This is the fourth joint meeting we're having on this issue. We started with the merchants. We next went to the credit card companies. We had the payment processors here on Tuesday, and now we're dealing with the card issuers part of the four-party credit card model.
We have a number of witnesses here with us today. I'll just read the organizations, for information's sake. We have, first of all, the Credit Union Central of Canada; secondly, the Canadian Bankers Association; and then individual banks, including the Canadian Imperial Bank of Commerce, BMO Financial Group, TD Canada Trust, Scotiabank, and, finally, RBC Royal Bank.
My understanding is that we will have a brief opening presentation from the Credit Union Central of Canada, and then the Canadian Bankers Association will be speaking for, I believe, most of the banks. My understanding is that RBC Royal Bank will have a short addition to the presentation by the Canadian Bankers Association.
So we will start with the Credit Union Central of Canada. If we could have a presentation of between five and ten minutes long, then we'll go to the Canadian Bankers Association.
Mr. Chair, ladies and gentlemen of the committee, thank you for the opportunity to speak to you today. My name is Brigitte Goulard. I am the vice-president of policy with the Credit Union Central of Canada. I would like to introduce you to my colleague, Mr. Douglas Whalen, director of payments policy.
Before addressing the issue, allow me to begin by making a few preliminary remarks regarding the role of Canadian Central and, more generally, the credit union system in Canada.
Canadian Central is a federally regulated financial institution that operates as a national trade association and finance facility for its owners, the provincial credit union centrals, and, through them, for approximately 440 affiliated credit unions across Canada. With over 1,700 branches serving more than five million members, and over 24,000 employees, and holding more than $114 billion in assets, credit unions represent an important component of the Canadian economy.
Although the global economic downturn experienced since the latter half of 2008 continues to present challenges for credit unions and their members, we are pleased to report that our performance for 2008 will go on the record as one of the most successful years ever for the Canadian credit union system. Our financial position remains strong, and we have maintained our share of the market, in step with growth of the Canadian population.
Credit unions in Canada come in all shapes and sizes and operate in almost every community. Actually, in more than 300 communities in Canada, the only financial institution in town is a credit union. Credit unions are the first choice of a significant percentage of the population. In fact, one in three Canadians are members of credit unions and caisses populaires. We believe these numbers reflect the strong cooperative values of the system and the commitment of the system to the economic development of their communities.
Charitable donations, employee participation in worthwhile causes, and scholarships and bursaries are all part of the contribution that Canadian credit unions make every day. In fact, in 2007, the Canadian credit union community's involvement reached $35.8 million.
Let us now turn to the issue that brings us here before you today: credit card interchange fees and the debit payment system in Canada.
I will now turn to my colleague, Douglas Whalen, to speak to that issue.
Canada's credit unions provide their members with access to a broad range of consumer card services, including both debit cards and credit cards.
While credit unions offer one of Canada's largest networks of proprietary ATMs, they are not significant providers of services to merchants for acquiring debit or credit transactions.
Visa products are offered by some credit unions and MasterCard by others, and approximately 600,000 credit union members have obtained a credit card through their association with a credit union.
Credit unions use a variety of different business models to provide credit card services to members, and each credit union makes its own decision regarding which card products and services they will offer, how they will deliver them, and which suppliers they will use, based on what best fits their business situation and the needs of their members.
For example, one credit union issues credit cards directly to their members and maintains control of the service relationship with the member, the terms and conditions of the card service, the design of the card, the marketing, pricing, fees, and interest rates, and the ownership of the card balances. Only the back office processing is outsourced to a third party.
Most credit unions, however, have completely outsourced their credit card services to a third-party financial institution. In this situation, it is the third party that issues the card, manages the customer relationship, sets the terms and conditions of the card service, and controls card design, marketing, pricing fees, interest rates, and owns the card balances.
In regard to debit card services, Canadian credit unions have issued approximately 3.5 million proprietary debit cards and are members of several ATM and debit payment networks. Credit unions affiliated with Canadian Central have access to Acculink, the national credit union system's proprietary network of over 1,700 surcharge-free ATMs across Canada.
Credit unions in British Columbia and the Atlantic provinces, and many in Ontario, are also members of The Exchange, a national network that includes credit unions and other financial institutions and provides surcharge-free access to more than 2,000 ATMs across Canada.
Credit unions have access to Interac membership and services through the group memberships provided by Canadian Central or Central 1, or through a direct membership with Interac. Credit unions also have access to international ATM and debit services networks through MasterCard Cirrus, Maestro, and Visa Plus.
It is important to note that each credit union individually determines which of these debit services they will provide to their members and at what pricing, and puts in place the service delivery models and appropriate supplier relationships that best fit the needs of the credit union and its members. This individuality is both a reflection and a reminder that credit unions are locally based organizations, delivering services that match the unique and diverse needs of the communities they serve.
