Welcome to the joint meeting of the Standing Committee on Industry, Science and Technology and the Standing Committee on Finance. This is meeting number 16 of both respective committees, I believe. Pursuant to Standing Order 108(2), we are engaging in a study of the credit card interchange fees and the debit payment system in Canada.
I'd like to welcome all of the committee members who are here today. I'd also like to welcome our witnesses, who represent a number of organizations. These are the Canadian Restaurant and Foodservices Association, the Québec Hotel Association, the Retail Council of Canada, the Canadian Council of Grocery Distributors, Coalition québécoise sur les hausses de frais de transaction de carte de crédit et de débit, and finally, the Canadian Federation of Independent Business.
Before we go to the witnesses for their opening remarks, I believe there is a motion that Mr. Rota, on behalf of the industry committee, and Mr. Wallace, on behalf of the finance committee, will move with respect to the joint hearings this committee will hold over the next number of weeks. This motion was agreed to by all four parties in our subcommittee on agenda and procedure. It concerns dilatory motions.
Mr. Rota, would you care to read the motion into the record?
First, on behalf of the witnesses here today, we want to thank the joint committee for holding these hearings and for tackling this thorny issue.
The importance of these hearings cannot be overstated. They provide the opportunity to shine a light on the seemingly never-ending proliferation of higher fees and new charges from the credit card companies. These fees should be a major concern to the government because they hit at businesses and consumers alike. Following our testimony and that of other witnesses, we hope the committee will recognize the need for government to act.
In order to provide more time for questions, and since members of the coalition share the same concerns, with members representing more than 250,000 businesses from coast to coast, the following organizations have agreed to make a joint presentation: the Retail Council of Canada, the Canadian Council of Grocery Distributors, the Canadian Restaurant and Foodservices Association, Conseil québécois du commerce de détail, Association des détaillants en alimentation du Québec, and Association des hôteliers du Québec.
We're pleased to say that we have two witnesses with us representing business. They are Mrs. Brenda O'Reilly from Newfoundland, as an independent restauranteur, and Monsieur Louis-Robert Handfield, as an executive in the hotel business, who will also be on hand to answer questions.
The Stop! Sticking It To Us coalition came together in 2008, the vast majority of our members being small independent businesses in retail, hospitality, food services, restaurants, and other service sectors. They are extremely concerned with the rapidly rising credit card merchant fees and impending new debit card schemes that will be introduced by Visa and MasterCard. At the heart of the issue is Visa and MasterCard's duopoly, representing 94% of the credit card market in Canada, thus having the market power to force increasingly high fees for their services, as seen in recent months. Both merchants and consumers are paying the price.
Make no mistake about it, even credit card company executives view merchant fees as a cash cow, as you will see on slide 4. Allow me to quote the former vice-president and assistant general counsel for Visa International and Visa U.S.A.:
||[Issuers] began to view the interchange reimbursement fee not as a revenue reallocation mechanism to ensure success of the system, but as a demand-driven pricing scheme to collect as much revenue from merchants as the market would bear.
Economics 101 tells us that competition leads to price reduction, but this isn't the case in the credit card market. The credit card companies have no direct relationship with either consumers or merchants. Instead, they compete only for the business of financial institutions, which they do by offering high returns to issuers using other people's money. This is a complete reversal of the normal effects of competition. The harder they compete, the higher the fees.
The best way to look at how Visa and MasterCard set their interchange fees is to think of it not as competition but as an auction, paid with money extracted from merchants and, ultimately, consumers. The quote on slide 9 from Dr. Philip Lowe, Assistant Governor of the Reserve Bank of Australia, says it all:
||[C]ompetition between these schemes creates upward--not downward--pressure on these fees. A scheme with a higher interchange fee paid to issuers is able to pay larger subsidies to cardholders.
There is no better way to explain why the market has been flooded with premium cards that carry higher interchange fees.
Over the past 18 months, merchants in this captive environment have seen double-digit increases, as seen on slide 9. By way of example, one of our discount retailers, which sells some basic grocery items and a mix of other necessities, has experienced fee increases in excess of 30%. These increases are coming at the worst economic moment, when retailers are lowering their margins and cutting their costs just to survive.
Think about it. In a tough economy, most businesses sharpen their pencils, cut costs, and cut prices in order to boost sales. Similarly, governments are acting to provide stimulus, such as Ottawa's two GST reductions and interest rate cuts by the Bank of Canada. Only the commercial banks and the credit card companies are going the other way, actually raising fees and adding new charges in the midst of a recession. And who pays? Obviously it isn't the banks and the credit card companies. They are the beneficiaries. The people who pay are the businesses and consumers who are actually making the sales and purchases.
The proliferation of premium card fees is the biggest contributor to these increases. Starting last fall, both Visa and MasterCard introduced new premium cards with more rewards points for cardholders at no additional cost. What every restaurant operator knows is there's no such thing as a free lunch. Merchants are stuck footing the bill for these perks. For my businesses, these premium cards are 12% to 30% more expensive to accept than the standard card. Because the fees paid to banks are so much higher, issuing banks are actively marking them and even automatically switching consumers to them. Because the perks are so generous, cardholders are using them.
