As we all know, government support has played a foundational role for e-commerce. The U.S. defence research lab, DARPA--Defense Advanced Research Projects Agency--paved the way for the Internet as we know it. Scientists at the CERN lab in Switzerland developed the browser to share information on the Internet, and of course the list goes on.

In Canada, CANARIE, with its partners, played an important role in the introduction and adoption of broadband Internet in the early 1990s. In fact CANARIE was created and funded by the Government of Canada to run and operate an ultra-high-speed network for research and education across the country.

With the Government of Canada's support over the past 18 years, CANARIE has built a 19,000-kilometre-long fibre optic network that is separate from the commercial Internet. This national backbone links provincial and territorial research networks and stretches from coast to coast to coast. Provinces share in the cost of this infrastructure: for every federal dollar invested in the CANARIE network, we leverage $1.50 in matching investments from the provinces.

The network itself connects all Canadian universities, over a hundred federal and provincial labs and departments, and thousands of community colleges and K-12 schools. More than one million Canadian users have access to this national ultra-high-speed network. It enables them to collaborate across Canada, and with colleagues in 100 countries worldwide, including the United States, Brazil, China, and India.

Post-secondary institutions in the United States have proven themselves to be the most fertile ground for the development of innovative technologies, including e-commerce technologies. For example, roots of the most innovative companies of the day, such as Google and Facebook, can be traced back to U.S. universities.

However, in Canada the commercialization effort of new services leaves much to be desired. We have not witnessed the same level of commercialization activity from the higher education sector as the Americans have. One of the reasons, according to recent analysis by national advisory bodies such as the Council of Canadian Academies, the CCA, and the Science, Technology and Innovation Council, STIC, is that there are not enough strong linkages among the private sector and the academic sector, be it at the policy level or the infrastructure level. We believe that CANARIE's state-of-the-art infrastructure can be further leveraged to not only create new knowledge but also to increase collaboration and knowledge transfer from university labs to the marketplace.

CANARIE has been doing its part to support the Canadian innovation ecosystem. Along with operating its advanced national infrastructure, CANARIE has also funded technology innovation programs aimed at developing leading-edge platforms. To put it into context, CANARIE has invested close to $200 million over the last 18 years and leveraged $240 million from other sources in the development of online platforms and services in over 300 projects. Towards the end of the last decade CANARIE specifically funded projects to help develop and accelerate adoption of advanced e-business applications and services.

An example of a project that CANARIE has funded is GS1 Canada, previously called ECCnet. I think they made a presentation before this committee a few days ago. In 2002 this CANARIE investment helped to ensure the Canadian industry was positioned to play a leading role in the development and participation in global e-commerce trading standards.

In April of this year CANARIE also launched the digital accelerator for innovation and research program, also called DAIR, in short. The aim of this project is to make our infrastructure available to small and mid-sized Canadian companies in the information and communications technology sector. DAIR allows them to use the CANARIE network together with cloud-based compute and storage facilities to design, develop, test, and validate their solutions on the large scale prior to commercial deployment.

Even in the early stages of this DAIR program, which is currently in its pilot phase, we have observed its benefits to our users. It has reduced their upfront capital investments in R and D infrastructure, allowing them to focus on the most important task, developing the product. This helps reduce their time to market and gives them the opportunity to seize first-movers' advantage in the global marketplace.

A second equally important advantage that our users have is access to expertise in leading-edge technologies. For example, through DAIR, CANARIE has helped small and medium-sized Canadian businesses to use cloud computing resources and technologies, and to integrate them with their business models. The results have been very positive.

Our plan is to expand this program, and offer more resources to accommodate significantly more companies, around 3,500, once it's fully operational. We see no reason why the next Google or Facebook cannot be developed right here in Canada over the CANARIE network.

In short, by supporting research and education, CANARIE is helping to deliver on the government's priorities, including innovation and productivity to create more wealth and improve the health and wellness of Canadians.

CANARIE is a major internationally recognized Canadian success story. The need for CANARIE remains compelling, and it is growing. As I mentioned earlier, there is a legitimate role for the federal government to invest in CANARIE. It represents a strategic investment in the future of Canada.

CANARIE is funded in five-year tranches, and our current five-year mandate ends in March of next year. On behalf of its users and the beneficiaries of its services and programs, CANARIE seeks your support for another five-year renewal of its mandate and associated funding so it can continue to accelerate e-commerce development and adoption.

I'd be pleased to answer any questions from members, and to provide whatever additional information the committee may need.

Thank you for your time.

[The Chair, Conservative, David Sweet]

Thank you very much, Mr. Roche.

Now, Madame Brisebois, I understand that we have your opening remarks from another session where there was a vote--and by the way, I regret to inform you that it's going to happen today.