To continue meeting these needs, Canada's credit unions need access to the broadest possible range of products, suppliers, and delivery models for debit and credit card services. This kind of flexibility is consistent with an open market environment that provides competitive choice for credit unions and their members. It also includes support for ensuring that a strong, domestically focused payments delivery channel, as provided by Interac, is preserved.
This should include allowing Interac to restructure its governance model to gain access to the capital and revenue generation tools needed to support development and implementation of new products and services, and a review of the regulatory and compliance environment to ensure that it provides a level playing field for all payments services.
As locally based organizations, credit unions respond to the unique needs of the communities they serve. Nationally, the tremendous success of Interac shows that it is similarly well positioned to respond to the unique needs of Canadians.
And as the card services market is transformed by the introduction of chip and other new technologies, the capability of Interac to develop and deliver new services focused on the needs of Canadians and the characteristics of the Canadian market will be of critical strategic value to Canada's credit unions in preserving their ability to remain competitive and continue meeting the needs of credit union members.
We wish to thank you once more for the opportunity to address you today. Ms. Goulard and I would be pleased to answer your questions.
Thank you very much, Mr. Chair.
I am pleased to be here.
With me today is my colleague, Terry Campbell, the Vice-President of Policy at the Canadian Bankers Association.
I'm also pleased that there are five individual bank representatives here, who have made themselves available on very short notice, and they will obviously be pleased to answer your questions as well.
We have a brief for you—and I hope you all have a copy of it. It contains information on the issues we will be discussing this afternoon.
We have met with many members of Parliament, many of whom are here at this table. In addition, we appeared before the Senate Committee on Banking to discuss the same issues you are focusing on in your study. I have also spoken with the president of the Retail Council of Canada and the Canadian Federation of Independent Business. We have heard the full range of their concerns.
While we're pleased to offer our thoughts and suggestions on issues from the perspective of institutions that issue credit cards, there are a range of matters—and I would include as examples the setting of interchange fees and the specific terms of merchant acquirer contracts—that the banking industry does not control and where we are therefore not able to provide specific detailed commentary. It's also important to remember that in a competitive marketplace, where individual institutions are actively competing for customer business, information regarding bank operations and business strategies is highly confidential and proprietary in nature. It is information that banks do not share among themselves or with the CBA to ensure we're in full compliance with the Competition Act.
That said, we're certainly very happy to have this discussion today to answer any questions we can to the best of our ability. With this in mind, I'd like to turn to our submission. As you'll see at the beginning, we've outlined the many benefits of credit cards for both consumers and retailers, including choice and competition in the marketplace. I think that unfortunately many of these benefits have been overlooked in the recent public commentary. We also need to keep in mind a few key statistics about credit cards, such as the fact that 70% of Canadians pay off their cards every month, the fact that credit card debt at the moment is only 3% of total household debt, and the fact as well that there are over 60 low-rate cards currently available in the marketplace in Canada.
In the interest of time, Mr. Chair, I'm going to touch very briefly on four issues of interest to this committee.
Starting on page 4 of our submission, I'd like to clarify a few points on interchange fees. As this committee well knows, interchange rates are set by the credit card companies, not issuers or acquirers. Further, while Visa and MasterCard do not receive the interchange fee directly, they do receive a transaction fee from acquirers and they do receive a transaction fee from card issuers like banks and credit unions. I think the important point here is that in a credit card transaction, all participants benefit from the transaction so all share in the cost.
A key issue that has been raised in the committee hearings is around the disclosure of interchange fees by both card companies and by acquirers to merchants. We have to admit that what we hear is that this is very complex. We note from their presentations to this committee that both Visa and MasterCard have heard these concerns, and we understand they will be working more closely with retailers to resolve these concerns. We've also heard the same sentiments from the acquiring companies that you had testifying before you on Tuesday.
Even though banks do not set these fees, our members agree there are things that can be further enhanced to assist consumers in better understanding this process. Banks as card issuers are considering better explanations for their card customers about the cost of interchange fees to merchants when credit cards are used. Clearly the suggestions of this committee are very welcome in that regard.
If I could turn to premium cards, it's on page 5 of our brief. We know this committee has heard a great deal about premium cards, particularly around the introduction and issuing of some of these cards to consumers. We agree there was some confusion on the part of some who received the cards, and there could have been better and clearer communications to the customer about why these cards were being introduced. Going forward, the lesson learned here is that more care needs to be taken to ensure there is greater clarity for our clients in any such further implementation.
Another matter that has been raised is the question of premium credit cards being sent to consumers without their consent. I think there's been a discussion around this, but banks have heard these concerns and they are reviewing their practices around issuing these cards. As well, there's a concern that a true premium card--and I would say “true” is one that attracts a higher interchange fee--had been sent to people who perhaps should not have received them. A step that could be taken by the banks is to further clarify for customers what the criteria and the requirements are for these true premium cards.