If these increased premium card costs were offset by these cardholders purchasing more, as suggested by the card companies, that would be one thing, but this is not the case. In fact, credit card usage is actually down over the same period. What we are doing is paying for higher fees and less business.
Slide 11 puts into context the size of the bite that these fees take, especially the newly introduced fees. The situation is particularly dire in the restaurant industry. Restaurants are extremely competitive, with very thin margins.
In Newfoundland, where I operate my restaurant businesses, the situation is the toughest in the country, with an average profit margin of 2.1%. For that return, we invest capital, pay rent and utilities, employ staff, buy from our fishermen and our farmers, and promote and advertise. That 2.1% return for the industry is lower than the 2.2% merchant discount rate charged to us as on some credit card transactions.
Don't get me wrong. We're not asking the credit card companies to take a haircut because the times are difficult. What we're here fighting for is an end to the gouging of fees by this credit card duopoly. What choice do we have in accepting these higher fee cards? In a word, none.
Through our merchant agreements we are required by Visa and MasterCard to follow the “honour all cards” rule, to take all their credit card offerings. It is hard to refuse a legitimate payment method chosen by the consumer, especially since that consumer is probably unaware of the detrimental impact on the merchant and the inevitable boomerang effect in higher consumer prices.
Even if merchants were allowed to decline such higher-fee cards, it would be next to impossible for one of our thousands of food service workers to identify them from among 200-plus credit card products, and it would be very difficult for employees to explain to the consumer why their particular card is not accepted.
I'm not going to top what my colleague from the Canadian Restaurant and Foodservices Association just said about small profit margins; however, I believe that the members of the joint committee, mainly those from the Industry Committee, can understand how tough times are in our sector.
What I can say is that the hotel sector is probably the one most dependent on payment by credit card, which is increasingly the operating method. Credit cards are mandatory for reserving rooms at hotels, and 95% of reservations are made by telephone or over the Internet. The balance of a stay is paid by credit card in 85% of cases, followed by debit cards and cash.
Visa and MasterCard believe that controlling 94% of the market isn't a problem since there is enough competition from other forms of payment such as debit, cash and cheques. Well, I can tell you that there is no such competition in our sector: credit cards are an integral part of the way we operate. That moreover is the case around the world. The hotel business can't survive without them.
The Quebec Hotel Association would like to tell you about the consequences of increased fees charged to merchants by Visa and MasterCard in our sector. I would like to draw your attention to one example, on page 14, of a rate structure that we have to deal with. This is a structure for one company. There's a different one for the other one. We went from a single fixed rate to an average of six variable rates depending on the type of card used, that is individual consumer, corporate, worldwide or premium, and the type of transaction, standard or electronic.
A number of our clients use a company or worldwide card, which involves higher fees. The majority of transactions are billed at the standard transaction rate, that is the highest rate, because the hotelier doesn't have the client's credit card in hand at the time of the reservation, which is done, once again, by telephone or over the Internet. The card is processed by a management system of the property. In our sector, this is a very common operating method that makes it possible to inform various services at the hotel which client has arrived. The system ensures high-quality client service.
At the end of the day, the various rates thus do not allow the hotelier to determine the amount to be allocated to the payment of transaction fees, since there is no tool for determining what type of transaction card was used. These various rates represent an average increase of 11.5% to 17%, as shown on page 15. For a single hotel, these fee increases represent additional costs varying between $11,000 and $55,000 a year. Hoteliers currently pay these fees out of their profits, and increasingly out of reserve budgets. These fees cannot be indefinitely absorbed by the hotel; they will be passed on to consumers, whether or not they are the holder of a costly card.
Apart from the increase imposed on the client, we feel that the entire operational system in a business environment and key sector of the tourist industry is being affected and taken hostage. The hotel industry would like to live without it.
So what is the solution? The coalition believes that transaction costs charged to retailers, whether on credit or debit, should reflect the true cost of processing, as is the case in Australia. Reasonable costs should be allowed, of course, plus a fair return on investment for card companies. But interchange fees should be capped at that level.
How does it work in Australia? The details are provided in our submission, but the highlights are as follows. The entire fee-setting process of the card organization is transparent to all stakeholders. A common benchmark has been established on allowable costs. The result in Australia is that interchange is capped at 0.5% or 50 basis points, producing a merchant discount rate of less than 1%.
We do refer extensively to the Australian model, but as you can see on slide 18, Australia is not the only country to act. The European Union has also moved to a cost-plus model on cross-border transactions. In fact, multiple jurisdictions are working to address the problem. The world is moving on this.
The coalition understands that Canada is unique and that considerable analysis is needed to produce a regime that is appropriate for Canadian circumstances. However, it is urgent that Canada get on with the task, and we urge the committee to recommend that the government develop a system of oversight to ensure fair pricing and competitive behaviour by the two card companies.
The Minister of Finance has the power to designate, and therefore regulate, payment systems in the country. The options on how to do that are detailed in our submission.
Now let's talk about debit cards.
The debit card electronic payment system is one of the most successful globally. It is very popular with merchants and consumers. In can represent 60% of transactions for some food retailers.
Interac is a non-profit association that reflects current processing costs. The system costs the retailer only a few pennies per transaction and enables consumers to access their funds quickly, safely and at low cost.