I'll let you recap your remarks for a couple of minutes, Madame Brisebois, so everybody remembers them, and then we'll go on to Mr. Campbell. We'll try to get as deeply into the meeting as we can before those dreaded bells ring.

Please go ahead.

[Diane Brisebois, President and Chief Executive Officer, Retail Council of Canada]

I will summarize. Thank you, Mr. Chair.

We went over some documents during our last presentation.

I'm not sure they were circulated today, but I certainly will not go over those notes. I thought it was important to be invited again—and thank you—to comment on the voluntary code of conduct for credit and debit cards, and particularly the misleading comments made by VISA and MasterCard during their testimony. I don't use my words lightly.

We thought we would go on record to ensure that the committee understood the point of view of small, mid-sized, and large retailers in this country. Let's be clear: Retail Council of Canada only speaks for merchants; it does not speak for other businesses. Its membership represents

80% of total retail sales in Canada.

So this is from the retail perspective.

We believe the code did serve the retail community well by ensuring that retailers could say yes to VISA credit or MasterCard credit, but be allowed to say no to VISA debit or indeed MasterCard debit. That was extremely important. As we heard Kirkland discuss, there's a huge difference between the price of accepting a credit card and a debit card, specifically an Interac debit card.

We believe, however, that the code now needs to address fair competition in the mobile and online world, so that transparency and choice are still available to merchants, specifically small and mid-sized merchants.

We also believe that the Competition Bureau needs to move on the Interac restructure, to ensure that there's a healthier and more effective governance model, so that Interac can reinvest and be competitive in the mobile and online world.

Mr. Chairman, I'll end by just adding a few comments in French.

Retail electronic debit and credit card services benefit two parties: merchants and consumers. Consumers enjoy payment choices and the ability to buy goods instantly through debit cards or credit lines. But while consumers are free to choose their method of payment, merchants must absorb differing costs.

A 2010 Competition Bureau press release suggests that the purchase of $400 worth of tires costs a merchant 12¢ if the customer uses a debit card, and $12 if the customer uses a credit card that carries a 3% fee. And it goes without saying that the costs are also a reality when it comes to mobile and online technologies. So we are here to ensure that the Interac system continues to be available in stores, as well as online and in mobile payments.

Thank you.

[The Chair, Conservative, David Sweet]

Thank you very much, Ms. Brisebois.

Now on to Mr. Campbell for six minutes, please.

[Terry Campbell, President and Chief Executive Officer, Canadian Bankers Association]

Thank you very much.

I'd like to update Mr. Revell's title. He just got a new job. He's also doing two jobs at once—the senior vice-president and chief information officer of retail and business banking at CIBC. Outside of his banking hours, he spends a lot of time supporting tech start-ups, particularly in the Kitchener-Waterloo area. I thought you should know that.

Good afternoon. I want to thank you for inviting the CBA to participate in these hearings.

There are three things I want to talk to you about today. Let me start with online banking.

This committee has considered what e-commerce might look like in the future, but it's important to recognize that here in Canada today, we have a successful example of Internet-based commerce that can serve as a model for the expansion of e-commerce in other areas of the economy. Obviously, I'm talking about online banking, which Canada's banks offer to their 25 million customers across the country.

Online banking is the most widely used form of Internet commerce in Canada, with over two-thirds of Canadians reporting that they used online banking in 2010.

Whether it's paying the phone bill, the cable bill, utilities, toll roads like the 407 north of Toronto, newspaper subscriptions, or a whole host of other kinds of invoices, Canadians can do all of this and more online through their bank's website. They can also transfer funds between accounts. They can buy and sell stocks. They can invest in mutual funds. They can send money to friends and family. They can buy travel insurance. The list goes on.

As you know, technology continues to evolve. As this committee has heard, for example, from a number of other organizations, we're now offering mobile banking services that allow Canadians to carry out a variety of day-to-day banking transactions through their smart phones. In the future, it was just recently announced, Canadians will also be able to use their bank authentication credentials to obtain access to online services provided by the Government of Canada.

This leads me to my second key point, and that's the critical factor of trust. Underpinning the banks' e-commerce experience is the single most valuable commodity for any online provider, and that is consumer trust: trust that their bank will keep their personal information and their financial resources safe; trust that the bank will deliver on its promises—deliver its product, deliver its services; and trust that the bank will provide them with a recourse mechanism and protection for consumers, should something go wrong along the way.

Research shows that Canadians—82% of them, in fact—are confident that banks continually update their technologies so online and electronic transactions are safe. And that confidence is justified. Since 1996, banks have invested more than $56 billion to ensure that the Canadian banking system is accessible, convenient, and secure—and those investments in security will continue.

