Industry Committee on Nov. 4th, 2024

[The Chair, Liberal, Joël Lightbound]

Good afternoon, everyone.

I call this meeting to order.

Welcome to meeting number 144 of the House of Commons Standing Committee on Industry and Technology.

Before we begin the meeting, I would like to ask the in‑person participants to take note of the instructions on the small card in front of them. The instructions concern good practices for the use of microphones and earpieces. This affects the health and safety of everyone, especially the interpreters, whom I want to thank for their work.

Pursuant to the motion adopted on Thursday, September 19, 2024, the committee is resuming its study of credit card practices and regulations in Canada.

From the Canadian Federation of Independent Business, we're pleased to be joined today by Daniel Kelly, president and chief executive officer; and Michelle Auger, senior policy analyst, national affairs. From the Centre for Future Work, we have Jim Stanford, economist and director. He's joining us by video conference. From the Peoples Group Ltd., we have Anne Butler, chief legal officer. I would like to welcome all the witnesses and thank them for coming.

Each witness has five minutes to give their opening remarks. There will then be a discussion with all the members of Parliament.

Without further ado.... Actually, with further ado, I just want to take a small moment to wish a very happy birthday to MP Perkins, whose birthday it is today. He's not listening, and it's a good thing, because he didn't want it to be publicly communicated.

Happy birthday, MP Perkins.

On that note, Mr. Kelly and Madame Auger, the floor is yours for five minutes.

[Daniel Kelly, President and Chief Executive Officer, Canadian Federation of Independent Business]

Thank you so much.

Good afternoon, everyone.

My name is Daniel Kelly. I'm joined by my colleague, Michelle Auger, senior policy analyst.

Thank you for the opportunity to talk about lowering credit card fees for small and medium‑sized businesses.

CFIB has a long history on credit card processing fees in Canada. In fact, it goes back to 2007-08, when the credit card industry introduced premium credit cards like higher-end Visas and higher-end Mastercards. Merchants started to see fees increase rapidly, with no idea why.

We took this issue to Minister Flaherty at the time and worked with him very closely to develop a code of conduct for the credit and debit card industry. In fact, it was my organization, CFIB, that wrote the first draft of the code of conduct. We were very pleased when that was adopted with changes by the Government of Canada at the time.

That put some guardrails and better practices in place. This used to be the Wild West in the payments industry, and it did clean up a lot of the bad practices that had been used up until that point, but it didn't serve to lower rates.

We worked then with the Conservative government at the time on the first round of Visa and Mastercard fee reductions, and those went into effect. There was a second round when the Liberal government took office, so that's two previous rounds of credit card reductions for businesses and merchants.

However, I have to say that both of those rounds were imperfect, with much of the savings being captured by larger players in the industry, with some trickling down to SMEs.

The reason we were so pleased about this most recent round of reductions that was announced and went into effect just a couple of weeks ago is that it is very much focused on small and medium-sized companies specifically.

This reduction is welcome news. These are hundreds of millions of dollars in savings that we are hoping will hit the bottom lines of small and medium-sized companies across the country. For this to happen, we need it to be universal and respected by the industry as a whole.

I'll turn it over to Michelle for a few additional comments.

[Michelle Auger, Senior Policy Analyst, National Affairs, Canadian Federation of Independent Business]

The agreements reached with Visa and Mastercard represent a major victory for our members. However, we still have work to do.

For Visa, we estimate that, depending on the sector and card type, rates should drop by 25% to 35%. This amounts to savings of $300 to $400 per $100,000 in sales. Our data shows that 56% of our members will be eligible for reduced Visa fees. For Mastercard, we estimate a reduction of 20%, or savings of $200 per $100,000 in sales. Our data shows that 66% of our members will be eligible for reduced Mastercard fees.

These changes mark a significant first step in easing the financial burden on small businesses. However, we also hope that the agreement will include other credit card companies, such as American Express.

We know that this reduction specifically concerns small businesses. We took the initiative at the end of the summer to send a letter to major purchasers and suppliers to ensure that small businesses will benefit from the savings.

I'll now give the floor back to Mr. Kelly.

[Daniel Kelly]

Thank you.

Look, the agreement and even the code are not perfect measures, but the structure has largely worked. It has delivered benefits, both in the past and in the present day, to small businesses. As Michelle noted, our primary focus right now is ensuring that all acquirers, all processors, pass on the savings to small firms.