Visa and MasterCard recently announced that they are entering the debit market starting this year. It must be understood that Visa and MasterCard currently operate outside Canada's legislative framework for debit cards and outside the control of the Canadian Payments Association. So we are currently in a unique and critical situation for the future and for the development of financial services provided to merchants and consumers both in Quebec and Canada.
Visa and MasterCard say that their entry into the debit market will benefit consumers and merchants since it will provide more competition. In fact, this will be a reproduction of the alleged competition that currently exists in the credit card market in Canada, which is a simple bidding for business by the issuers of cards and credit card companies. This situation will invariably result in increased costs paid by merchants.
In addition, Visa and MasterCard intend to offer benefits to buyers so that their debit products have priority routing at the point of sale. This will be accompanied by aggressive distribution of these new cards by the issuers.
Thank you very much, Mr. Chair.
My name is Catherine Swift. I'm president of the Canadian Federation of Independent Business, and I'm joined by Corinne Pohlmann, our vice-president of national affairs.
Because a lot of issues have already been mentioned that I would certainly agree with, I'm going to skip to page 5 of our presentation, our slide deck. We actually have two pieces of information we handed out. One was the slide deck and the other was one page of suggested questions we would hope you would consider asking to some of your other witnesses in this proceeding, because there has been a lot of confusion, obfuscation, misinformation, and lack of information on this entire issue. It's a complicated issue; it's not something you're going to get easily. I know, personally, I still continue to learn something new every day that I didn't know the day before.
To briefly summarize what CFIB has done, we basically started hearing exactly the same complaints last year about skyrocketing charges to businesses to process credit card transactions. We started to look into it, did some surveying among our members, and distributed so-called action alerts—a copy of which is included on page 5—to gauge the level of interest among our memberships. We've collected over 14,000, and we still get 1,000 a week, so obviously this is a very hot issue. The timing isn't great either, obviously, but I would say this would be a hot issue at any time. The fact that we don't have the strongest economy right now simply makes it that much hotter.
We also did some surveying among our members as well as some public opinion polling to see how the general public felt about this. On the credit card side, first, one issue was the rapidly increasing cost. The 30% figure that was mentioned earlier was one we heard very frequently within a very short period of time. The second one is the confusion and the lack of transparency, the proliferation of different kinds of cards, meaning a different percentage charge to the merchant. There is no way anybody can keep track of that, so you can get your bill at the end of the month and get a rude surprise. You can't run a business that way.
On the next page is a very brief summary of our survey results. It's not only the retail sector. Obviously, they're big users, but we have detailed here that every single sector of the economy is a significant user of credit cards. Here you can see all the groups—natural resources, retail, hospitality, and some of the groups you've already heard from. This is a very pervasive part of our financial payment network. You may have even heard recently that some universities have stopped accepting credit cards for transactions because they can't afford the drastic increase in fees. That's an unfortunate recent example of some institutions that aren't accepting them.
On the next page, we asked our business members which cards they do accept. Not surprisingly, the overwhelming dominance of Visa and MasterCard is very clear there. We don't have a competitive market. We know that, but that item puts some numbers on it.
The next slide is on which of the companies—the acquirers or the processors—you use for credit card processing. I might note that CFIB actually has an arrangement with Chase Paymentech, so I don't think this would represent the market writ large, but at least it gives you an idea of which of the processing companies our membership is using.
Skipping to the next slide, this is from one of our surveys of our members. We wanted to understand how difficult they believed understanding credit card fees was. As you can see, almost a quarter felt it was very difficult; another 46%, somewhat difficult; less than a third didn't find it difficult. So obviously, two thirds of the membership here are having trouble figuring out their credit card fees.
The next slide, page 10, refers to the same survey. In the federal budget earlier this year, the federal government included a proposal to improve the way banks and other financial institutions informed consumers on credit cards. We asked our members whether they thought this should be expanded to include how things are conducted with merchants. Obviously, overwhelmingly, they said yes.
The next slide is our public opinion poll. This was done of the general public. We simply asked if they would support or oppose tighter rules for the credit card industry. Again, the general public is also realizing that there's an issue here that needs to be addressed.
I'm going to speak to the recommendations very briefly because we want to leave a lot of time for questions. The first category, and you can read the bullet points underneath, shows clearly that we need enhanced oversight scrutiny of credit and the debit card industry, and we've suggested a number of ways how that could be accomplished.
The transparency and accountability is another area that's been mentioned previously, and we absolutely back that up. We have some specifics as to how we think that could be achieved.
Allowing merchants and consumers choice is another one. Merchants typically are forced to take all credit cards. They can't say they will accept this one, but they'd really rather not accept that one because it just doesn't work for their business. These contracts they sign require them to accept all cards. Again, there are some other specifics there.
Finally, the last set of recommendations refers to the debit card system. I will just support what has been said previously. We do not want to go to the U.S. model, where fees have increased astronomically. A debit transaction is not a credit transaction. There's no justification for having a percentage value of the transaction. We have a flat fee system here in Canada now that's worked extremely well. We should debate what system we want to have going forward. Do we want to continue the current system or do something different? But do not permit this percentage as a value of the transaction.
We've done a lot of work, actually, with some U.S. business associations, and it was very interesting. One comment they made to us was to not let Visa and MasterCard into debit. We were quite intrigued and even surprised by the very categorical nature of that statement.