The third area I'd like to comment on—which is in our brief, on page 6 in English, et à la page 7 en français--is the recently introduced new government regulations. While obviously the full implications of these regulations are still unclear and we're still working through the implications and the impact of these, they will require significant changes to products, systems, and processes. They will be very costly to implement. We're still looking at what that could mean. Estimates go as high as hundreds of millions of dollars, which is exceedingly material. We would be very pleased to answer your questions today on these regulations, and of course we will be commenting to the government in terms of the period that is available for public comment.
Lastly, we have some comments on debit cards. That starts on page 6 in our brief, à la page 8 en français. While the current debit card system in Canada has served Canadians well, it needs to grow and evolve to meet the needs of a more integrated global economy. We know that Canadians are among the heaviest users of debit cards in the world and that Interac can rightfully take credit for that. However, Interac is an association and it operates on a strict cost-recovery basis, which limits its ability to raise capital for innovation. For competition to be an effective driver of innovation, all competitors need to have the freedom to compete fully in an open marketplace, including Interac.
We know there are other players in the market. They have testified before you. Both Visa and MasterCard recently entered Canada with debit products. The point I wish to make is that debit market choice and competition is an international reality and Canadians should not be left behind.
I'd like to conclude by saying that the payment card system in Canada works well for individuals and for businesses. Nonetheless, there's always room for improvement. I've given you a few suggestions about areas where the banks are able to make changes to improve clarity and transparency for consumers. I would also stress that it's an exceedingly complex system. It's very important that we carefully consider the potential impacts and consequences of all aspects of the system before new measures are put in place.
Merci beaucoup. I'd be happy to answer your questions.
Thank you. We appreciate the opportunity to appear before the committee today.
My name is Cathy Honor, and I head up RBC's global cards and payments business, overseeing card products in more than 20 countries around the world.
As in issuer, RBC provides debit, credit, Visa, MasterCard, and Amex products all around the world. We are also our own acquirer in many countries, but in Canada and the U.S., our acquiring business was transferred to a separately run joint venture company, Moneris, which has appeared at these hearings on its own behalf. Up until earlier this year, I also sat on the Interac board.
RBC is the second-largest credit card issuer in Canada and the ninth-largest in North America. Based on our experience globally, we believe the credit card market in Canada is functioning well for consumers and retailers who are benefiting from choice, competition, and the convenience of a thriving payment system.
Merchants have enjoyed virtually no changes to interchange rates for over a decade, despite rising fraud and payment costs. I acknowledge, however, that there have been a lot of changes over the last year to align Canada with other parts of the world. Despite these changes, Canada remains and continues to enjoy significantly lower interchange rates than similar industrialized nations.
Canadians are happy with their credit cards, both consumers and businesses who heavily use credit cards for both payments and cash management. In February 2008, Forrester Research issued a Canadian customer experience report, with overall customer experience ratings across multiple industries. Canadian credit card issuers came out amongst the highest ratings.
In closing, we are privileged to participate in one of the world's largest and most successful electronic payments markets. At the same time, we recognize that there are always areas for improvement, and we will continue to work with our customers, the industry, and the government to ensure that Canada's payment system remains one of the best in the world.
Shall I start all over again, Mr. Chair?
The Co-Chair (Mr. James Rajotte): Yes, absolutely, Mr. Laforest.
Mr. Jean-Yves Laforest: Very well, thank you.
You seemed to warn us, Ms. Hughes, that you were not responsible for everything, that you did not have any control over the contracts between acquirers and merchants, or over the interchange fees, and so on.
In some ways, I think that you have put your finger on our great concern as committee members. I have learned this over the meetings we have held in recent weeks.
The fact is that there is little or no interaction between these players. There is some, if we consider the money transactions that go on between issuers and acquirers, between Visa and the merchants, and so on. However, there is no interaction or control of one party with respect to the other. On the one hand, there are the acquirers and the issuers; on the other, there are the merchants who supply goods to consumers who use their credit card.
There is no overall vision. There is one, but it is so complex that consumers really have trouble making heads or tails of the system. I am sure that many of them think they are dependent on the credit card system.
Let me give you an example. Anyone who wants to travel in Canada must use a credit card to make his or her reservations. There are some situations in which even cash seems to be less valued than a credit card. We are caught up in this system, whether we use it or not, and that causes a great deal of discontent. Committees have looked into these issues in an effort to get a better understanding of what is going on, and, at the very least, to shed some light on it.
