Good afternoon, everybody.
Good afternoon, everyone. Welcome to the joint meeting of the Standing Committee on Industry, Science and Technology and the Standing Committee on Finance.
I am here with my co-chair, , who is the chair of the House of Commons Standing Committee on Finance. My name is Michael Chong, and I am the chair of the Standing Committee on Industry, Science and Technology.
Pursuant to Standing Order 108(2), we are studying credit card interchange fees and the debit payment system in Canada.
Today I am pleased to welcome two representatives of UseMyBank Services, Mr. Brian Crozier, co-founder of UseMyBank Services, responsible for global business development; and Mr. Joseph Iuso, who is the chief executive officer and also a co-founder of UseMyBank Services.
We're also pleased to welcome, from Moneris Solutions, Mr. Jim Baumgartner, president and chief executive officer; and Ms. Fern Glowinsky, senior vice-president, general counsel, and corporate secretary.
From TD Merchant Services, we're also pleased to welcome Mr. Jeff van Duynhoven, who is the president of that company.
Welcome to all.
You now have a chance to provide some opening remarks. We'll begin with UseMyBank Services.
We'd like to thank the committee for the opportunity to present our view, as a Canadian online payment service provider, of the online electronic transactions business in Canada.
My name is Brian Crozier. I'm in global business development for UseMyBank Services in Toronto. I've been in the online payment processing business for over 12 years. My business partner and CEO of UseMyBank, Joseph Iuso, has worked for major Canadian banks for over 20 years. Joseph has extensive knowledge of the technical capabilities of the Canadian banking system, as well as all aspects of security, transaction processing, the self-service arena of ATM POS terminals, as well as telephone and Internet banking.
UseMyBank is a Canadian online bank service provider for online merchants and billers. Our core technology provides an easy way for online merchants to transact in real time with their customers using online banking.
Consumers who use a merchant's online checkout may choose their online bank and make a purchase or pay a bill in real time. We launched our service in 2002 and have processed millions of transactions for Canadians, with a good funds rate of 99.99999%.
UseMyBank pioneered online payments several years ahead of the Canadian banking institutions. We were able to accomplish this by leveraging the existing online banking systems to perform real-time payments. We have since expanded our service to hundreds of banks across 10 countries. This real-world experience gives us at UseMyBank a global view of the best online payment practices, which we can share with committee members.
The business of making payments in Canada is largely controlled by a handful of financial institutions. Many believe this constitutes a monopoly that stifles competition, which is the very lifeblood of Canadian business. E-commerce is an important and growing part of the payment industry in Canada. Payments to online merchants and billers are now in the tens of billions of dollars, and many merchants and consumers would like to see more available choices when making these online payments.
There is very little competition in the Canadian payments market. There is a tradition of in-house sales of merchant services, with the largest payment processor, Moneris Solutions, being owned by two of the largest banks. Paymentech and Global Payment Systems have taken over the rest of the market where mergers were not allowed. So it's not difficult to understand why new independent businesses face an uphill battle to offer service.
Interac, Canada's near-monopoly debit network, as well as Visa and MasterCard, are in the business of processing online payments. We believe it's in our country's best interest to offer consumers a choice by having as many suppliers of online payment services in Canada as possible, thus ensuring the quality of service as well as fair market prices.
Since 1989, retailers in Canada have been accepting debit payments at point of sale terminals for pennies per transaction using Interac. In 2006, Interac launched Interac Online, charging merchants upwards of 2% or more per transaction.
Canadian online retailers and billers require a greater variety of options when accepting payments from their customers--more than the current four banks that Interac supplies. For example, the Canadian travel and airline business processes billions of dollars in transactions each year online. This industry currently finds itself between high credit card rates and Interac Online's position of placing them on a restricted list. These retailers are unable to accept direct payments from their customers using online banking.
Canada's clearing and settlement system is among the most efficient in the world. The Canadian Payments Association operates national clearing and settlement systems for all cheques, wire transfers, direct deposits, pre-authorized debits, bill payments, point-of-sale debits, and online payments. Transactions that are charged to credit cards are not cleared through CPA systems, thus the CPA rules don't apply to them.