We are very happy that your committee has opted to look into this important issue. It may be overdue, but because of a lot of things that are happening in the economy now, it really warrants a focus on it.
I'd mention too that we strongly recommend you call the individual banks before you. Having just the CBA, the Canadian Bankers Association, isn't sufficient. We think there are big players in this. They all have different strategies. We would really encourage you to do that to really get a good handle on the entire picture.
Thank you very much, and we welcome your questions.
Thank you very much, Madam Swift.
Thank you to all the witnesses for your opening remarks.
Just so all members of the committee and the witnesses understand, Mr. Rajotte is chair of the finance committee and I'm chair of the industry committee. We're holding these joint meetings. So that members of this committee understand how we will conduct ourselves here at these meetings, I'll chair this meeting and Mr. Rajotte will chair this Thursday's meeting. We'll alternate between the two of us so that we can have some clarity and efficiency here.
We'll have about two hours for questions and comments from members of this committee to the witnesses.
We use both official languages.
If you need translation, the earpieces are available to you. I believe English is on channel one, French is on channel two, and the floor feed is on channel three.
We'll begin with Mr. McTeague.
This in fact that would be an appropriate question to ask Visa and MasterCard. We certainly hope the committee will not accept the answer they usually give, which is that they don't share that kind of market information. Everyone knows the acquirers do.
The point I'm making is that a year and a half ago the premium card market represented 2% of the entire credit card market in Canada. Those were high spenders. Since then, Visa and MasterCard have changed the rules around who qualifies, but they told all industry associations that this was going to be a minor change and in fact people getting premium cards are high spenders. They're not just fun loyalty cards. They told us very clearly that you needed to qualify. To qualify does not mean that during a recession you go from 2% of Canadians who can qualify for a premium card to 35% of Canadians qualifying for a premium card.
What's fascinating is that we have a member like Giant Tiger, which caters to low-income Canadians, appear before the Senate banking committee, and they saw the use of premium cards go from 0% in March 2008 to 35% in March 2009. The point here is that it has a huge impact on business. Certainly there would be great examples.
I would encourage Brenda to talk about the impact it's had on her business in Newfoundland.
Mr. McTeague, perhaps I could answer that question as well from a grocery perspective.
In our business we've seen premium cards increase. While we've seen overall credit cards increase from approximately 6% to 10%, within that 10%, premium cards now represent over half of those purchases, and they started almost at zero.
The impact of that to those in the grocery business, which has a very thin margin of business of 1% to 2%, is that the cost associated with those is being paid by everybody. Whether you're paying with cash, debit card, or a lower-cost credit card, the increasing and constantly spiralling cost of premium cards have nowhere to go but into the cost of the food for everybody, because we can't distinguish.
Mr. McTeague, the impact is that food prices are higher for everybody.
Thank you, Mr. Chairman.
Good afternoon and welcome to all the witnesses.
First I have a few comments, and then some questions. First of all, I want to congratulate all the members of this coalition and those of the Canadian Federation of Independent Business. In fact, I believe you have sent a common message which is much easier for us to understand because you've previously worked on it and you have agreed on certain priorities.
Since we began looking into this matter, we have learned a lot, although I don't think we've learned everything. We're learning more every day about the credit card payment system, that there are issuers, among others. We knew that banks were involved, acquirers as well, which is a new term for me. With consumers and obviously the credit card companies, the merchant is doing business with a system involving five players. When you see that, you say to yourself it makes no sense that this isn't regulated.
This credit card payment system has been in existence for a number of years. However, I'm convinced that very few people in Quebec or Canada know it's not regulated. In my view, a majority of people imagine that a system as complex as this has regulations that, in some way, sets some major parameters; however, that is not the case.
The effort you are making will enable us to understand, first, that there's something nearly anarchic in this matter. You're making recommendations that I think are very interesting. The first is related to what I just said, that Canada—at least someone somewhere—should regulate the credit card payment system. Ultimately, it's always the consumer who has to pay more. Consumers are increasingly expressing their anger, which is hard to direct at someone, since they don't know who to turn to. As I'm telling you, it's a bit anarchic. They may think it's the banks that are making extreme profits; they may think it's the merchant or all the other people possible. They don't know who exactly. That's why we really have to shed some light on this point. The first step you're taking is very interesting in that sense.
In the recommendations you make, you're saying, first, that Canada must develop regulations and that they should be based, second, on what's been put in place in Australia. In Australia, have they had the time to analyze the consequences? Among other things, they reduced the interchange by a half a percentage point, I believe. Has that produced any operating results? Are there any people or institutions that have gone bankrupt because the Australian government legislated in this field?
Thank you for the question, Mr. Laforest.
Mr. Chairman, the approach that was adopted in Australia has definitely produced some results. However, on the one hand, it must be said that the studies that have been conducted to date have definitely not shown that there were negative effects on consumers or merchants.
On the other hand, if you look at some of the tables we've provided, especially at the end, there is a demonstration of the inflation-related impact: we've seen a certain reduction in inflation in the years that followed the program's introduction. However, I would say that there's not necessarily any causal relationship here. We've even seen a drop in inflation, then a subsequent rise.
In addition, we've also noticed that credit card transactions have been as frequent, and that the amounts of those transactions have risen as well.