Someone talked about competition and free markets. We understand that the objective of banks is to make money, and the same goes for the other stakeholders as well. However, once the Standing Committee on Industry, Science and Technology and the Standing Committee on Finance have completed their study, we may find that there are some injustices, either for consumers or merchants—because I do think there is some injustice, but in any case, I will not start by making that hypothesis. I would say that so far, it is hard to understand why merchants have to accept all credit cards and why the banks are offering people premium cards. Everyone seems to go along with the system, sometimes without really understanding why.
If the members of the committee realize that there is some injustice, do you not think that the government should regulate the system?
First, I will continue with my answer to your first question. Clearly, the system is very complex, but it is also clear that the objective of each party within it is to compete with the others. So I think there is a very good level of competition among the issuers of credit cards. On one hand, there are millions of credit cards available to consumers, and on the other, there is competition among the acquirers, for example.
I will just clarify it for the committee because this is a frequently asked question. On the Bank of Canada interest rate, it has a very, very small impact on the overall cost of funds of any bank. It is less than 1%. It is an overnight clearing rate for banks. On that point, there is sometimes a bit of a misconception about exactly what the Bank of Canada rate is.
As I mentioned, there is obviously a huge choice of credit cards in the marketplace, where you can get low interest rates, you can get rates tied to prime, etc. But the fact is a credit card is an unsecured card that has a lot of risk involved. Unfortunately, as we see in today's environment—and we've certainly seen that recently—the risks are rising, and therefore the issuers must respond to that risk for the benefit of being able to provide cards for the entirety of their customers.
Thank you, Mr. Chair. Thank you, ladies and gentlemen, for appearing here today in this most interesting discussion.
I have a question to which I would like a comment or response from each organization.
I know, Ms. Hughes Anthony, you represent the Canadian Bankers Association, so I'm going to refer to a conversation that you and I had some time back, when I shared with you that we were hearing from a lot of concerned constituents, who are also your customers—or customers of the credit unions and banks, I should say. They were concerned about credit card fees, as well as issues with debit cards coming forward.
I'm quite sure you do your job well, and I'm quite sure you go back to your membership, so I had suggested it would certainly be helpful if all of the players in this, the issuers through to the banks—all of those involved in a credit card transaction—sat down and worked this out. I said that because our constituents were complaining to us, enough that we were going to have to do something about it. I suggested to you at the time that if we ended up having to regulate it, if all of the players in this business didn't get together and fix this problem, you'd probably not like the regulations we would have to put in place.
We're still trying to avoid that. We've put in what we think are some realistic regulations. The comments from Australia are that they're prepared to step back now from regulating direct interchange fees if the industry shows it can take steps to increase competition.
How was that message received when you shared it with your membership?
I would like a comment from everyone on this. Why can't we get this competition worked out, so it is fair to everybody: fair to the retailer, fair to the customer, and fair to the providers involved in the whole process?
If I could respond first, Mr. Chair—and I hope Mr. McTeague is not leaving the room—I think it's a very logical and sound suggestion. There are legal impediments through the Competition Act—and I mention it because I know Mr. McTeague is an expert in the Competition Act—that prevent any industry, and certainly the banking industry would be one, or any other industry, from getting together and agreeing on pricing, and on any agreements concerning the quality or quantity of products and allocations of markets or customers.
Obviously, because all the member banks of the CBA take this extremely seriously, it is just not feasible for us to get around a table and say, “How do we fix this market?” We would obviously be challenged by the competition commissioner.
I suppose there may be ways for the government to call us together, Mr. Menzies, under the umbrella of a ministerial exemption under the Competition Act. That could be done. I think at the moment what we and you would find—and I'm sure this could potentially be frustrating for you around the table to hear, because you may hear from the banks and then from individuals—is that it is very difficult, and totally against the Competition Act, for all of us to get into a big room and cook this up.
If the committee does have suggestions about better, permissible ways to resolve some of these issues, I'm sure we would be very happy to hear those.
For starters, Mr. Menzies, I would just remind you that we are digesting these regulations. There is a public comment period, and all parties will be commenting before June 13.
Clearly, I think there are some great improvements for consumers in terms of some of the points in these regulations. We already have in Canada, contrary to other parts of the world, quite robust disclosure regulations, the cost of borrowing regulations, and these certainly enhance and build upon those.
Some of the, shall we say, standardization of grace periods will probably make it very much easier for consumers to understand their statements. I think the challenge the industry will have is that there's a heavy burden in these regulations to explain this and change this, which will very definitely be costly for the industry to implement. We're in the middle of assessing exactly what those costs are.
There's a good idea in there about putting a personalized calculator on everybody's statement. There are 68 million cardholders. I would just say that some of the operationalizing of this is very difficult.
Thank you, Mr. Chair, and thank you to everyone for coming today. It's kind of interesting to look straight down the line and have this conversation with you.
Where I'm going to start is with some of the specific questions relating to the consumer side of credit cards. Of course, the merchant and the exchange fees ultimately come back to the consumer as well.
