Thank you, Mr. Chairman.
Good afternoon, everyone.
This is a very important opportunity for MasterCard, so we thank the joint committee for inviting us.
We thank you for the opportunity to be heard before this committee. Through our discussions on this topic, we have realized that the value of the payments industry and its economic impact is largely misunderstood. We have also realized that the likely negative impact of proposed price controls to consumers has been ignored.
In Canada, MasterCard and other electronic payment providers facilitate over half a trillion dollars of commerce flawlessly each year. They operate in a highly competitive environment that offers a host of payment alternatives to merchants and consumers.
We believe Canada's current regulatory framework safeguards the interests of all participants and that direct regulatory price controls will suppress innovation, reduce competition, and harm consumers.
MasterCard believes that government promotion of market forces over monopoly in Canada's debit system will ensure that consumers and merchants benefit from choice, price competition, innovation, and international reach.
Finally, we believe that Canada's credit card systems are well balanced and managed to maximize their value to merchants, cardholders, and the Canadian economy as a whole. However, there is always room for improvement. Through this process we have identified specific market responses that would address merchant concerns without harming consumers.
Retail lobbyists are advocating for price controls that have hurt consumers elsewhere. MasterCard believes that it is time for consumers to understand the harm that has happened in Australia when that country introduced the kind of price controls now being advocated by the global retail lobby represented in Canada by the Retail Council.
When the Reserve Bank of Australia adopted price controls in 2003, it expected that the savings would be passed on to consumers in the form of lower prices. But nearly six years later, there is no evidence that prices came down.
Price controls did reduce interchange revenues to credit card issuers, but that, in turn, forced reductions in credit card features and benefits. Interest rates, which had been subsidized by interchange revenue streams before the RBA price controls, had to be increased for issuers to operate their credit card portfolios within prudent banking guidelines. For similar reasons, grace periods had to be shortened.
RBA price controls reduced competition. Under the new economics, only issuers with sufficient scale could operate profitably, leaving niche providers and new entrants with no choice but to vacate the field. This is an important consideration in Canada, where new entrants and innovative issuers have led to unparalleled price and feature competition. The RBA price controls did not apply to American Express. This was inexplicable, as it transferred considerable advantage to the most expensive merchant proposition in Australia. In fact, we believe that a fulsome review of credit and debit cards in Canada must include American Express.
Government interchange regulation is not the standard elsewhere in the world. Australia is the only country even remotely comparable to Canada that has regulated interchange. It has been a disaster for consumers and a textbook example of unintended consequences.
Now I'd like to address some of the commentary about our entry into the debit arena in Canada. The same special interest groups that seek to impose price controls that will harm consumers are asking the government to suppress competition in debit.
MasterCard's debit proposition in Canada is called Maestro. Maestro is a PIN-based, real-time debit offering that works just like Interac. However, Maestro delivers more value to consumers and merchants than Interac through enhanced security, greater network reliability, and international reach.
For the record, and to officially clear up any confusion on this point, Maestro has a flat fee to merchants, and that flat fee is substantially lower than Interac's. MasterCard sees an opportunity to engender merchant demand and loyalty by offering a lower-cost, more reliable, and more valuable debit product in Canada. When Interac raised its fees by 60% this February, MasterCard chose not to. That's one of the benefits of competition.
MasterCard operates in a highly competitive environment and works hard to earn merchant and consumer loyalty as they consider the payment alternatives available to them. These include cash, cheque, Interac, Visa, American Express, retail store cards, pre-authorized debit, and most recently, unregulated web-based payments like PayPal.
Allegations of duopoly are untrue and ignore the high degree of competition in Canadian payments. That competition requires MasterCard and its financial institution customers to labour to retain and increase acceptance and usage by providing compelling and tangible benefits to both merchants and consumers. As a result, while neither consumers nor merchants are required to use or accept MasterCard, an increasing number choose to do so.
For merchants, these benefits include a payment guarantee, increased sales, improved efficiency, increased safety, billions of dollars in infrastructure investment, innovation, speedier check-out, and easy access to international customers. For merchants who prefer the cost structure of cash but want to reap the benefits of accepting credit cards, MasterCard has always allowed merchants to offer and advertise discounts for cash.
For small businesses in particular, the MasterCard system helps level the playing field. It provides lower rates than would likely result from one-on-one negotiations for access to the purchasing power of credit card holders, and an intra-system competition that allows them to shop around for the best merchant processing deal. These efficiencies are further enhanced by the collective credit card acceptance arrangements offered by merchant associations.
For consumers, increased usage is earned through zero liability, global acceptance, grace periods, intra-system competition, chargeback protection, and the very rewards and benefits that are threatened by the price controls proposed by the retail lobby.