Ultimately, that leads us to the conclusion that the introduction of regulations in Australia has made it possible to establish a framework for harmonious evolution. There has been no major decline in the use of credit cards, on the contrary. The statistics as a whole show us that there has been a gradual evolution.
Thank you, Mr. Chairman.
Thank you to our guests for coming today. I appreciate the opportunity. There are lots of questions on this side, so I'll try to go quickly.
I've never been in a retail business, so understanding what happens with your credit card is a new experience for me. I'm still not sure I understand it completely, because it is complicated.
You're here today about the merchant's cost, not what my card costs me in interest as a consumer. Is that an accurate statement? Okay. So you are charged an interchange fee every time a card is swiped in your store or restaurant. That's one issue. The other issue is the debit one. I'm going to avoid that because I don't have time for it today. Others may ask you about that.
You're telling us today you had a meeting with a credit card company. There are a number of players in the marketplace. There's the consumer. Then there's you. Then you have a deal with a payment processor acquirer, which is the middle person. Then there's the bank that actually issued the card--the issuer. Then there's the company on its own, like MasterCard. So there are really five players in the marketplace.
On the interchange rate set for you, is that an agreement between you and Visa, you and the bank, or you and the acquirer?
So was our organization, indeed.
I think it's important to note, first of all, that the retail market is a competitive market. A consumer can choose to shop in thousands of stores, eat in thousands of establishments. That's the number one comparison. With Visa and MasterCard, merchants don't have that opportunity.
Let me clarify. Visa and MasterCard set the interchange rate and also determine if other fees will be passed on. There's an assessment fee and now there's a new foreign card fee. So if I'm a merchant in Niagara Falls, Canada, all of a sudden, all of my transactions from my neighbours in the U.S. will be charged a higher fee, for whatever reason.
I think we need to clarify the interchange. The retailers do not negotiate. They don't even generally negotiate with the bank; they negotiate with the processor. The only thing they negotiate is the processing fee. Everything else is non-negotiable.
Thank you, Mr. Chair. I want to thank all the witnesses for coming out today.
Having been in the retail business, I can understand what it is. You set your cost with a fixed rate and you want to know what you're going to. As soon as that rate starts being variable, it really affects what you're going to charge and you pretty well have to raise your prices, which eventually does affect the consumer in the end. When it's variable by as many as Ms. Swift mentioned, a hundred different rates, you really don't know where to set yourself. That was one of the big concerns when this issue came up.
One of the things I find very interesting is that you talk about transparency and disclaimers. You talk about consulting. As a former president of the local chamber of commerce, when I have business coming up asking for regulation, I start to ask questions and wonder.
This is a topic that has been around for some time, and you're bringing up terms such as consulting, transparency, disclosure. Obviously, as organizations, you have dealt with the Bankers Association, the Visa and the MasterCard. What has been the major hurdle to reaching some agreement up until now? Why has there been nothing there? We try to leave it on its own, and you want to make sure that business takes care of itself, but why are you here today, and what results have you had from talks or attempts at talks to deal with issuers?
I'll just echo what Diane said earlier. We also met, and without political pressure by somebody who could inflict some pain on these companies.... There wasn't movement; there was some disclosure, but again, if you get handed a monstrosity of a handbook with all kinds of fine print and so on--and often the contracts our constituencies are signing look like this. They're very difficult to get. So you can say the information is there, but it's presented, to my mind, in a deliberately confusing way. They've only really been forthcoming since the Senate and now this committee agreed to have hearings.
On those contracts we were talking about earlier, conditions can change. It's the acquirers who are the meat in the sandwich, the middlemen. Fees can change on those contracts the merchants have signed, and if the merchants don't like it, there's usually a big fat exit fee to get out of them. This market, really, because it has no oversight--and it does have oversight in just about every country around the world, by the way--has basically had it all to themselves. There hasn't been any push-back. And you're right. We don't typically call for regulation at all, but this isn't a competitive market. We effectively have a duopoly, and they're also foreign-based multinationals, where Canada is never going to be their top priority.
We have a banking system that's very concentrated, but I think it's advantageous that those are Canadian banks because at least they do have some stake in what happens in the Canadian economy.
So I think for all of those reasons, yes, it's atypical, perhaps, for us to be calling for...whether it's regulation, whether it's better oversight. We're recommending maybe an agency somewhere. In Australia it happens to be the central bank that is tasked with overseeing. It could be the Bank of Canada. They've already done some research on this issue. So it could be the FCAC, potentially, as well, but in any event, some regular reporting is required on these companies.
In our sector, since credit cards are really the way we operate, we tried to meet with the Visa people, but through our acquirer. We wanted to explain to them that, in the current situation, our entire operating method was affected and that this represented thousands of dollars in costs. Those people were very polite, but it was very brief. The whole thing led to a dead end. The message boils down to this: there are costs, increases, and we have to bear them. No discussion was possible.
In our sector, a number of associations or brands have agreements. We can't determine how one establishment whose sales are higher than those of another can have higher costs. We're trying to link that to the type of transaction, but we can't really establish a framework that enables us to understand the principle. We also find it hard to understand why, for a $150 hotel transaction, it can cost as much as 60¢ more for a premium card than an individual card. There's no loan. It's the same amount and the same type of transaction. There's no more handling. You don't swipe the card twice. However, there are fees, and these people have no explanation for us on that subject. We can only accept the situation. It's hard for us to pass the cost onto consumers. Indeed, as a result of the economic crisis, tight competition among hotels is making us lower prices. This summer, the situation will be tough for the tourism industry. We won't be able to increase rates indefinitely.