So far, Stripe is the only processor that has publicly shared that it will not pass on the savings to small firms, and while we appreciate its transparency, this is absolutely unacceptable.

In earlier rounds—I will say in the first and second round of fee reductions—other processors did try to hang on to some of the savings themselves and not pass them on to small businesses. However, we worked with both the Conservative and Liberal governments at the time to bring them back to the altar to get them to reduce their fees as was promised, and it generally worked. We need the public pressure right now for Stripe to get back to the table.

I will note that just over the weekend we had confirmed for us that Shopify is now going to pass on the savings; it didn't look like it was going to at the beginning. However, Shopify does use Stripe to process its transactions, and it will pass on the savings. I'm not sure at this moment whether it is Shopify doing that on its own or whether it has negotiated a special arrangement with Stripe, but it is good news that many small merchants using Shopify will now see the savings today.

If Stripe is allowed to get away with not passing on the savings, we believe that other processors will begin to raise their fees to make up the difference. Given that one of Stripe's board members is the chair of the governing party's task force on economic growth, this sends a very worrisome message to the payments community, and we at the CFIB take it extremely seriously.

I believe that everyone in the payments community would agree that my organization, the CFIB, has become the main enforcement agency for the code of conduct and the three rounds of Visa and Mastercard rate reductions. We're happy to take on this role, but we're counting on your committee and all parliamentarians to help ensure that these structures and the agreements are respected.

Thanks so much for your attention.

[The Chair, Liberal, Joël Lightbound]

Thank you, Mr. Kelly.

Mr. Stanford, you have the floor for five minutes.

[Dr. Jim Stanford, Economist and Director, Centre for Future Work]

Thank you very much, Mr. Chair and members of the committee, for the opportunity to meet with you today.

Let me begin by outlining some of the aggregate data regarding the scale of the problem of consumer debt in Canada and why excessive interest payments on that debt are contributing to the financial distress that so many households are experiencing.

Since interest rates began rising in Canada in March 2022, credit card debt has become the fastest-growing major source of new debt for Canadian households. As of August this year, Canadian households were carrying $109 billion in outstanding debt on credit cards issued by the chartered banks. Including broader measures of credit card debt, like non-bank cards, total credit card debt was higher, at $122 billion. Overall, non-mortgage consumer debt totalled $770 billion for the same month.

We all know that mortgage debt, of course, constitutes the largest share of total consumer debt in Canada, at $2.2 trillion, but credit card debt and other forms of non-mortgage debt are important contributors to the overall indebtedness of Canadian households, and since interest rates are higher on non-mortgage debt than on mortgages, the debt service burden is proportionately worse.

It seems that many Canadian households, hard pressed by the increase in mortgage interest rates, are increasingly turning to their credit cards to help cover monthly expenses.

Consumer interest payments on non-mortgage debt reached over $60 billion at an annualized rate as of the second quarter of this year. That's an increase of $25 billion per year, or over 70%, since interest rates started rising in early 2022. As a share of household disposable income, non-mortgage interest payments, including on credit cards, had increased by one full percentage point of disposable income, to 3.25%, by the second quarter.

Again, that is not as dramatic as the increase in mortgage interest costs, which more than doubled in the same time, but non-mortgage consumer debt charges have become a significant and secondary source of the financial stress facing Canadian households. This burden is more concentrated among lower-income Canadians, most of whom do not own a home and, therefore, do not face those higher mortgage interest charges.

Some of this trend in rising non-mortgage interest costs of course reflects macroeconomic developments, especially monetary policy, that is obviously beyond the purview of this committee, but that rapid growth in non-mortgage debt charges and their regressive distributional effects attest to the importance of enhancing transparency, fairness and choice for consumers, and thus I commend this committee for your inquiry.

I also commend some of the initial steps taken by the federal government in pursuit of those goals of transparency, fairness and choice, such as reducing the criminal rate of interest; strengthening enforcement of predatory lending practices and criminal interest; helping to negotiate reduced credit card fees for small business, as Mr. Kelly just reported; and exploring options to expand access to low-cost and no-cost banking services.

I think these measures need to go further. Specifically, I would recommend some of the following steps.

