Industry Committee on Nov. 21st, 2011

[Dan Kelly]

Terrific. Thank you.

On the first part of the question, with respect to the merchant fees, there are a couple of conflicting trends. One is that the only major change in credit card fees, after the adoption of the code of conduct, was MasterCard's issuance of even higher merchant fees with its new MasterCard World and World Elite credit cards that are even more costly for our members. They're approaching the 3% mark, the upper end of PayPal's segment. So that has been an unfortunate trend on the part of MasterCard.

There was a positive trend too. After urging both Visa and MasterCard to give us the list of the types of all of their different card categories and the rates associated with each of those card categories, CIBC actually voluntarily lowered one of its credit cards, the one that can flip from low-cost to higher cost. They actually voluntarily lowered it to the lowest level of interchange, a move on their part that we appreciated. That was a positive development that came out of the disclosure provisions that were built in to the code of conduct itself.

So there are some conflicting trends on the credit card side. MasterCard is also looking at some other major changes, which we're waiting for anxiously, that may have some positive or potentially not-so-positive impacts on our membership. So that's something we're waiting for—another shoe to drop.

On the regulatory side, the one area I would urge you to explore, which I mentioned briefly before, is that of regulations on IT professionals. Our other presenter, Mr. Cohn, talked about the collaborative nature of a lot of IT enterprises, where self-employed individuals are working across many different spectrums with many different partners on projects, and sometimes internationally. The regulatory setup in Canada, particularly the CRA setup in Canada, just doesn't know how to recognize that at all. It is still caught in this negative spiral where somebody's either an employee or they're an employer; but there are all sorts of enterprises now that are just different from that.

We need to make sure that those businesses are treated legitimately; they are legitimate businesses. They may, for two years as an IT professional, work on one project specifically, yet down the road are then deemed to be an employee and back payroll tax are then assessed on the contracting employer. These are the kinds of things that are just not recognized. There were some earlier recommendations made by either this committee or another that they have access to things like the small business deduction, etc.

So there are some simple regulatory steps that need to be made, particularly with respect to the tax treatment by the CRA, that we think would help a lot of IT professionals who are in this industry succeed.

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

Thank you.

Mr. Kee, you talked about malware and some of the hurdles that you face in your industry. Security is a concern of mine, obviously, with privacy, etc. I wonder if you could talk to some of the deficiencies on the security side and what we might be aware of in that area, particularly for privacy of information.

[Jason Kee]

Certainly there are always challenges, and over the course of the past year there have certainly been some fairly high profile data breaches. The highest structured profile was Sony, who runs the PlayStation Network, which basically had been hacked. Someone broke in and apparently made off with some information. From all indications, luckily no financial information was made available. We haven't seen any negative consequences in that respect, but it's still a problem. Also, the Privacy Commissioner of Canada indicated that she was quite satisfied with Sony's response—but still, it was a major breach.

These things are seemingly occurring on a fairly regular basis. In order for us to facilitate electronic commerce, it is critical--I cannot overstate this--that the element of trust exist. I think Darrell talked about this. Without trust, e-commerce doesn't work. Without trust, no one is ever going to give their credit card information and no one is ever going to give their personal information. We have to build this regime of trust. That is done largely by building mechanisms like PayPal that have an established track record, that are themselves trustworthy, and that also operate very quickly to root out, identify, and squelch basic issues of breaches, violations of trust, or the abuses that occur.

[The Chair, Conservative, David Sweet]

Thank you, Mr. Kee. Sorry, but we're over time again. I always need to be the referee here.

Now on to Mr. Andrews for five minutes.

[Scott Andrews, Liberal, Avalon, NL]

Thank you very much, Chair. It's a pleasure to be back at your committee again. My apologies for being late. Sometimes coming from rural Canada, the transportation network doesn't work as efficiently—

[Some hon. members]

Oh, oh!

[Scott Andrews, Liberal, Avalon, NL]

—as it does here in central Canada. That is a prelude to what I'm going to ask.

One of my colleagues, Mr. Toone, was talking about rural Canada.