Thank you, Mr. Chairman.
I also want to thank the witnesses who are before us today. We're dealing with an important question. Everyone, at least most Canadians, has a credit card, I imagine. I would like to understand a little about the problem, since you're asking us to make regulations.
You know that I prefer deregulation to regulation. The issues really have to be important for it to be necessary to impose regulations, especially in the case of business people, as was said earlier. Business people usually don't want to have the government on their backs. However, you're asking us to intervene. In my opinion, something must have been causing a problem for years for all the businesses you represent.
In terms of regulation, one of the solutions you're proposing is transparency, no one can be opposed to transparency. I have here the recommendations of the Canadian Federation of Independent Business on the subject. I'm sure you're in favour of them.
Furthermore, you're telling me about the Australian model, and I would like to know a little more about that matter. I believe the regulation there goes beyond mere transparency. They regulate the fees and costs that credit card issuers apply. So we're starting to talk here about price-setting by the government. That's the proposition you seem to prefer.
In short, I would like to be given a little more detail on the Australian model and have it explained to me why we should adopt it. With respect to the recommendations on transparency, I've read them. I entirely agree with you on that point.
My questions are for all the witnesses. Who wants to answer?
Thank you, Mr. Chairman.
I believe we've quite clearly demonstrated that, in the current context, we have no bargaining power. In a situation of healthy competition—and I use the word “healthy” because it's important in the present circumstances—parties can negotiate and market forces can operate. However, no one around this table could claim that we are in a situation of healthy competition, and thus that market forces can operate.
When we have an adhesion contract, it means something, in civil law back home. That implies that there is a contract and that you sign. That's the only law we have. You have to meet obligations. Otherwise, the card can be withdrawn. We're telling you clearly that our consumers and we ourselves consider that the use of credit cards has value. We respect that fact. We know the extent to which this payment method is used.
Regulation would help create a framework within which businesses wishing to compete with the financial institutions could continue to do so. However, as regards the interchange fees, there would be assurances that they are indeed costs related to those products, and not percentages that ultimately can have an inflationary effect. I'm going to give you an example. Gasoline prices substantially increased last year. They moved up from 80¢ to $1.48 a litre. However, the convenience store that sells gasoline receives 2¢ or 3¢ per litre sold, regardless of the value of the litre, but the cost of the transaction by credit card, which he must bear, is based on the value of the transaction. When that convenience store sells 50 litres of gas at 50¢ a litre to a consumer, the consumer pays it $25. Multiply that amount by 2% and you get 50¢. However, if the price per litre climbs to $1.50, the convenience store stills receives only 2¢ per litre sold and has to pay $1.50 in fees. That's a big increase.
You absolutely have to understand that our businesses want to continue using credit cards, but that that will have to be done in a context where it is possible to apply regulations so as to ensure that the costs paid are used in calculating the interchange fee. We haven't talked about debit cards, a very important issue.
Yes. Our pie chart on page 10 shows the number who believe that the federal government expanding an approach.... By the way, we're not necessarily recommending regulation. We wonder if a proper process to just have a reporting relationship.... It doesn't have to be regulation per se. We're not saying that's necessarily the way to go. We do think we have to properly understand what's going on here. We believe the credit card companies and others have gone out of their way to confuse what's going on here. We're starting to get to the bottom of it, which is good, and we're understanding a lot more. They're not very comfortable with that, which speaks volumes to me. The federal government did include this proviso about consumers in the last budget, and we really felt that we wanted to expand that to merchants.
We did, however, also ask our members--and it doesn't happen to be in this presentation, but we can get it to you--virtually the same question we asked the general public, which is shown on page 11, and the responses were virtually identical.
So, yes, you're right, our constituencies are not typically ones that say “regulate, regulate” for anybody. Back in the early nineties, some of you may recall, we actually put out a call regarding chartered banks because small and medium-sized firms were being treated very badly. By the way, to their credit, they're not doing as much of the same bad stuff this recession. We actually asked the industry committee to have the banks come before them on a regular basis and--you know what?--just that requirement meant better data, better understanding of what they were doing, and better practices by the banks.
There don't necessarily have to be hard and fast rules.
I agree with that. I remember those days, and I was part of that survey as well.
The point is, though, I also remember a time when the credit we wrote off was a whole lot higher than it is today. I think we have to recognize that too, that credit cards have removed a portion of risk in business. As well as that, they've made things a whole lot easier.
If the majority of the public wants us to do this thing, obviously governments will act, but I think we need to dig a little bit deeper. I feel there are some things that we are not....
My final statement would be that it's somewhat akin to having me pave my stone driveway because the neighbour's kid is throwing stones through my window. Isn't the real problem the fact that Canadians are addicted to credit and we have huge credit debt? As a result, the credit card companies have to protect themselves, and this is one of the ways they're protecting themselves.
Yes, I'd like to add to the question.