The first is strengthening responsible lending rules and enforcement of those rules for credit card lending and other forms of non-bank consumer lending, such as the various “buy now pay later” schemes that are popping up all over, to ensure that consumers are not provided access to more credit than is feasible for them given their incomes and interest rates.

The second is requiring all chartered banks—not just those that have agreed to do so—to provide access to low-cost and no-cost accounts, following that $4 monthly fee model, to a broader range of customers, including lower-income Canadians of all ages, not just the specified groups, such as young people and GIS recipients, that are currently covered.

I also think we should require chartered financial institutions to contribute proportionately to establishing, capitalizing and operating a new nationwide non-profit, small-value lending agency to provide short-term and emergency loans to low-income Canadians on a cost-recovery basis. There are some promising experiments in the non-profit sphere and in other countries to show that this would be a viable alternative to the terrible exploitation experienced through payday loan firms and other predatory lenders.

I would like to see the criminal interest rate reduced further for credit cards, retail loans and other non-mortgage lending, to 2% per month, or about 27% per year on an effective annual basis. We need to strengthen transparency in advertising rules for credit cards, retail loans, “buy now pay later” schemes and other non-mortgage lending.

Let me conclude, committee members, with a brief remark about the role of financial literacy in the broader effort to protect low-income Canadians against these practices. Coincidentally, today is the launch of Financial Literacy Month in Canada, sponsored by the FCAC and partner organizations. I'm a big believer in financial literacy, and I served for many years as a volunteer director of the Canadian Foundation for Economic Education. Certainly, consumers need to be fully informed about effective interest rates and other terms and fees in credit card loans, payday loans and other forms of expensive credit.

Frankly, though, we cannot count on financial literacy efforts to protect consumers against unfair practices. People are driven to participate in these schemes by desperation more than by lack of knowledge. Clearly, we need stronger regulations to limit unfair practices, rather than adopting a “borrower beware”, “blame the victim” or “inform yourself” approach. Therefore, stronger efforts to prevent Canadians from experiencing the sorts of financial distress and desperation that drive them to excessive consumer debt—including through predatory channels—are also critical for protecting Canadians against burdensome levels of unsecured personal debt.

Thank you again for having me. I look forward to the discussion.

[The Chair, Liberal, Joël Lightbound]

Thank you, Mr. Stanford.

Ms. Butler, you have the floor.

[Anne Butler, Chief Legal Officer, Peoples Group Ltd.]

Thank you for the opportunity to appear in front of the committee as part of its study on credit card practices and regulations in Canada.

My name is Anne Butler, and I'm the chief legal officer for Peoples Trust Company, Peoples Bank of Canada and their subsidiaries, which carry on business collectively under the brand name Peoples Group.

Peoples Group has been providing tailored financial services to the Canadian marketplace for more than 35 years. We have over 500 employees across the country, in Vancouver, Toronto, Calgary and Montreal.

Peoples Trust Company and Peoples Bank of Canada are federally regulated financial institutions overseen by the Office of the Superintendent of Financial Institutions. As a federal financial institution, we're subject to the Financial Consumer Agency of Canada's financial consumer protection framework. Peoples Trust is also regulated provincially and is subject to consumer protection regulation across the country.

Peoples Group provides residential and commercial mortgage lending, embedded finance services and deposits to customers in Canada. Through our subsidiaries, Peoples card services and Peoples payment solutions, we provide payment solutions to fintechs and other payment service providers across the country.

Peoples Group's roots are in multi-family residential mortgage lending. We provide commercial mortgage funding to multi-family landlords, real estate investors, developers, seniors facility operators and non-profit, affordable housing societies in communities across the country. We also provide single-family residential mortgages through a network of independent brokerages.

From our roots in multi-family residential mortgage lending, we've grown to become an important enabler for domestic and global fintechs in the Canadian market, providing them with banking and payment services and helping them to provide innovative financial products and services to Canadians. We are a strong supporter of financial innovators, underscoring our fundamental belief that a strong and competitive ecosystem will foster the development of new financial products and services and innovative ways of delivering them for the benefit of Canadian customers and businesses.

As the largest issuer of prepaid cards in the country, we have helped our customers launch products and services that have expanded access to digital financial services for Canadians.