UseMyBank has met with the CPA to bring them a better understanding of the need for alternative forms of online payments and the benefit that such technology offers Canadian e-commerce. The rules ultimately drafted on this measure excluded not only UseMyBank but many other innovative companies from participating in the Canadian payment sector.
From its initial launch, UseMyBank has made every effort to be an active participant in the payment processing industry. Both in Canada and abroad, we have ensured that our goals and objectives are heard and understood at the regulatory and legislative levels of the financial banking industry.
This same scenario has been replayed time and time again with every group that has been charged with the responsibility of governing the Canadian payment industry. Sadly, innovations that could offer Canadian merchants safe and cost-effective ways to build their online business are being stifled, while other countries begin to surge ahead of us in this sector. We believe that the banking system in Canada should have regulations that foster competition and innovation, similar to the telecommunications industry today, which is enjoying more services and lower prices as a result of allowing more competition to enter a market that was once a monopoly.
In 2006, the Bank of Nova Scotia became a defendant in a case brought before the Competition Tribunal. It was alleged to have illegally reduced competition in the online debit payments market. The bank won the case, but the plaintiff, GPay, without the cooperation of the defendant and other Canadian banks, was unable to remain doing business. GPay was our payment processor for Canada at that time.
At one time, Canada was number one for consumer adoption and usage of ATMs, POS terminals, debit transactions, and online banking. We are no longer number one, as many of these other countries have surpassed us. Since 2000, the banking industry has not been as responsive to changing market conditions and expectations. Their policies and tactics have attempted to restrict the market by manipulating the rules and regulations through lobbying the CPA, the CBA, and other government agencies.
It is possible for Canada to regain its lead in the payments industry. However, it requires an environment that rewards entrepreneurs for creating the next big ideas and companies. We hope that the committee can help make this a more friendly and competitive market for online payment service providers and their millions of Canadian and global customers.
Thank you for the invitation to speak to the committee regarding the study of the credit and debit card industry in Canada. We appreciate the opportunity to appear before you and share information with you in support of your study.
I'm Jim Baumgartner, president of CEO of Moneris Solutions, and with me here today is Fern Glowinsky, our senior vice-president and general counsel.
Moneris Solutions is a Canadian-based payment processor with operations in Canada as well as the U.S. Our head office is in Toronto, and we also have offices in Sackville, New Brunswick; Montreal; Calgary; Vancouver; and throughout the United States. We've been providing credit, debit, and gift card acceptance solutions to merchants in Canada and the U.S. since December 2000. We process for approximately 350,000 merchant locations in Canada and close to 65,000 merchants in the U.S.
Moneris is a joint investment of the Royal Bank of Canada and the Bank of Montreal. We distribute our products and services to the market directly through various sales channels. Moneris employs approximately 1,800 people, the vast majority of whom are right here in Canada.
As our role in the industry tends to be the least understood, I'll take a moment to briefly describe what we do. First, we enable merchants' acceptance of electronic payments by providing and supporting the cardholder facing solution, which may be a stand-alone device at the point of sale or enablement of a cash register, gas pump, kiosk, or even a website. Second, when a card is swiped--or inserted, in the chip context--we route that transaction and the authorization request through the payment brands to the card issuer. They send back an authorization message that we deliver to the merchant so the merchant knows that the customer is authorized by the issuing bank to complete the transaction. Once the transaction is authorized by the card issuer, the merchant will finalize the transaction with the cardholder and send us a settlement file that prompts us to settle funds into the merchant's bank account for that day's transaction activity.
An important component of our business model is merchant underwriting. We bear the risk when the merchant does not deliver the goods or services that have been paid for in advance--for example, when a cardholder purchases an airline ticket and the airline goes out of business prior to delivering the flight--and in the cases of merchant fraud and non-compliance with payment brand rules.
We also provide reporting to enable the merchant to monitor their transaction activity for the purposes of operational and financial reconciliation, as well as fraud monitoring.