I'm a bit concerned that we're talking about transparency here, believing that it is going to solve all the problem. While our banks are indeed chartered Canadian banks, Visa and MasterCard are not Canadian companies, and in fact have made an art form of ensuring that even if you think you are getting transparency, you're not.
Let's be clear: they represent 94% of the market. They are, in fact, controlling the market. They do understand and promote the use of credit cards in establishments, so it's extremely difficult to walk away from this, or to assume that you can invite Visa and MasterCard before the committee on a regular basis so they can behave.
At the end of the day, they are charging, and will continue to charge, unless there are regulations in place.
I just wanted to get back to the first issue you raised there, about cash discounts and all that.
There's also a practice that's referred to as “surcharging”, which is when you use a Visa or whatever, it's another 1.5% on top of your bill. That currently is not permitted, but interestingly, it has been in some other markets. It has been in Australia, for example—we keep bringing up that example—and interestingly enough, it didn't really work because merchants didn't want do it because they were seen as the bad guys by the consumer. Even if that's proposed to you as some kind of mollifying measure, don't buy into it that easily, because, as I said, experience we've seen has not suggested that that was good.
About the competition issue, I think what's important is that we need collectively to define, for Canada, the terms of debit in Canada. What is the best model for us? Yes, competition is good, but what we've seen if we're looking at what happens in other nations with Visa and MasterCard is this. In the U.S., it was very different. They never had a national debit system like we have. So Visa could come in and offer a national system, whereas that is not applicable to the Canadian model.
That's where we need to do our fact-finding, find out what's best for Canada. We may well say, sure, let her rip, but you can't go to the ad valorem pricing. Certain terms have to apply.
First of all, allow me to say thank you to all of you for appearing here today. It takes a lot of time and attention away from other matters, and I certainly appreciate it. I thank you, as well, Ms. O'Reilly, for coming all the way from St. John's, Newfoundland, to visit us today. Thank you very much. I know the time and attention is important, and thank you for all your briefing notes.
I also want to compliment you on bringing so many industry organizations together on this very important issue. It shows the magnitude of the difficulty you are having in this particular issue, and I appreciate that. Because it did raise all kinds of red flags—I know when industry associations try to bring together a diverse group, it certainly is important.
I have a lot of questions and I want to try to take them systematically, but sometimes it won't make sense until the end of it.
First of all, I think in my notes I understand that interchange fees in Canada are higher than in other countries, leaving out Australia, because we know why they're lower in Australia. Am I to understand they're higher than in the United States, and can someone offer an answer as to why that would be the case?
Thank you all for coming in today.
I'm trying to understand this model. It reminds me of the voyage that Dan McTeague and I took through gasoline pricing and the Competition Act.
It's three for three here, Dan.
We do have a model, and the researchers have very helpfully identified the relationships among the merchant, the payment processer or the credit card company, the card issuer, and the cardholder.
I think where Ms. Coady was going next was the difference between the merchant discount rate and the interchange rate cost. If we can get someone to just identify.... What proportion of the merchant discount rate typically is the interchange rate? I think that's where she was going.
Madam Brisebois, do you want to answer that?
All right. I'll try to go quickly. Thank you, Mr. Co-Chair.
Good afternoon, ladies and gentlemen.
Listening to you, I think we were right to ask that some special meetings of our committee be devoted to the study of this problem. Unlike my colleague opposite, Mr. Bernier, I believe that you are here because you need regulation. Otherwise, we wouldn't be talking about it, and everyone would be happy.
At some point, I think we have to establish some order. I find it unacceptable that you are at the mercy of third parties who determine the rate they charge, in addition to offering promotional aspects, to make more profits for themselves. If we want to retain our small businesses, which are so effective, I think the government has to shoulder its responsibilities.
The Retail Council of Canada people presented a document to us in which they referred us to the Australian model. I see that as a benchmark. However, I wonder about that. An interchange rate topped out at 0.5% seems very low to me relative to the rate we previously had, which was predictable. Earlier Ms. O'Reilly mentioned that a rate of 1.5% might perhaps be acceptable. But I think that, in your recommendations, you asked us to analyze the matter and to determine the rate. If I understand correctly, your objective is to establish a fixed rate based on the actual costs upon analysis. Is that correct?
Thank you, Mr. Chairman.
Thanks as well for being here this afternoon.
Unless I'm mistaken, you're presenting a problem that affects a lot of businesses and also concerns consumers.
Like my colleague, I'm open to government regulation. I understand that regulation could be quantitative. Consequently, there would be a transaction cost, an interchange rate and a form of regulation respecting increases, which would provide some transparency.
Am I mistaken or would you prefer a general framework? When we have to develop regulations, an act has to be passed, and that act sets either the “quantity”, if I may use that term, or a general framework.
I'd like to hear what you have to say on either of those cases. What should that legislation include?
Thank you for the question, Mr. Bouchard.
Mr. Chairman, the important thing here is the objective, and that is to ensure that we have a framework, whether it be by regulatory or legislative means or through a specific agency that would monitor the establishment and charging of costs.
We're talking about regulating. So we would like to ensure that some kind of agency establishing the eligible costs that will in fact determine what are called the interchange rates.