I had a figure of 50 million, but you're saying there are 68 million cards out there. You're saying that about 70% of them are paying their bills on time and never really have to worry about the interest rate.
You're the bankers, and I'm sure you can calculate the number a lot quicker in your head than I could, but 30% of 68 million is still a significant number of people across the country who are being affected in this economic downturn.
We understand that you have unsecured risks and you need to cover those costs, and you need to ensure you're still making a profit. I understand that.
When I started asking the questions in the House six months ago, we started to get inundated with phone calls and people showing us examples on their bills, saying, “I've always made my payment. Unfortunately, right now I'm watching every nickel and every dime, so I'm having to make the minimum payment this time. But I made the minimum payment two days late, and because I was two days late, my interest rate went from 18% to 24%.”
I have examples like this: a 17-year-old who has a credit card, and now the parents are being forced to pay the credit card. This was an unsolicited mailing, and the 17-year-old submitted it and got the credit card.
The concerns we have relate to the interest rates that are being charged. You're talking about there being 60 low-rate cards right now. Well, if there are 60 low-rate cards, why aren't you, as the issuers of the card, automatically giving someone a low-rate card when they start off, and then, if they so choose, they can move up, if they demonstrate good history, rather than handing out the premium cards?
I know I'm talking a lot and there are quite a few questions in there. So I'll leave those and we'll go back from there. Does anyone want to start with that?
I can begin on the low rate. I think you raise a very good point. Should customers be able to start with a low rate?
One of the things we've done for many years, and it's something we're proud of, is that customers can select, in our case, their rewards first, and then go on to pick whether they want to have the standard interest rate—in other words, they probably won't carry a balance regularly—or a lower interest rate, and they pay us a fee for that, but they don't have to give up their rewards in order to get an interest rate.
We know consumers love to have rewards but also want to have an attractive rate. So we declare right up front with our consumers, on our applications on our Internet site, that they can have an 11.9% rate on their card. We even go as far on the Internet and in the branch to give them a calculator and say, if you carried this amount every month you would be better off at the lower rate than the higher rate, paying the $35 fee.
The market does react, and I think sometimes we just look at what is advertised, but there are programs out there that can help consumers lower their cost of borrowing.
I would like to jump in on that one.
Much like Mr. Kitchen said, we offer low-rate cards as well, including as low as single-digit interest rates. Choice is a big issue that the consumers want. Issuers provide anything from single-digit cards up to 19.5%. We've had low-rate cards in the marketplace for a dozen years, and much of our acquisition of new customers is from low-rate cards.
We deal with our customers to meet their individual needs all the time. You mentioned customers who are maybe living a little more hand to mouth, and we counsel them to move to low-rate cards, that is, to our 11.5% card. We will actively move our customers. We will actively put customers on something we call pre-authorized payment to make sure they have paid their bills from their account on a monthly basis to keep their credit bureau record in good standing, and we help the customers and advocate for them on those.
In the case of CIBC as well, whether you're on a low-rate card or a high-rate card, we provide what we call our credit smart features, where you can set your budget and we will send you alerts, so you can be your own money manager, your own smart money manager. If you say, “I don't want to spend more than x amount”, we will send you an alert when you hit that amount. But consumers have a choice, and they need to take accountability for the choices they make.
I agree that every consumer has personal responsibility. We're not saying that once you get credit, there is no responsibility. Unfortunately, what we're hearing loud and clear from these card holders is that they're not being counselled back. I'm sure that's happening, but from the people I'm hearing from, it's the opposite. We're hearing the complete opposite, that their cards were at 18% and are now going up to a punitive 24% to 25%, because they've been late or they've missed a payment, even though they've been communicating with whatever the institution it is.
To comment on something Mr. Menzies was mentioning, I think it's important to recognize that if you want to police yourselves, so to speak...and yet we're hearing these stories and are getting constant examples of this; it's starting to tie the hands of government from having to say, “We're going to have to get in there and do something.”
What do you recommend we do? You're talking about the counselling side of it, and I'm sure everyone else can give me some examples of that, but we can give you stacks and stacks and stacks from the opposite side, of e-mails and letters of people saying, “How is this fair and how is this right?”
I'm going to have to speak in English.
The Bank of Canada rate is literally an overnight rate. It only applies to that overnight settlement; that's literally all it is. As Ms. Hughes Anthony said, it's less than 1%.
Let's look at credit card interest rates. A lot of people talk about 19%, and so on, but there is a wide array of low interest rate cards. You have to look at the whole array of interest rates available. That's the first point.
The second point, again, is that when you look at how cards are used, 70% of people pay them off. So, in effect, the interest rate is 0%. From the bank's perspective, that means there is an interest-free period of up to 51 days that has to be managed, and it's unsecured credit.