My point is that ensuring robust security standards to protect customer information and to protect the integrity of payment transactions in effect must be “table stakes” for anyone who wants to accept or process customer payments. The question, of course, is how to get there.

We think that building mechanisms for secure digital ID and secure authentication is a key first step, and we know that useful work is already being undertaken in this area by the federal government.

I'd like to conclude with some comments about Canada's effective payments system, particularly payment cards. It's the 25 million consumers in Canada who drive our economy through their purchases. They rely on an efficient and effective payments system that's there for them 24/7. And they derive a great deal of benefit from that.

Consumers in Canada, for instance, have tremendous choice, with hundreds of institutions offering credit cards with a wide range of features that can fit every profile and every pocketbook. Many cards include rewards, and Canadians really value those rewards; they use them. Consumers also benefit from very high security standards, and if there's a problem, it gets fixed quickly and painlessly. You've heard it before at this committee, it's the zero-liability promise.

Consumers benefit, but let's not forget—as Diane was mentioning just a moment ago—so do businesses. For businesses, payment cards speed up the checkout line. Payments are virtually instantaneous, and they provide security of payment. Imagine if every payment transaction took an extra 30 seconds; it would use up an additional 27 million hours of staff time every year. Remember when businesses had to extend credit just to be able to get the sale? Or remember when the store manager had to come by and verify your ID so you could cash a cheque? You don't have to do that any more, because of the payment system we have.

Payment cards also enable online sales, and that helps expand business. Card payments also mean less cash on hand, and that means less cost of counting, handling, and making deposits. And it makes it considerably safer for employees. Consider the teenager working the midnight shift at a convenience store. People go after the cash; they don't go after credit card slips.

The payment system in Canada is very easy to take for granted because it works so well. It's critically important here that future public policy decisions continue to ensure that the efficiency, the resiliency, and the security of the payment system in Canada are not compromised, because the price we would all pay would be a significant and negative impact on the economy.

I would like to conclude just by saying that as this committee and as policy-makers consider the future of e-commerce in other sectors of the Canadian economy, we think some important lessons can be learned from our experience in the online banking world. We look forward to discussing these points and thank you very much for the opportunity of appearing.

[The Chair, Conservative, David Sweet]

Thank you very much, Mr. Campbell.

I'll ask the members here. I'm going to need unanimous consent on one of my decisions of discretion. The best estimate now is that we have about 21 minutes before the bells, at least from my information. So we'll either go with the first round of five minutes for everybody, or with unanimous consent we'll go with the standard seven minutes per person, but that will take us eight minutes after the bell. So I need unanimous consent for that.

What would you like, five minutes or seven minutes?

I don't have consent for seven minutes, so it will be five-minute rounds and we'll begin with the Conservatives.

Mr. McColeman, you have five minutes.

[Phil McColeman, Conservative, Brant, ON]

Thank you, Mr. Chair.

And thank you all for being here and bringing us your thoughts.

I would like to ask and learn more about CANARIE. I'm wondering, Mr. Roche, if you could first of all confirm for us what we heard from Bernard Lord when he was here. He's the president of the Canadian Wireless Telecommunications Association. He was saying that about 97% of the Canadian population is covered by 3G or faster. He also asserted that we have more of the fastest networks in Canada than any other country in the world. Is that a correct statement, from your point of view and your experience?

[Jim Roche]

I can't confirm or deny Mr. Lord's comments with regard to wireless coverage. The CANARIE network is focused solely on research and education. It's not available to the average Canadian for use the way the commercial Internet is. The CANARIE network, though, is a world leader in terms of the capacity it offers to our researchers and has been a world leader pretty much since its inception in 1993. So with respect to research and education networking, yes, Canada is at the forefront with regard to bandwidth and capacity available to our researchers.

[Phil McColeman, Conservative, Brant, ON]

I'm wondering if you could just give us not only some real-life examples of how your network connects and the importance of it to what you had mentioned, which is the research element and obviously the enhancements to education, but also some real-life examples you may be able to share with us regarding how it has sped up the commercialization of research in the Canadian context.

[Jim Roche]

There are so many examples I could think of. I'm just sorting through my mind as to which one might be most relevant.

One example is a massive multi-player game that has in-game purchases enabled. The gaming industry is actually quite a large industry in Canada, as you are probably aware. This massive multi-player gaming company was able to trial its product on the CANARIE network to ensure that, once it went into full production, the technology supported the number of users who would be using it simultaneously, and it allowed that company to verify that the in-game purchases operated the way it expected them to, so it could collect its revenues for that type of transaction. That's one concrete example of commercialization. That company is using the DAIR pilot program I referred to in my earlier comments.