Another important element of our service is exception item management. This includes the tracing of individual transactions and mediating on behalf of the merchant in the case of a transaction being disputed by a cardholder.
As a whole, these components are the payment processing value proposition. Payment processing is often the last interaction or final impression between the merchant and the consumer in the shopping experience, therefore it has to be instant, always on, and easy to operate. It is critical in enabling cashflow, and therefore the merchant must receive funds when and where they want them and have certainty of payment. The finality of payment feature in today's uncertain times removes an element of credit risk from the equation, as well as the risk in handling large amounts of cash.
The payment processor also plays a leading role in the integrity and evolution of electronic payment networks. With the introduction of enhanced verification technology such as chip, data security standards such as PCI, or new card entry modes such as contactless, the processor must upgrade its infrastructure. These are no small tasks. They're very capital-intensive and complex undertakings that have helped Canada maintain one of the most ubiquitous, secure, and successful networks in the entire world.
As an industry, we're subject to the increasing liabilities associated with potential data compromises. A number of recent high-profile breaches in the U.S. have highlighted the threats posed to the digital infrastructure. The reality is that the cost of compliance and ensuring security within the payment system is continually increasing as the threat of breaches and fraud continues to evolve.
The Canadian payment processing market is highly competitive. Most of North America's top processors actively market in Canada. Significant established players regularly enter the market. U.S.-based merchant processors now control a significant percentage of the Canadian market. In addition, there's a robust reseller industry that offers even more choice to merchants. Our industry is forced to compete on price and innovation to maintain our market position. And at this point in the evolution of the payment card industry, card acceptance is roughly equivalent to the growth in the retail economy. It is essentially a zero-sum game, requiring each industry participant to strive to be the most relevant to its merchants. We negotiate fees with merchants directly.
In terms of merchant acceptance of cards, merchants have a choice about acceptance, and they do so because of the significant value they receive from electronic payments, including avoiding the costs associated with handling cash, reporting and reconciliation, finality of payment, speed and throughput at the point of sale, and increasing customer satisfaction by offering their customers a payment method of choice.
There has been much discussion about interchange, and as you may know, it is the fee that's paid by the payment processors to the card issuers. In our pricing model, it is a component of our cost of goods sold. Payment processors do not set interchange rates; we are advised of them by the payment brands. Other components of our cost base include the assessment fees that are paid to the payment brands, as well as our operating infrastructure.
There has also been much discussion about the introduction of competing debit products in Canada. As payment enablers, we have to invest in the infrastructure to process new acceptance products from card issuers because we expect that at least some of our merchants will want to be able to accept the card their customer presents for payment. As a result, we must develop the technical acceptance capability, build business processes, commercialize, and inform and train the merchant. New products attract a greater compliance burden, greater wear and tear on our hardware, as well as additional risk and exception item management.
We hope our remarks have provided some helpful insights, and we look forward to answering your questions. Thank you again for the opportunity to be here.
Thank you, Mr. Chair. I appreciate the opportunity to appear before you today on behalf of TD Merchant Services.
Payment systems are obviously a complex topic, but I'm happy to do what I can to help explain the process and explicitly the role that a merchant acquirer plays within that system. In the simplest sense, as acquirers, we provide our customers with point-of-sale payment devices, the hardware that sits on the counter in a store, and we process payments on behalf of the retailer.
Major merchant acquirers, or payment processors, including TD Merchant Services, Moneris, Global Payments, Chase Paymentech, and Desjardins, provide essentially the same set of payment capabilities to merchants, but we compete with each other primarily based on two things: the quality of service we provide and the price we charge that merchant.
TD is the only Canadian bank that currently operates a merchant acquiring business. The reason for this is quite simple. We believe it is a relationship business and we appreciate having a direct relationship with retailers and business owners across Canada. In fact, more than 85% of my clients are also clients and customers of TD Canada Trust, illustrating this relationship aspect for us.
In terms of pricing, as the committee knows, interchange rates are set by the payment network companies—Visa and MasterCard—and they both make these rates available via their websites. Both have stated their intention to enter the debit market in Canada and have communicated the interchange rates associated with accepting those debit cards. Acquirers take these interchange rates, determine our own additional direct costs, and then develop a comprehensive fee structure that we present to merchants. The cost of interchange is by far the largest component of the merchant discount rate.