Mr. Kee, you gave kudos to the government for expanding into rural Canada. We haven't seen any real move into rural Canada in about the last three years when it comes to broadband. We did it in the late 1990s and early 2000, but it petered out. We still have about 23% to 25% of rural Canada not accessing broadband. We want to see what your suggestions is for rural broadband to penetrate rural Canada.

I have the same line of questioning for Mr. Kelly, about small and medium-sized businesses in rural Canada. We have some examples of where there are success stories, but I know there is also a big hurdle to get into rural Canada because the broadband isn't there. Dial-up just doesn't cut it.

Mr. Kee and Mr. Kelly.

[Jason Kee]

As we alluded to before, offering concrete suggestions is challenging. Also, at the end of the day, we represent video game makers, and while we encourage and basically urge the deployment of broadband into rural areas, the specific means of doing that is something that, frankly, we tend to defer to those who are actually in the industry.

Our general philosophical stance is that the best way to overcome the inherent challenges of dealing with wide geography is to basically try to incentivize entrepreneurs to deploy. Satellite is one way where you can actually cover a fairly broad area. Satellite is not necessarily going to be as good as wireline technology, but I think the sheer expense of deploying wireline technology to some geographical areas is not economically feasible. It's to essentially somehow incent and encourage that kind of behaviour on behalf of small and medium-sized companies.

[Dan Kelly]

Since your colleague asked that question, I haven't come up with any brilliant solutions to that either. This is a challenge, no question, and hopefully technologies will advance to bypass some of this in the near future. We're not there yet, but there's no question you're right. This is imposing challenges on a lot of our members in a lot of rural communities in taking advantage of the opportunities this presents. Do I have a solution for you to offer today? I'm afraid I don't.

[Scott Andrews, Liberal, Avalon, NL]

That leads to my next question, which goes to what Mr. MacMullin said when he talked about mobile infrastructure. The same problems are out there in a lot of rural parts of Canada. The infrastructure is just not there. The service is not at that level. I know Mr. Kee just talked about satellite technology. I see broadband and wireless as one and the same thing when it comes to rural Canada and some of the problems involved. Is it really holding us back in rural areas that we don't have access?

The second part of that question is about your experience in dealing with mobile companies. Too often we've seen the companies coming to the bigger areas to carve up that market. No one really looks at the outer fringes of rural Canada, because there's the cost and they need incentives to get into those areas. What are your comments on that?

And then you guys can hop in on that same issue on the wireless infrastructure.

[Darrell MacMullin]

We can talk about mobile for hours.

It is a bit of a catch-all phrase, though. I alluded earlier to one of the approaches that PayPal is taking toward mobile. We are making ourselves ubiquitous from that standpoint, so we're not reliant on a particular handset or a particular network. We may not be relying on the handset at all.

One of the things we've focused on is how we can take advantage of and leverage existing infrastructure and be able to use it in a whole new way. You used the example of how we can link and verify your mobile phone number with a PIN to your PayPal account. Now you can use an existing point of sale terminal, enter your phone number and a PIN, and pay with PayPal that way. You're not using your mobile phone, but you're using your mobile phone credentials and your PayPal credentials to facilitate a payment on an existing point of sale network.

That's another way for a merchant to be able to enable a mobile payment or a PayPal payment without having to worry about incremental infrastructure costs. The approach we're taking is not necessarily...because a lot of companies are saying we're going to make a wallet related to NFC, meaning that merchants would have to create NFC terminals, and then you'd have to rely on a network and a handset that has those capabilities. That's limiting in a lot of ways, both for consumers and merchants.

We're taking more than one approach and are trying to tackle it in quite a few different ways to make it much more effective for merchants to compete and keep up with the pace of innovation.

[The Chair, Conservative, David Sweet]

Thank you very much, Mr. MacMullin, and Mr. Andrews.

We have about six minutes left, and with the indulgence of the committee, I want to ask one question to clear up some testimony about the cost to merchants for payments.

Mr. MacMullin, you mentioned that someone can sign up for a PayPal account.... I'm taking that as meaning that a customer can sign up for a PayPal account and do that at no cost. What does it cost a merchant to sign up for a PayPal account?

[Darrell MacMullin]

The same thing.