You also have to take into account all of the costs of issuing the cards and running the system. We talked about fraud a moment ago. There was half a billion dollars of fraud last year. That was actually up 34% from the year previously. All of that has to be managed in terms of the offering of that card.
We talked about the chip and security. Again, that is a continual battle to keep ahead of the game. All of that also has to be reflected in that card.
All of those things are taken together, and we've seen the risks growing. This is unsecured and relatively risky credit, and it must be priced accordingly.
I will make two brief comments.
The banks fund themselves globally, and they tend to fund themselves on a matching basis. They need so many funds for the short term; they have so many mortgages at five years and so many mortgages at ten years, and they need to match those funds in the global market. So there are no funds actually set aside for which it's said, these are for credit cards.
But I would also point out, Mr. Vincent, that a credit card is only one type of financing. Someone might be better off with a line of credit. They might be better off with a short-term loan. A credit card is not the potential answer for everybody's financing needs. People have the opportunity to shop around for the type of credit card they need, but they might be better off with a line of credit at a totally different interest rate, if they want to hold a balance for some period of time.
Thank you, Mr. Chairman.
I want to thank our guests here today.
To start off, I want to thank the Canadian Bankers Association. I've asked them for information, which I've been able to use for my constituents at home to explain the banking situation in this country, including credit cards. They've done an excellent job of providing that information, and I appreciate that effort.
And, to be frank with you, as Canadians, we're pretty proud of the banking system we have here compared with what's happening south of the border and elsewhere in the world, and I appreciate the work the banks do. However, there are problems, and that's why you're here.
Nancy, I'll ask you a question first. You talked about disclosure and transparency, and you think you've been pretty good about it. I happen to be a customer, so I can say this. To my friends from the TD Bank who are here—that is, Mr. Sallas—here is the agreement that I hold up here. It's four or five pages, printed on both sides with very small print. Then we have the actual agreement that I signed, with very, very, small print. Let me just read you a little bit here. You talked about interest rates and being transparent on interest rates, so I read:
||The preferred variable annual interest rate for the TD Emerald Visa Card is one of the following: “TD Prime” + 1.9%, “TD Prime” + 3.9%.
||“TD Prime” means the annual interest rate established and reported by us to the Bank of Canada from time to time as a reference rate of interest for the determination of interest rates that we charge to customers of varying degrees of creditworthiness in Canada for Canadian Dollar loans.
That is not very transparent. That's not very clear, in my view. Do you agree that we need to clean that up, as has been announced, so that consumers at least know what they're signing up for?
Thank you very much, Mr. Chair.
Thank you for coming out this afternoon.
I'm going to ask a question and request some homework. I don't expect an answer right now.
There's talk of preferred clients and the ones who are asked for premium cards. Could each and every one of you submit in writing what constitutes a premium or a preferred client? I'm sure that would take up the five minutes and then some. If your answers are submitted in writing, we can all look at them and study them. It's just to clarify the way the system works.
I keep hearing that competition is a good thing for any system. What happens is we have four basic players: we have the credit card company, we have the banks, we have the merchants, and we have the cardholders. The idea is that each and every one of those has a component, but the credit card company is trying to get banks as customers and the credit card company is also trying to get the cardholders as customers. The merchants are customers as well, but they're using the system.
The competition is really to get the banks and the cardholders onside. What ends up happening is the cost to the merchants goes up, which helps the bankers. It's increasing the costs to the merchants, and in the end the cost to the merchants eventually makes its way back to the cardholder. It sounds like a pretty good system: when you raise your prices, the credit card issuers make the money, the banks make the money, and the two people paying for it are actually the losers.
I've got two questions. I'll ask all my questions, and then you can go on so that there's no back-and-forth. We'll hopefully cheat a little bit more and get an extra few minutes while you're answering.
What controls are in place to stop banks and credit card companies--I'm putting them both in the same place, and I know you're going to tell me they're different--from changing their rates to the merchants? As the competition gets more fierce, what's stopping the interchange rate from continually rising so that we can get higher fees for the customer, the customer really being the banks of the credit card companies?
I'm going to refer to the “Householder Information for Constituents“, which you passed out. It's an excellent document. I'm going to read a little bit, and I'll ask you to comment on that as well. I'll quote:
||The differences between our system and some others (notably the US) boil down to a few key features--a national system that is well-regulated, well-managed and well-capitalized....
Then on the next one it says:
||Canada's banks are well-regulated by the Office of the Superintendent of Financial Institutions and the Financial Consumer Agency of Canada.
Here is my question: what kind of regulatory system do you suggest for the credit card companies and banks so that we can have something reasonable for Canadians, merchants, and banks and credit cards, so that everybody works well together?
I'll start with the first question, and maybe some of my bank colleagues will wish to step in.