Harry, do you have another example that you want to bring forward?

[Harry Sharma, Policy Analyst, CANARIE Inc.]

I could mention that in previous mandates back in the early 1990s we invested in a lot of companies such as Flintbox, which you may know of. It's basically used for distributing IP licences to companies now. As Jim mentioned, there are many other examples that we would be happy to share with the committee if you want.

[Phil McColeman, Conservative, Brant, ON]

Excellent. Thank you for that.

This question is for Ms. Brisebois. What sorts of steps are your members taking to ensure they are growing their businesses or increasing their productivity and innovation in the new digital world? What examples can you give us? What sorts of steps are your members taking?

[Diane Brisebois]

I think the first thing I should do is make sure that each member of the committee receives a copy of the Industry Canada study on the state of retail in 2010. It's fairly recent. It speaks to the productivity of the retail sector in Canada, which has surpassed every other sector in information technology investment and supply chain investment. That includes, obviously, e-commerce, which we talk about in the research.

Our retailers in Canada, both international players and local players, specifically mid-size and large retailers, have been investing more than their U.S. counterparts in the last five years. Many of them, I'm sure you'll hear from other witnesses, are investing in or doing a lot of tests in mobile technology, which includes not only mobile payments but mobile marketing. The large retailers are investing in social media, interaction with customers, and customer management information.

We also saw a substantial increase in web business enabling technology. That means not just websites that provide product knowledge but websites that allow customers to interact with a company and purchase goods online. There's been an increase of 30% in the number of those sites within the medium and large retail market in Canada. There's been quite a bit of activity. I think often we don't realize that, because we tend to compare Canada with the U.S.

[The Chair, Conservative, David Sweet]

Thank you, Madame Brisebois.

I have to be a little bit disciplined, because I want to try to give everybody at least one round before we go.

[Diane Brisebois]

I'm trying to jump in before I'm put on a plane again.

[Voices]

Oh, oh!

[The Chair, Conservative, David Sweet]

I understand.

We'll have Mr. Thibeault, for five minutes.

[Glenn Thibeault, NDP, Sudbury, ON]

Thank you, Chair.

I guess, Ms. Brisebois, I'll start right off with you, then, before you have to get right back on that plane.

We've been hearing some great testimony since we've been studying e-commerce and mobile payments over the last little while. One of the things we've been trying to identify are the concerns of the merchants on the other side of this who are having to accept the mobile payments and the e-commerce transactions.

We can go back a year and a half or two years, when we had the stop-sticking-it-to-us campaign against the merchants fees, and all the stuff we did on that file. Now, again, the warning flags are coming up with respect to how mobile payments and e-commerce are going to affect the merchants. It's great that we have all this innovation. And no one is trying to stifle the innovation. But how is that going to affect the small and medium-sized retailers?

I guess maybe you can give me your comments on that to start off.

[Diane Brisebois]

Thank you for the question, Monsieur Thibeault.

I think that small and mid-size retailers will be back here in short order to talk about the costs associated with accepting mobile payments. The challenge is that they have very little leverage.

As I mentioned earlier with regard to the code of conduct, because VISA, MasterCard, and their issuing banks were unable to circulate those cards at the point of sale, merchants said, “No, it's too expensive. We want Interac debit. We'll take your credit card. We like it, but we can't afford anything else.”

Our concern is that the code does not protect the online world and the mobile world. They're kind of ignoring the bricks and mortar and are moving their VISA and MasterCard debit, with the different issuers, into the other world. As you know, the costs are substantially higher for merchants to accept VISA debit versus Interac debit.

What's interesting, in closing, Mr. Chairman, is that they always talk about more competition, that Interac has a monopoly. It's funny that a monopoly is cheaper than the competition. It's odd how that's working. Until such time as they can really bring a competitive product to the market and there's an association between the cost we pay and the service provided, I think the code needs to continue to be refreshed so that we can ensure that they are transparent and competitive.

[Glenn Thibeault, NDP, Sudbury, ON]

We all have our technologies with us--BlackBerrys, iPads, iPhones, whatever it is. There are new developers coming out daily, almost, with a new app to process a payment. Many of them are for small and medium-sized businesses. That's where I think the fear is.

Mr. Campbell, we had VISA and MasterCard here. MasterCard is saying that there's going to be no cost for some of their applications. VISA can't give us an answer; they say that they have to make sure this is coming out.

We know that the merchant fee is a concern. Are the banks looking at putting another percentage point on some of these transactions? What can we see from the banking industry in relation to mobile and e-commerce?

[Terry Campbell]

First of all, I should say I'm deeply sympathetic to Diane. Lightning strikes twice for you, but there we go.

[Diane Brisebois]

I'm sure you're very sympathetic.