Interchange is determined by MasterCard—not by issuers or acquirers. Interchange makes up a part of the fee paid by a merchant for card acceptance, but ultimately that price is determined by negotiations with their acquirer. Interchange is not MasterCard revenue, and consumers most certainly do not pay interchange more than they pay any other operational fees directly.
MasterCard continuously assesses the value that it delivers to merchants and, in that context, recently reduced interchange in several merchant categories. We also determined that we were at a disadvantage among affluent, rewards-driven cardholders, with American Express and Visa having the majority. For that reason, we introduced premium card programs that represent about 5% of our cardholders, while still being priced lower than American Express.
Finally, to make MasterCard more competitive in the small-purchase category, we dropped rates to compete with cash and debit by eliminating minimum fees.
Overall we moved from three rates to nineteen. Our highest interchange rate went from 2% to 2.13%, and our lowest effective interchange rate was reduced from 1.45% to 1.21%. All these adjustments were the first in seven years, and our rates remain below those of other developed markets and often well below flat-fee equivalents like that of Interac.
At heart, this issue involves a commercial dispute in the private sector. It is unfortunate that lobbyists called for government regulation as a matter of first instance, before providing any recommendations directly to MasterCard. When the RCC and CFIB launched their campaigns in September, I personally invited both organizations to meet with us to discuss their concerns on the very same day. When we met with the CFIB, we had a frank discussion, but they made no specific requests. However, they have since made several recommendations to the Senate banking committee, and many of them are in areas where we can work together.
Since then, we have met with the CFIB and put forth specific proposals that address small-merchant concerns without harming consumers. We have reiterated our invitation to the RCC, and they have confirmed their availability for a meeting in June.
MasterCard believes Canada's current regulatory framework is sufficiently robust to ensure competition in payments, and that price controls will result in consumer harm. We also believe the system always benefits from greater transparency and education. In that respect, MasterCard recognizes that we have a role to play. We pioneered web-based disclosure of our interchange rates and have recently improved this program by providing customized reports to merchants that enable them to shop around for the best acquirer deal. We are currently developing model disclosures, merchant education materials, and an online cost-benefit calculator designed to help merchants understand whether credit cards deliver sufficient benefit to them to outweigh their cost.
We believe that Canada has one of the strongest financial systems in the world. Credit cards are an important part of that system, providing one of the few credit delivery mechanisms that remains reliable, despite the current economic crisis. We understand that this system is simple on its surface, allowing you to exercise your purchasing power across the street and around the world. But that simplicity is underpinned by a sophisticated infrastructure that requires continuous investment, innovation, and balance.
Therefore, we thank you for the opportunity to participate in this process. I look forward to your questions.
Merci. Thank you.
Good morning to all of our witnesses.
Last Tuesday, at a joint meeting, the Standing Committee on Finance and the Standing Committee on Industry, Science and Technology heard from witnesses who represent an array of retailers and merchants' associations from across Canada and Quebec, including the Retail Council of Canada, and several coalitions of merchants and various groups.
These groups made presentations to the committee. They also made three recommendations, one of which was the importance of legislating in the credit card industry; it is important for the government to start regulating the credit card system. A second recommendation dealt with regulating for greater transparency among the various stakeholders that make up the credit card system.
I asked these associations and coalitions if they themselves had approached banks, Visa, MasterCard, issuers, and others concerned, directly to call for greater transparency. They replied that, indeed, requests had been made. Yet, when we asked them what you replied to them, they told us that you had not. In fact, the representative from the Retail Council of Canada told us that they were quite taken aback. Each year, the Retail Council of Canada holds three meetings, to which you are invited. When the last meeting occurred in September, MasterCard decided not to attend. This is what the representative told us.
Apparently, you had told them that there were problems with software that prevented you from answering their questions. Yet, in a letter sent to the chair of this committee, you claim that you are willing to discuss issues of common interest at least once a year. Since there currently are issues of common interest, why did you not attend the meeting?
On the one hand, there are associations that represent some 250,000 merchants; on the other hand, there is you. Who should we believe? You and your document, or the people who speak on behalf of 250,000 merchants and even more employees?
What degree of transparency are you willing to demonstrate, when merchants are claiming that they are totally unaware of why they are paying higher interchange fees and other fees they are forced to assume?
First let me provide some background on Visa.
Visa's fundamental role is to facilitate financial transactions between consumers and businesses. We are not a bank or a financial institution. We do not issue cards, make loans, or set rates and fees associated with card usage or acceptance. That's the domain of the Visa financial institution clients. Instead, think of Visa as a network for commerce.
In facilitating transactions, Visa connects 1.7 billion cards to 30 million merchants in 16,600 banks worldwide securely and reliably every second of every day. In making these connections, Visa creates value for all of the systems' participants. Cardholders receive a more convenient, secure, and widely accepted way to make payments. Retailers benefit from the speed, efficiency, reliability, and guaranteed payment that only electronic payments can bring. They also have the ability to take payment from any Visa cardholder regardless of their home country.