Your first question, sir, was on the question of interchange and how it's set and all that. Again, you're absolutely right: you predicted that we will say that the banks do not set that rate. That is the card companies.
I think it's broadly known that.... What is their product? The product of the card companies is the network. They're interested in trying to drive as much traffic through that network as they can. Their mechanism for that is the interchange. What they try to do, as we understand it, is set the interchange to balance it. They have to make it attractive enough for issuers to say, “Yes, we'll take that card”, but they also have to make it attractive enough for merchants to say, “Yes, we'll accept that card”. It's that balance between the two.
The question is, have they set it right? That's a matter for the card companies, but they do try to achieve that balance so that they get flow-through on their network.
Would any of my colleagues like to elaborate on that, or do we want to move on to the second question?
Thank you, Mr. Chair, and thank you all for attending. I have a number of questions I want to ask, and you may not have the answers to them. Maybe you can get those for me later. I think, though, that if we're going to complete this loop, if we're really going to understand what's happening in credit card usage today, we need the answers to these questions.
How much cash is in circulation in Canada today? Does anybody know that? Can you get me that information? How much money would be needed in circulation if credit cards were eliminated?
I also want the numbers of credit cards over the past years. Over the last 20 years, let's say, how many credit cards have entered into the system? How many more credit cards are we using? Maybe if you have some of those answers, Ms. Hughes Anthony, you can answer those questions.
Do you have statistics on sales revenue in the marketplace? I've asked that question before and nobody has given me the answer in regard to the increase of credit card usage. In other words, can we see a reflection of what's happened in the marketplace as credit cards accelerate?
There's also personal debt. How much is personal debt? You mentioned personal debt; what is personal debt today in Canada? Do you know what the figure is? You said it was a percentage, but what percentage is credit card? What is personal debt today? Do you know the figure?
I'm glad I got that opportunity, and I thank you for that wonderful introduction.
Ms. Hughes Anthony, thank you again. After 15 or 16 years, I'm still doing the same thing I've been doing. I haven't been able to shift gears, so I'm going to stick on something that works: competition.
You mentioned competition in the debit area and in the advance, down the road, the possibility of greater competition for consumers. I think most of the colleagues here from the banks have Visa as their issuer. I think every one of you does. Well, you might have one with MasterCard there. For the purposes of the question, let's say it's the majority here.
Visa has told us that they're interested in a flat fee or in perhaps going to a percentage fee, making it more expensive, obviously, for merchants. If the model is the same as the one used in the United States, where we know that debit fees are much higher than they are currently with the interchange, in the way you see it, and knowing how practical that proposal is and how it's implemented in the United States, how do higher prices constitute better competition? How do we sell that to consumers?
Maybe I can take a first stab, and I think some of our members would like to comment.
First of all, I'd make two points. One is that there's a mix of costs and benefits across the system. As Ms. Hughes Anthony said in the opening comments, banks, individual customers, and merchants each have costs and each have benefits. Yes, the merchants pay the interchange, but they certainly get a range of benefits from that. They don't have to carry cash, they get immediate security of payment, and they don't have to set up their own credit adjudication system. It's all done for them. They get online payments and they get increased spend. There's a mix there.
In terms of the costs being all on one side and the benefits all on the other, if you look at what the banks have to do, you see that the banks have to fund all the costs of issuing the cards. They have to fund the costs of the systems and the interface with the network. They take care of all the fraud costs; last year those costs were half a billion dollars, and it's going up. They take care of the costs of the security system to enhance that. They have to take care of the costs of loan losses; the results of the banks are just coming out, and in some cases they're--
We're much more active on both the debit card side and on the Interac side. In terms of fees and some of the things you were just talking about, credit unions themselves pay for those in terms of offering those types of services. So they do provide special features, such as fire protection, and those are paid for by individual credit unions.
We are hearing concerns from some credit unions, primarily around making sure that their Interac services will be able to compete on a fair, level playing ground. We are primarily issuers of Interac services, and we want to make sure--we are Canadian only, as is Interac--that it remains a strong player in the services marketplace.
One of the things we see in the move to chip cards is that in the move to chip cards, all those terminals get changed. That introduces the opportunity for new applications to come into the marketplace. We believe it's really important that Interac has the opportunity to participate, with those new applications that are going to come into the marketplace, on a fair and even playing field.
Certainly. When I was mentioning confusion, Ms. Coady, I think I was mentioning the fact that I personally have seen a number of billing statements that these merchants do receive. I have to say that they're very complex and very difficult to understand. So perhaps one of the issues, when we're talking about transparency and disclosure, is, boy, let's try to make it a little easier for them.
Perhaps some of the other members here can comment as well, but we don't seem to have the same numbers, shall we say, that the merchant community does with respect to the impact of, in particular, the implementation of premium cards.