In the past, we presented costs to merchants via a simple, often all-in merchant discount rate—that is, the all-in cost a merchant would pay per transaction process. This was feasible as the interchange rate structure was simple at the time. The payment networks have since changed their interchange rate structures to a more complex model that has different rates for consumer, premium, and business cards, as well as for online or other card-not-present transactions. As a consequence, acquirers also revisited pricing approaches to merchants.
TD Merchant Services completed this task in time for the introduction of Visa interchange rates in April 2008, and this was a significant effort and was completed at considerable cost to my business.
This committee has heard testimony to date regarding transparency on the part of acquirers. As part of our submission to today's hearing, we provided the committee with samples of notification letters that we sent to clients to illustrate the approach we take to articulate any change in the merchant's processing costs. I'd like to highlight to the committee, as well, that these letters are from 2007 and 2008, before Parliament began its studies on this matter. Quite simply, it's the way we do business.
As illustrated in these letters, we introduced new fees or changes to current fees arising from the interchange rate structures made by Visa, and we provided appropriate examples to ensure that merchants understood the impact of these changes. At TD Merchant Services, we are proud to provide our merchants with what we believe is a clear and transparent statement of their monthly activity.
I've shared a sample of this statement with the committee and have highlighted the Visa discount rate adjustment box, which lists the number and dollar amount of all transactions for which a rate in excess of the merchant discount rate has been applied. This section of our statement also clearly identifies the type of card used—for example, an Infinite card or a commercial card—in plain English, not via the use of codes or other more obscure terminology. This section also identifies the increase in the rate associated with the processing of these transactions and the sum of the additional charges for each card type processed by that merchant.
To reiterate, I know some organizations have complained that there is a lack of transparency at some points in the payment process. From my perspective, I believe that clients of TD Merchant Services have a clear picture of the fees they are paying for the transactions we process on their behalf. In fact, delivering quality service and communicating with customers in a clear and transparent manner is a key tenet for both TD Merchant Services and the entire TD Bank Financial Group.
As an acquirer, TD will continue to bring the latest payment options to our merchants. However, as these options are introduced, history would suggest that in order to be viable, any innovation needs to create value for all stakeholders in the payment value chain, whether they be issuers, consumers, merchants, or acquirers, as without the acceptance of all of the parties involved, these innovations are likely to fail.
As change evolves, we will continue to consult with our customers, presenting new options to determine whether they are of interest to them, as well as educating and training their staff on how to use the new technologies. Throughout this process, we will continue to communicate clearly so that merchants know exactly what they're paying for and that they're getting value for their money. As payment processes continue to develop over time, TD Merchant Services will not change our strategy of offering customer-focused, price-competitive, high-quality services to our clients in a transparent manner.
Thank you, Mr. Chair. I'd be pleased to answer questions.
With Visa, as it's currently envisioned, they will be higher, because Visa has set their interchange level at a level that, in our opinion, is too high. They believe there's value brought, and there is value brought in both scenarios. For example, if you buy something online and you dispute that it was you, with Interac you're more of an unsecured creditor. Visa and MasterCard have a policy that will protect you, so there is definitely value there.
In Visa's case it will be more expensive, upwards of maybe three times more expensive on average. It'll vary by merchant. With MasterCard it actually wouldn't be more expensive, because they've committed, so far, to holding consistent with or lower than Interac.
I wouldn't characterize Visa debit as priority routing, because the consumer does have the choice. What will happen is that on the point-of-sale dialogue.... Today, if you use your debit card, the terminal dialogue will ask you after you've swiped your card—and in this case, it would have to be a chip card, so it would only be applied to a chip transaction—if you want to pay by Visa debit or Interac. You will select Interac by pushing a button on there, just as you do today. The dollar amount of the transaction will come up, and you will confirm that and enter your PIN, etc., and the transaction will be processed. So you have, as a consumer, selected Visa debit.