We also have a thriving merchant-acquiring sponsorship business, in which we sponsor and act as the settlement bank for independent sales organizations, which we call ISOs, in their delivery of payment acceptance capabilities to their merchant customers across the country.

Given this committee's focus, I would like to now explain the role of Peoples in the payments ecosystem. I will focus on the acquiring side of the business, which I believe is most relevant to the committee's current work.

Peoples Group's role in the merchant-acquiring side of the credit card business is relatively unusual compared to the role played by most financial institutions that might appear before you. Peoples Group acts as a sponsor bank for ISOs. We act as their acquiring bank, enabling them to contract directly with merchants and use us as the settlement bank for payments processed through the credit card networks on behalf of those merchants.

In this model, our ISOs are responsible for signing up merchants and for offering merchants payment processing services and, often, equipment to process card transactions. Peoples Group does not provide payment processing services directly to merchants. We provide ISOs with sponsored access to credit card network processing systems, for instance Visa and Mastercard, and we act as their settlement bank.

In this capacity, Peoples is an acquirer as defined in the code of conduct for the payment card industry. For this reason, we require that our ISOs, as downstream participants, comply with the code of conduct obligations as well as the payment card network operator rules.

Peoples has no direct role in setting the prices that ISOs charge to their merchants. This is determined by the ISO based on a variety of factors, and it varies from ISO to ISO.

All interchange fees charged to Peoples Group by the card networks are passed along by Peoples Group entirely to ISOs for payment. The ISO determines whether or how to factor those charges into the overall pricing to their downstream merchants.

Peoples Group's compensation for acting as the acquiring bank is through a fee paid by ISOs for the use of our services. Typically, this is calculated as basis points on gross payment flows through the account. Interchange rates or fees do not play a role in the compensation that Peoples receives from the ISOs.

I hope my explanation has helped the committee to understand Peoples Group's unique position within the Canadian financial system as an important enabler of financial innovation for Canadians.

Peoples Group appreciates the opportunity to appear here today. I look forward to answering your questions.

[The Chair, Liberal, Joël Lightbound]

Thank you very much.

To start the discussion, I'll turn it over to MP Patzer.

[Jeremy Patzer, Conservative, Cypress Hills—Grasslands, SK]

Thank you very much to everybody for attending today.

I'll start off with CFIB, if that's all right.

Mark Carney is a special adviser to the Liberal Party, but we all know he's advising the Prime Minister. He is the de facto finance minister of this government. He also happens to be sitting on the board of Stripe, as you alluded to earlier. He has also said that they will not be passing on savings to consumers through a government-led initiative.

Given that you guys represent small businesses that would stand to benefit from these cost savings, do you have any thoughts on Mr. Carney's effectively saying no to his own government's initiative?

[Daniel Kelly]

It is bizarre that we are in this situation, where we have somebody who is a special adviser to the governing party also serving on the board of a company that is in direct conflict with the stated objective and promise of the government with which he is currently associated.

I understand what a board member on a board of directors does, but this is super, super awkward. I have to tell you that our bigger worry is for.... All of the other acquirers watch closely what is happening. If this is allowed to stand, if Stripe does not change gears and actually flow the discounts that it's supposed to to small merchants, the whole process will fall apart. Whether it's Stripe, its board or Mr. Carney, somebody needs to move here and make this happen.

It was the Deputy Prime Minister who said in a recent statement that it is the expectation of the Government of Canada that all participants in the ecosystem will pass on these savings down to the small businesses that deserve them. Now we have a party that is not doing that, with this very close connection to the same players. It is really outrageous.

[Jeremy Patzer, Conservative, Cypress Hills—Grasslands, SK]

Yes, it really is. This is the finance minister trying to stave off a competitor for her own job—that's for sure.

I have one more question for you. It goes back to the whole point about the cost to payment processors here. I talked to a couple of small businesses back home in Swift Current. When it's the busy season, they pay over $7,000 a month in their fees alone. That's crazy. They could hire three full-time employees, albeit for minimum wage or just above. They could hire three full-time employees.

Would it not be incumbent on them to make sure that people are adhering to these new initiatives?