Today Visa operates in a highly competitive environment. There is robust competition between the payment types and various local and global networks well beyond credit cards. We also compete with an array of existing and emerging competitors, including cash, cheque, pre-authorized debits, Interac, retail-issued credit, PayPal, and higher-cost competitors such as American Express.
Retailers have also benefited greatly from billions of dollars in infrastructure investment that has increased security on business transactions. Other benefits to merchants include guaranteed payment, innovations like contactless cards that speed transactions, and improved access to international customers. Small businesses in particular benefit from the Visa system, in that they can compete on a more level playing field with large retailers. Small businesses can also dedicate their capital toward their businesses, as opposed to having to dedicate capital toward payment products.
Consumers benefit from payment choices such as credit or prepaid, the convenience of fast checkout, global acceptance, rewards, 24-hour customer service, and enhanced security protections such as zero liability and purchase protection. Consumers can obtain cards from financial institutions that meet their needs--from small local credit unions or large multinational banks--with the assurance that every Visa card will afford them the same security, protection, and access to global acceptance regardless of who issued it.
Visa uses a mechanism called interchange to maximize the benefits of the system, encourage participation in innovation, and ensure that the economics are appropriately balanced. Interchange makes the system run. It's the small amount of money retailers pay a cardholder's bank for every transaction. In part, interchange compensates the cardholder's bank for the value they provide to merchants and acquirers, and it motivates the cardholder bank to bring cardholders into the system. By helping balance the economics of the system, interchange is an effective incentive for banks to participate. It encourages investments in innovations that deliver consumer benefits like new products, rewards, and enhancements, while encouraging merchants to accept cards.
Visa's interest in setting interchange fees is to maintain the balance of the system. If interchange rates are set too high, merchants will stop accepting cards. If interchange rates are set too low, issuers will go uncompensated for the value they deliver to their cardholders, and the features that attract cardholders will be diminished. This in turn reduces cardholder participation and the value of Visa to merchants.
When setting rates, Visa considers a host of factors and sets rates to help promote overall system growth and growth in specific payment segments, and to reflect the value delivered to retailers and cardholders by payment type.
With that context in place, I'd like to address a few points about interchange and acceptance costs.
First, interchange is not the price a retailer pays to accept electronic payments. Retailers pay a merchant discount, and that rate is set by their acquiring bank or payment processor.
Importantly, interchange is not a Visa revenue stream. Visa's only goal is to set rates that maximize system participation from banks, cardholders, and merchants. Interchange rates paid by acquirers may vary based on type of card used, type of transaction, or type of retailer.
In 2008, Visa Canada introduced a change to its interchange structure that resulted in some transactions attracting a higher interchange rate and others attracting a lower rate. This was the first fundamental change we introduced to our rate structure in Canada in 30 years, and we provided more than a year's notice to our clients.
The overall effect of the change was neutral for the system, and Visa Canada's effective interchange rate has remained relatively flat for some time, at approximately 1.6%. Interchange rates in Canada are fully transparent and available on our website.
Some retailers argue that government intervention of interchange is needed. Visa believes that these attempts are not only wrong but are also harmful to consumers and other system participants, as I'm sure we'll discuss. The regulatory intervention sought by the retail lobby would unfairly pass merchant business expenses on to consumers. Such government intervention would result in fewer payment choices, a reduction in benefits for consumers, and possibly higher costs for consumers in their monthly statements or at the checkout counter.
This scenario has been tested in Australia, with harmful and unintended consequences for all parties. In Australia, where caps on interchange yields were imposed with the intention that the price of goods would go down, consumers have not seen the savings. What they have seen are fewer rewards and other benefits from their payment cards, along with the higher costs associated with surcharging at the checkout counter.
In addition, issuance of American Express cards increased because American Express was not subject to the same regulation as Visa and MasterCard. Not only did this create an unlevel playing field between American Express, Visa, and MasterCard, but ironically it resulted in more higher-cost American Express cards being used for payment at retailers. Government intervention in interchange is not the standard elsewhere in the world and should not be so in Canada.
As Bill discussed, interchange fosters competition and innovation. When it comes to debit, there is currently no competition in Canada, and without interchange, financial institutions have little incentive to invest in the system. The debit product offered today has served us well in some ways, but the dynamics of the global and Canadian payment landscapes are changing, as are the demands of the Canadian consumer.
The Visa debit card builds on the utility currently offered, and like today's bank card, it will be issued by a financial institution. It will allow you to withdraw money from a bank account at an ABM and buy goods at points-of-sale in Canada. But unlike today's bank card, Visa debit also allows you to use your debit card when shopping online, by telephone, or mail-order, or when travelling internationally.