As Jim has said, MasterCard has taken a different approach and has implemented priority routing. So the bank has issued a card with Interac and Maestro on it, and if it comes to an intersect, a merchant who actually accepts the Maestro MasterCard transaction.... Again, that's important to distinguish: the merchant has to be enabled for Maestro. If the merchant is enabled for Maestro, there is no terminal dialogue in that case, because the bank and the merchant have essentially agreed. The bank has issued a card to a consumer that will be processed by Maestro, and the merchant has agreed to accept Maestro, so in that case it will get priority routed to Maestro versus Interac.
Okay. I'd like to come to back something else, and then I'll come back to the priority routing.
But one of the areas that really concerned me was the shifting of liability. One of the features as a merchant is that when you are taking in money through plastic—through a credit card or a debit card—you don't have to worry about the liability. You are basically selling your receivables and taking the money in, and there are no more worries.
With the shifting of the liability to the merchants, I'm concerned about two things. One, there is the cost of all of a sudden having to self-insure, because not having to do that was one of the big features. But the other concern I've heard is that with the new technology, with the chips, I understand there are some changes coming up to the terminals themselves. For large merchants that's an issue; it's a cost, but they can absorb it. But for smaller merchants, who will be absorbing the cost of this shift? Do they have an option not to shift over to the new technology, and what would be the consequences if they didn't shift?
If you owned a hotel, for example, and it didn't have a chip-enabled device, and if you were renting from either me or Jeff or the other dozen or so competitors in the marketplace, we would, by October 2010, send out a technician and we would replace the device with a chip-enabled device. Once that chip-enabled device is in, then from the hotel owner's perspective, there is no increased liability because we have a device in there.
In fact, from a hotel perspective, you'll actually be better off because our data, so far at least.... The market hasn't been flooded with chip cards yet, but to the extent that we've had chip card transactions, our data show that the numbers of disputes--if you had disputes before at the hotel such as, “It wasn't me staying there”, etc.--have come way down.
From our perspective, from Moneris' perspective, we actually do support the introduction of the chip in Canada. We think it's a more secure way of paying. We don't support the liability shift happening as quickly as it has. We think it's a bit of a burden on the merchants that is not currently needed.
Let's say you owned your own device, as a hotel. Let's say you purchased your device and you had just invested in it and it wasn't chip-capable. If someone showed up at your hotel and disputed the transaction and said, “That wasn't me”, and you didn't have a chip-capable device, then you'd lose that dispute. So there is increased liability in the case where you do not have a chip-enabled device. But as Jeff pointed out, the vast majority of the devices that'll be deployed will be chip-enabled by October 2010.
Thank you very much, Mr. Chairman.
Thank you all for coming in today.
I want to address my questions to you, Mr. van Duynhoven, because you've provided some documentation that I think is helpful here. What I really want to do is to drill down to try to understand all of the fees that are being charged to merchants.
First of all, you have the Visa corporate, commercial, and business card transaction fee, which, if I'm reading this correctly, increased, according to this letter of February 2008. You have a Visa Infinite card transaction fee, which is a new fee. Then you have a Visa assessment fee, which seems to be a new fee as well. And then you have the merchant discount rate, which, interestingly, actually decreases, according to the documentation here.
The merchant discount rate includes, according to the information we have, the interchange fee plus other costs. What proportion of the merchant discount rate is the interchange fee?
I'd love to, and thank you for raising the question.
I'm going to distinguish between an airline and a travel agent. There are government agencies involved in the tour operator business. In the case of the tour operators, TICO, if you're familiar with it--and there's a fund in Quebec as well--protects the travellers. They will require the tour operators to place on deposit funds for future trips. If you buy a trip to Cancun in June, for example, and it's a thousand dollars, and let's say you buy it from a major tour operator, that tour operator will have to place the money in a trust fund. However, if that tour operator were to fail, and let's say you were the merchant processor, you would dispute the transaction with your card issuer. We, as the merchant processor, would end up absorbing that charge if the tour operator was out of business. So we require, in the case of the more challenged tour operators, deposits as well.