In that sense, I refer you to page 15 of our brief, where we put forward a proposal which is in fact being implemented in Australia. It concerns the determination of eligible costs in developing the process. On page 15 of the brief that you received from the Coalition québécoise, we provide a description of section 13. That's the section that in fact talks about the costs of credit card issuers, mainly the costs associated with the transaction processes, the costs associated with all aspects relating to fraud and fraud prevention, costs mainly associated with credit card transaction authorizations and, lastly, costs incurred in funding the interest-free period between the transaction and payment by the consumer.
We find this element very acceptable, although it's not necessarily the final solution. Nevertheless, the model should help to further your thinking.
About a month ago we heard from Conquest. It had had 37 years in business; numerous people were laid off, lost their jobs. I'd like to get their statement correct, but I believe it was citing “unrealistic and unreasonable demands by credit card companies” as having put a business, a Canadian business that was around for 37 years, out of business.
Now we have Air Canada looking at CCA protection. We talked earlier, in my very first round of questioning, about 97%.... We're looking at small and medium-sized businesses across our country. If Conquest had to lay off people, what's happening now to small businesses, in an economic downturn, when their profits are being pulled away? I haven't heard of any layoffs at Visa or MasterCard. Maybe I'll ask them that question.
Can you tell me what's happening now to small and medium-sized businesses that are trying to stay afloat and are losing their profits, when they're even reducing their profit margins to stay afloat? How are they staying alive? Are they laying off people? Are they stopping expansion? Are they taking less themselves?
I want to start by saying that I definitely have some sympathy for what you're talking about here today. It seems that there's a real concern about a lack of competition and a lack of transparency. Some of those concerns seem quite valid.
I'm also concerned, as Mr. Bernier expressed earlier, about regulation. We need to be very careful when we start talking about regulation. There are often, with government regulations, unforeseen consequences. It can be a slippery slope once you start moving.
I noted the difference between the recommendations. The biggest difference seems to be that the coalition group over there is focusing a little bit on price regulation, whereas CFIB, I noted, does not have a recommendation for price regulation. There's a recommendation for other forms of regulation.
Mr. Thibeault, in his first round of questioning, used the phrase “one step forward” when he talked about this regulation, implying, of course, that there are other steps to come. Once we go down here, who knows? We might go after that.
I would be interested, Madam Brisebois, if you could talk about your organization's or perhaps the whole coalition's stance, for example, on regulating gas prices, regulating grocery prices, labour prices--a national minimum wage and things like that. I'd be particularly interested in, for example, regulating the rate on retail credit cards. They have the highest rates of interest paid. I'm curious to hear your thoughts on whether that should be the next step in terms of price regulation.
Thank you for this question. I think we need to clarify something.
This coalition is not asking for price fixing or for price caps. We are in fact asking for regulations for oversight for transparency and accountability. Since merchants cannot compete in a market where Visa and MasterCard own 95% of the credit card market, there should be a system in place to ensure that whatever they're charged has a correlation with the service that's provided. I think that's different.
In relation to other markets, I would suggest that that is in fact the reason you're not getting calls to regulate. If you're looking at the retail market, it is the best example. If I want to buy organic eggs, I have a thousand places I can go to buy organic eggs and I can make the decision based on the value I receive and how much I should be paying. If I'm not prepared to pay that price, I have a choice. I can go somewhere else.
That is in fact the big difference, Mr. Lake. In this case you have two companies that own 94% of the market and who indeed set the prices. In fact, what we're saying is we may need, strangely enough, regulation and oversight to ensure that they stop setting those prices or those fees in a way that makes this business non-competitive.
As I said before, I have sympathy for the situation right now. I would think there are several ways we can solve this problem. Of course, the government can get involved in terms of regulating prices, as has been suggested, or it can get involved in terms of changing the rules in some other areas to do with competition, transparency.
Alternatively, of course, the parties involved can solve it themselves, which sounds like that's been a hard road so far. I'm sure Visa and MasterCard have some people watching on TV or maybe even in the room here as we have this discussion. I would caution them probably not to come to the committee and say there's no problem whatsoever. I don't know that there would be much appetite on the part of anyone at the table to hear that there's no problem. I think we recognize there's a problem. I want to hear from them what ideas they have for solving the problem.
If I could, I'll just turn to the CFIB and give you a chance to respond. You haven't talked about price regulation. Maybe you could explain why you haven't talked about that, and maybe you can elaborate a little bit more on the ways you have thought about to solve the problem. Perhaps there's been thought given to working with the other parties outside of government to see if there's some resolution to this.
Thank you for your question, Mr. Vincent.
It must be acknowledged that, currently, Canada definitely has the best debit card system we can hope for. The system works very well and is based on costs.
The entry of MasterCard and Visa into that market will create a situation that cannot be justified in any way. We know what happened in the United States, where a very different system is used, a mixture of direct costs and a percentage of transactions. In our minds, it's important to retain what works well and to ensure that all businesses that want to enter this market do so under similar conditions. We must ensure we do not go to an ad valorem system, which is not warranted, as is the case in the United States. We should at least allow Visa and MasterCard to enter the market on a direct cost basis.
If that were the case, some form of regulation would clearly be necessary. That's essential in our minds. If we move toward the current American method, I assure you that costs will rise in an unwarranted manner. Despite the fact that we're aware Interac will have to compete with those businesses in one way or another, the fact remains that we'll have to regulate the framework within which that competition occurs. Otherwise, honestly, our system will take a hit.