I think it's also important to stress how the concept of choice applies to Visa debit in Canada. A competitive debit product that offers features and functionality not currently available in Canada will succeed because financial institutions see value in issuing cards, cardholders want to use it, and retailers choose to accept it.
Merchant groups campaigning for the regulation of interchange and against the introduction of an alternative debit product want to reduce their business costs. We respect the desire of any business to manage their expenses, but we do not believe that government intervention is the right solution in a functioning industry. Visa believes that the best way to balance the interests of merchants and consumers is to provide them with an array of payment options in an open and competitive market.
Ultimately we believe you are being asked to regulate what is fundamentally a business-to-business matter, and government intervention is inappropriate for this purpose. We recognize the importance of engaging with merchants and merchant associations, and over the past year we have made changes to the way we operate our business in Canada that have addressed many of the concerns highlighted by merchants.
We have heard the calls for disclosure and believe that Visa provides transparency through the publishing of our interchange rates and our operating regulations on our website. We have met with and continue to meet with the CFIB, the RCC, trade associations, and hundreds of individual retailers—both large and small—to help them understand our system and the value it provides, and to help them more effectively manage their costs of accepting payments.
We have also heard retailers' feedback regarding choice. In recognition of the unique environment in Canada, we have changed our rules so that retailers can choose not to accept Visa debit without impacting their acceptance of other Visa products, such as Visa credit.
Our interchange rates for Visa debit were reduced last year to reflect market feedback. They are now about half of what they would have been previously, and about one-fifth of our current rates on our credit products. The Visa debit rates also now include a fixed component, which Canadian retailers are accustomed to, and a reduced variable component that is less than one quarter of one percent.
I would also like to highlight that the financial institutions on either side of a Visa transaction are already subject to oversight, either federally or provincially. In addition, Visa itself is subject to the provisions of Canada's Competition Act. The Competition Act has recently been bolstered by a number of amendments that will enhance and strengthen the protection offered by competition law in Canada. The overall trend in Canada has been toward more deregulation of industries, with competition law increasingly recognized as the appropriate protector of both consumers and businesses.
Thank you. We are now happy to answer any questions you might have.
Thank you, Mr. Chair, and welcome, gentlemen.
Our government understands the importance of small business to our economy. We understand that most merchants are small businesses. For example, that's one of the reasons we decreased the GST by 2%, which had a big benefit to retailers across Canada.
I certainly want to acknowledge the important role that Visa and MasterCard, and other credit card payment mechanisms, provide to enhancing the business and consumer spending, and therefore the success of merchants. We also acknowledge that consumer spending is a big part of the success of our economy. Of course, we want to do everything we can to encourage consumer spending to help bring us out of the current economic situation.
Having said that, I have some questions for you about your request to enter the debit market, and also some questions on the credit card side.
We heard from the Retail Council of Canada and the CFIB that the lowest-cost payment form that their members have access to is the debit payment mechanism. They showed us some statistics to show that. They also gave us some statistics on the percentage of consumers who have availability of using the Interac system and the debit system in Canada. Will the percentage of Canadian consumers who have access to debit increase if your company and, for example, MasterCard are allowed to enter this market? That's one question.
What will the effect of the entry of your company into this market be on the cost of transactions to merchants? We heard from MasterCard just a few minutes ago, and they told us their proposition for debit is a flat fee and lower than Interac rates. Is that your model as well?
The fourth question on this is, why would the retailers not want to have you enter the debit market if by entering the market you gave access to more consumers to the debit system, which is a lower-cost form of payment for them?
I just received information here from my researchers, as well. The MasterCard interchange rate is not as public as stated. In fact, it requires you to fill in an e-mail. For those interested in learning, it'll take several weeks for it to get back to you. I'm very concerned about that.
And on the issue of transparency, while it was nice and refreshing to see you have those made very public, the reality for most merchants is that they have no idea what those rates mean when that card is presented. I believe all of our colleagues here have talked about this. This is part of the frustration.
Visa happens to be not simply an important player, it happens to be, for many people, the player as far as credit cards are concerned. I appreciate your comments about Amex, but I have a feeling that Visa is infinitely bigger. It has a substantial chunk of the market. And therefore, in many respects, you're the leader.
Mr. Sheedy, earlier in discussions, with reference to the question by Mr. McKay, you had suggested that credit is sometimes more competitive than cash, and of course, you had suggested as well, arrangements. I have a discussion paper, “Merchant Acceptance, Costs, and Perceptions of Retail Payments: A Canadian Survey”, from December 12. On a $36.50 transaction, the cost to the merchant is 25¢ for cash, 19¢ for debit, and at that time 82¢ for credit. I'll leave you to look at that. I realize this is a lot to provide, but I thought that was a rather startling comment by you, given the facts of the Bank of Canada.
I want to ask a question. Visa Inc. is your parent company. Is that correct?