[Daniel Kelly]

Absolutely. Look, I will say that this isn't the first time we've seen this. When the Conservative government put the first round of credit card fee reductions in place after negotiating it with Visa and Mastercard, there were a couple of processors that did decide not to pass them on, but I will tell you that at CFIB we worked closely with Minister Flaherty's office at the time. I think it was also in the transition to Joe Oliver. Those savings ultimately were passed on after some pressure from both the finance minister's office and externally from us.

That is what my expectation is for this round. I am waiting to see that happen at this point in time.

To your point about the aggregate savings, I've talked to tons of small business owners who say they pay more in credit card processing fees than they take home from their business themselves. That's how big a cost this is to SMEs.

[Jeremy Patzer, Conservative, Cypress Hills—Grasslands, SK]

That's crazy.

I'll turn it over to Mr. Généreux now.

[Bernard Généreux, Conservative, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Thank you, Mr. Patzer.

Ms. Auger, I would like to address the comments just made in English, but in French this time.

Mark Carney's presence on Stripe's board of directors violates the policy just announced by the government. It even poses a conflict of interest, given that he also serves as a special adviser to the government. What are your thoughts on this?

[Michelle Auger]

Thank you for your question.

As Mr. Kelly said, a conflict of interest does indeed come into play. The situation leaves us in a somewhat strange position. We didn't really set out to create the current perception.

Like all other industry purchasers, Stripe should be passing on fee reductions to others. The company's decision, however honest, is a real disappointment. It's deeply disappointing for the small and medium‑sized businesses that make up its client base. Minister Freeland said that every stakeholder in the payments ecosystem should play by the rules. It's all the more disappointing that some companies are choosing not to pass on fee reductions to their clients.

[Bernard Généreux, Conservative, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Last week, the committee met with a representative of the Convenience Industry Council of Canada. Businesses in this industry will miss out on the lower transaction fees just announced by the government. What are your thoughts on this, since I imagine that a number of these businesses are members of your organization?

[Michelle Auger]

It's a victory and a step in the right direction. Many small and medium‑sized businesses in Canada will benefit from these reduced transaction fees. However, we know that many of our members can't access them because the thresholds aren't high enough.

[Bernard Généreux, Conservative, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

What percentage of businesses will miss out on these reductions?

[Daniel Kelly]

In our data at CFIB, we calculated exactly how many businesses will be under the threshold with Visa and Mastercard and how many will be over.

[Bernard Généreux, Conservative, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

How many members do you have?

[Daniel Kelly]

Roughly 60% of our members will see the reductions, because they are under those thresholds. About 40% of our members will not see the reductions, because they are more sizable small firms.

I will add this: Any time government puts in place any kind of threshold or rule, it never delivers benefits to 100% in its first year. We have a $500,000 corporate tax threshold. We have a $1-million lifetime capital gains exemption. Our goal, as an advocacy organization, is to see those thresholds raised each year.

However, this is good news for the majority of small and medium-sized companies. We receive it as good news. It's sad that this one aspect is going to prevent it from being delivered to a good number of small firms. That's why we need to get that reversed.

[The Chair, Liberal, Joël Lightbound]

Thank you.

Mr. Turnbull, the floor is yours.

[Ryan Turnbull, Liberal, Whitby, ON]

Thanks, Chair.

Thanks to all of the witnesses for being here today. I have questions for all of them.

Off the top, though, I want to mention that Stripe confirmed, in multiple committee testimonies, that its board was not involved in any of the decision-making. I think that's important to mention on the record.

I want to pick up where we left off.

Last week, I had a great exchange with Sylvain Charleboix from Dalhousie University, a gentleman who is known, sometimes, as the “food professor”. What was interesting is that we came to an agreement. He agreed with comments I made about climate change being the number one challenge to, and biggest driver of, food price volatility. He also said it was the biggest threat to the agri-food sector.

Mr. Stanford, I wonder if you have any views on whether climate change is the biggest threat to the agri-food sector and is driving food price volatility.

[Dr. Jim Stanford]

Thank you, sir.

Well, I would certainly agree that climate change is one of the major disruptors in our overall production and macroeconomic systems, including, obviously, the food industry. We've seen the impacts of climate disasters on agricultural supply chains, food deliveries and food prices in various parts of the world, including Canada.

Whether it's more important than some of the other crises we face these days is probably a matter of judgment. There's a lot of instability and uncertainty out there. Certainly, however, climate change has had a very negative impact on food supply chains and food prices.