So the tour operators are being doubly penalized, because the funds are holding money and ultimately, if it's charged on a credit card, the merchant processors get charged. That's a real problem for the industry. If there's anything anyone can do to help that particular industry out, they really need the help. I think Conquest was, in part, a victim of that particular situation.
In the case of the airlines, there is no such regime. We process for both. In the case of the airlines, we have a great big credit department that would look at the risk. If you own an airline and your airline is profitable and has plenty of cash and so on, we may not require a deposit. If you are more challenged or are going through some tougher times, we may require a deposit to protect against the risks I alluded to earlier.
Can I add something about Conquest?
Have you ever noticed that you can't buy an airline ticket in this country unless you have a credit card? If you don't have a credit card, you can't buy an airline ticket. It's the only country in the world like this.
If you really want to help that industry, what you need to do is help people use their money to make that payment online. Air Canada needs the help of UseMyBank so they can accept payments from their customers in real time at a rate that is going to be competitive with Visa and MasterCard. Instead of so many regulations, we could have competition help drive those prices down.
The technology has been here for 10 years, and we're the only country that is not using it. We have Visa and MasterCard that want to have the entire market to themselves. We have online banking, and we have customers who want to receive those payments. There's really nothing in the way of making it happen.
If you buy a $5,000 trip, you don't have to pay 3% to Visa to get that job done. It can be done for a lot less than $150 on that transaction. That's what we're talking about.
At UseMyBank, we're only in the online world. When you talk about point of sale, it's a place we're not at. But in the online world, I think Canada needs to have some more ability for customers, if they want to make cash payments, to make them. If they decide they want to use Visa, they can use Visa. But we need to have more choices, I would say. Conquest Vacations, I think, could still be in business if they'd had that edge, that competitive edge, to offer their customers the ability to pick a debit payment.
Thirty to forty per cent of people don't have Visa or MasterCard. If you don't have a credit card, you can't shop online. It doesn't seem fair. It seems that you need to have two systems to reflect the same values as you have in the physical world, where you can shop with your cash, your debit, and your credit. When you go on the Internet, you're stuck with credit cards only.
I think Canada needs to have some kind of regulation or something in place to allow merchants to accept cash payments from customers who decide that they want to use their online banks. It makes sense.
I want to direct my questions to Mr. van Duynhoven.
I'll go back to the letter, and to the statement that you provided us as well. I'm not sure that I'm any clearer, having been provided a sample statement, in terms of the flow of information. Maybe you can help me with this.
First of all to the letter, though, you mentioned that the letter is designed to kind of clarify situations for customers, but I notice that you use an example in your chart. You talk about the Visa corporate, commercial, and business card transaction fee and you use an example. With this fee change, a $75 transaction processed by your business will cost about 9¢ more than the current calculation. I think you're probably using that example to show that it's not much of an increase. Then with the Visa Infinite card transaction fee, which is a new charge--50 basis points--there is no such example. I would note that on the same $75 charge, it was easy to calculate using your number, and it looks like it would be about 37.5¢ more that they would pay.
Why would you not have an example there?
Sure. With respect to the premium cards, one of the things I did look at more recently was the difference in behaviour. Do the holders of premium cards have different behavioural characteristics? And the answer is they actually do.
I think that MasterCard mentioned that they have an average spend in their portfolio of $24,000 apiece to qualify for a premium card. And when I looked at the behaviour across our merchant categories—and this was only the last month, so it's only a month's worth of data—the average transaction size of those particular cardholders was markedly higher. It was a lot higher than I suspected it would be. The lowest was in the gas station category, where their cards were a little bit bigger, but they didn't spend that much more; it was a little bit more on food; and it went all the way up to as high as 40% in certain merchant categories.
So it is clear that those particular customers are bringing more value to merchants. But at the end of the day, it's costing merchants more money than they're used to paying. In large part, I think that's why we're here today, because the increases were much more aggressive than I think anyone was expecting, and no one really had a good sense of how many premium cards there actually would be. The merchants couldn't budget for them, and I think that has definitely caused some issues. I think your association is a great example of those issues.