When a customer sets up a PayPal account, you can both buy and sell with that account. You can set it up in your business name or in a person's name so that it has a few different features to it, but from a cost standpoint, there is no cost difference. It is free to set up a PayPal account.

[The Chair, Conservative, David Sweet]

All right. What other capital costs does a vendor incur to begin to use a PayPal account?

[Darrell MacMullin]

When you have your PayPal account essentially set up, when you're setting up your e-commerce website, you need some sort of a storefront, and that is not necessarily provided by PayPal.

We do have some capability there with one of our main products, Website Payments Standard. You could be a journalist, for instance, with a blog and you have a book that you just want to sell on your blog. You have one item. You don't need an entire e-commerce storefront and shopping cart technology, but just a button that says “pay now”. You want it to be branded so that people are confident that even though you're a journalist with a blog, they can make the payment to you and feel comfortable and confident in making that payment.

In that instance, we're not charging you for that ability to make any sort of a payment. We don't charge any incremental costs for any of our technologies.

[The Chair, Conservative, David Sweet]

In response to earlier questions, Mr. Kelly, you were saying that the costs for PayPal and some credit cards were similar, in the sense of being a percentage per transaction when you get to the higher cards, but that there's really no capital investment. One of the things for your members is that there is no capital investment required, as there has been with the credit card companies, in the sense that when a new technology comes out, your members don't have to invest in the infrastructure to execute that technology. Correct?

[Dan Kelly]

Yes, but there are many capital hurdles for small businesses to get into lots of games.

I don't want to overplay the difficulty for small businesses to get into making electronic payments. Many quality acquirers out there provide that kind of service to small businesses right now. Most of this equipment is rented. If you're buying this kind of stuff, especially for an in-store capacity, you're fooling yourself. Lots of our members have been creamed by doing that.

For an in-store capacity, and now for some of the e-commerce capacities that are offered, it's not that bad on the capital front. The big ticket is the per-transaction costs, and that's where PayPal will look very expensive to some, if your business accepts a lot of Visa cards or regular MasterCards. If you're accepting a lot of premium credit cards, a lot of American Express cards, then the math starts to change for that.

Again, I think there are lots of impediments. I'm not suggesting for a second that there isn't an impediment to setting up an electronic payments network in Canada—and for brand new firms that don't have any track record yet, that can be a challenge. For the majority of our members, smaller and medium-sized businesses that are making this transition, this would not be particularly capital intensive.

[The Chair, Conservative, David Sweet]

Thank you.

We have about two minutes left.

Are there any answers you wanted to finish off before we adjourn?

[Darrell MacMullin]

Just to elaborate on that point, when we look at the transaction cost, there is the per-transaction cost, but there are also other costs associated with transactions. For instance, if you refund a transaction, are the fees refunded? Often acquirers don't refund the fees. PayPal does refund the fees.

Probably one of the biggest issues, and also one reason that a lot of larger retailers like PayPal as well, is that if our fraud rates are at least half that, they can lower their fraud costs. So at the end of the month, when you look at your costs, between credit card processing, any other monthly fees, and fraud losses, for your full end-to-end costs against your sales, there are significant savings beyond just the per-transaction fee.

Whatever your rate is, I think is a little bit of window dressing, if you don't know the variable costs of which basic cards and premium cards and how many cards you're actually going to process. The reality is that most credit cards in Canada have some sort of premium loyalty linked to them. I don't know the exact distribution—

[A voice]

It's about a third.

[Darrell MacMullin]

Is it about a third? Okay.

That's of sales volume.

It's one of those things we're trying to make as simple as possible for customers to understand so they can build their business.

[The Chair, Conservative, David Sweet]

Mr. Kelly.

[Dan Kelly]

There is one other quick point that government can do something about.

Obviously collection of provincial sales taxes is not your jurisdiction, but every merchant in Canada pays a merchant fee to Visa, MasterCard, and the banks for collecting the HST. That's something you can do something about.

[The Chair, Conservative, David Sweet]

It's 5:30 now, according to my BlackBerry. It's time for us to adjourn.

On behalf of the committee, I want to thank all the witnesses very much for your testimony.

The meeting is adjourned.