To go back to something my colleague said previously, people might have in their wallets a gold card of some kind. It may not actually attract the additional interchange fee. It may not be a true premium card. When we looked at this whole premium card issue, we collectively looked at the entire industry. We think that represents about 9%. It's not the same sort of number that we're dealing with in terms of the merchant community.
I don't know if others have other items to add to that.
We don't have the same statistics, shall we say.
I see: most of my information comes from the Desjardins Movement in Quebec, for which credit cards are an important activity, but outside Quebec, the situation may be different. I accept your answer. That is all I have on this subject, because I will now turn to other matters.
My question is to the Canadian Bankers Association. In your presentation, you often talk about the importance of competition in your field. I think you want to highlight that point as regards the possibility of regulating credit cards. As has been said several times, the costs are passed on to the merchants. There is a coalition of merchants representing 250,000 businesses in Canada that are complaining that they are being forced to pay interchange fees that are higher than they were supposed to have been. I think the decisions made when credit cards are issued to increase the number of users are designed with competition in mind, but the cost of this competition is being passed on to people who were not at all involved in making the decision.
If there were regulations on an interchange rate, do you not think that there could still be competition? Interest is charged on unpaid credit card balances. It is the same as with all other bank operations. You are involved in areas other than credit cards, such as mortgages and personal loans. The banks are in competition to provide these services. So there could still be competition.
Would you care to comment on this?
I believe in competition. In my view, the role of government is to regulate the marketplace in such a way as to ensure sufficient competition so that the invisible hand can then set the appropriate price.
What would you, the bank issuers, say to the following two-part proposal? First, the government does not cap interchange rates. Rather, it allows the bank issuers--you--to set your own interchange rates by forbidding Visa and MasterCard from setting those rates. In other words, you could set those rates at 1.2%, 1.5%, 2%, 10%, or whatever you wish.
Secondly, the government mandates that the interchange rate be added on to the final bill of sale at the point of sale so that the consumer can make a choice between cash or credit. For example, if the consumer chooses credit, then that interchange rate is added on at that point to the bill of sale, at the point of sale, and itemized on the bill of sale so that the consumer can see what the rate is and what they've paid on the interchange, just as we do with the GST.
This seems to me to be a way to empower the consumer to choose the credit card and interchange rate that best fit their needs.
I'll take that question, being a Maestro issuer. Just for the record, we've been a Maestro issuer for north of 15 years because we think it makes a ton of sense to allow our debit consumers to use their debit cards around the world. We've had Maestro in place all along.
As Maestro has started to enter into Canada, even on a limited basis, what priority routing does, if two networks are available to make the purchase, is allow the determination of which network is provided. We have made agreements relative to wanting to be able to pick the low-cost alternative. As a result, we can elect to priority route our customers.
We think that makes a lot of sense, because we're worried about the alternative. If you ask the customer to choose whether he wants to go to Interac or Maestro, what will happen in the marketplace over time is that we'll start competing to win that customer's choice. For all of your concerns around the merchant today, those convincing the consumer to choose will start to enter more cost into the system. We think the priority routing keeps it in a lower-cost model.
I would say that's primarily a question for the acquirers. I know you had them here the other day. They're the ones who put the machines on the desk.
The basic thing is that it is more secure. It really is in the consumer's interest, because it's very traumatic to have your card compromised. This will take care of that.
This has been under way for a long period of time. There is going to be an end date. In the shifting over to the new system of chip, there will be no shifting of liability. The banks will still have that burden of liability. However, it should be a much better system all around because of the chip.
Mr. Anthony Rota: Other than....
Sorry, Mr. Chair.
Mr. Terry Campbell: As you say, when you're renting it or leasing it, there's no cost to that merchant.
I would say there are two things.
First, when you're comparing rates, the key point is precisely the point that you raise. For 70% of Canadians, the effective rate is zero. For Americans, that's a much smaller rate.
To do a real card-by-card comparison, you have to look across the board. Of course, interest rates tend to be affected by the local economic conditions, inflation rates, the strength of the economy, and so on. You'd have to look at the low-rate cards, the premium cards, the standard cards.
I think Canada compares very well. If you look at fees, and certainly compare with the United States, our closest competitor, we have fewer fees and we have lower fees.
That reduces your yield.
Now, one way to think of it is that industry statistics for the last quarter would suggest that loss rates in Canada are running at about 4.5% on credit cards, but that's across the whole population of 100%. In terms of those 70% who pay off every month, you can't rightly attribute any losses to that population. It's the 30% who don't.
So if you have 4.5%, divided by 0.03%, all of a sudden the attributable loss rate to that 30% of the population is in the 14% range. Now you have 19%, less 14%, less the cost of funds, another four percentage points, and pretty soon you're down to a margin of 1% or 2% plus interchange.