Good morning, ladies and gentlemen, members of the committee.
Good morning, and thank you for this opportunity.
Although the hearings to date have focused more on credit card issues, I am here to talk about the evolution of the debit market. This is an important topic, given that Canadians are the second highest users of debit in the world.
The debit market is changing, and how it evolves is going to have a significant impact on Canadian merchants and consumers well into the future. Let me be clear. There is a great deal of competition in the Canadian payments marketplace, and at Interac we welcome additional competition. That is not the core issue. The core issue is the need to have a level playing field.
I will address this issue as I talk about where we want to take Interac, a great Canadian gem, and what needs to happen to ensure that all stakeholders--issuers, acquirers, merchants, and consumers--continue to be well served in this debit marketplace. As I do so, I will also set the record straight about some comments made by others about our business, so that you can accurately understand who we are and why our continued viability is so important to the Canadian marketplace.
Without question, Canadians love Interac and Interac debit. It offers 24/7 convenience, reliability, and security. In short, Interac is a successful Canadian world-class debit payment system. Interac Association, which was first formed in 1984, 25 years ago, is responsible for the operations of the network.
Our members are not just the banks. Our membership also includes credit unions, other financial institutions, and payment and technology companies. We even have a merchant represented on our board. As a payment network, we do not issue payment cards or own or operate ABMs or merchant point-of-sale terminals, and we do not charge fees to merchants or consumers.
Interac is Canada's only domestically run, coast-to-coast debit payment network. We are the only home-grown payment brand. Interac operates on an efficient world-class national payments infrastructure with leading-edge security. We have the only debit payment product that clears and settles under the rules of the Canadian Payments Association and their built-in solvency and liquidity protections. Interac is Canadians' preferred and leading payment option, and we have a long-standing track record of being merchants' low-cost payment option. We offer a suite of trusted solutions for consumers and merchants across both the physical and the online space.
I'll turn to slide 3 and address that suite of solutions. Many of you likely know the first two, which are our main products. The first is shared cash dispensing, and this is the service upon which Interac was founded. It enables Canadians to withdraw money across the country at ABMs that do not belong to their financial institution. Our largest service by volume is Interac direct payment, which is a real-time, ubiquitous, PIN-based national debit service that allows Canadians to make purchases at retailers across Canada.
We also offer cross-border debit, which allows Canadian travellers to pay with their debit card at nearly two million point-of-sale locations in the United States through our partnership with the NYCE network, which covers about 80% of the US market. There are more partnerships in the plans and in the works.
Despite the views expressed by others, Interac is indeed in the online space. The first product is Interac e-mail money transfer. It allows Canadians to send and receive money across the country, in near-real time, from one bank account to another. Transactions are done quickly and securely through web banking, without the sender needing to know any of the recipient's banking information. All that's needed is the recipient's e-mail address.
The second is Interac Online, a unique solution that allows Canadian Internet shoppers to securely make online purchases directly from their bank account without providing any personal financial information to the merchant, not even a card number. It is offered by some prominent Canadian online merchants, including VIA Rail, the telecommunications companies—Rogers, Telus, Virgin Mobile—charities such as the Canadian Red Cross, numerous universities, municipalities, and other leading retailers such as Dell, which went live two days ago.
These are great products, but I will acknowledge that growing them has been hindered by the challenges that underscore our governance problems, which I will address shortly.
Having addressed the myth that we lack an online payment solution, let me turn to the security claims of our competitors.
Interac is and has been throughout its history a leader in the prevention, detection, and management of debit card fraud. We see investments in security as investments in the payment franchise itself. Our multi-layered strategy includes significant investments in consumer and merchant education, and of course, in our ongoing migration to chip technology, and we are delivering unique and powerful fraud management tools to our members. This investment has been ongoing, but it must be sustained and increased in the future.
In fact, this investment has played a part in the industry's enabling of its first overall declines in debit card fraud levels in many years. In 2008, debit card fraud declined by 3%, to $104 million, after years of steady growth. By contrast, according to the CBA's testimony before this very committee, our counterparts in the credit card industry saw fraud losses increase by 34%, to $500 million.
In the all-important web arena, the unique design of the Interac Online product I just described to you makes it one of the most secure electronic payment methods available anywhere, boasting a fraud loss ratio of one basis point, compared with 78 basis points for online credit card transactions and “card not present” transactions in the U.K., for example. I believe it is superior in this respect to the online debit options offered by the credit card companies.
I will turn to the matter of fees and of how Interac covers the cost of operating the Interac direct payment service.
As I noted earlier, Interac debit has always been a low-cost payment option for merchants. On a debit transaction, Interac receives a switch fee from acquirers and issuers to process the transaction. The association operates on a consent-order-mandated cost recovery basis, with these switch fees set solely to recover the operating expenditures of the association on an annual basis. The flat rate switch fee is currently 0.8¢ per transaction; historically our fees have varied from year to year, from about 0.4¢ to 0.8¢.
As you have heard in their testimony, MasterCard's switch fee is currently 0.5¢ per transaction on their Maestro debit product in Canada. Let me reiterate that Interac operates today solely on a cost recovery basis, with very modest marketing budgets and almost no research and development. I'm not privy to the strategic approach that they are employing as they enter the Canadian market, and although it is tempting, I am not going to speculate. I can say, however, that this rate is dramatically lower than MasterCard and Maestro debit pricing in any other market in the world that I know of.
Interac's position in the Canadian marketplace is clear and rooted. Interac has a long-standing track record of being a low-cost provider. It has been our strategy and it will continue to be our strategy.
As you have heard from the merchant community—
—and the payment processors and financial institutions, there is a broad consensus that against the backdrop of a rapidly changing marketplace, Interac must also change. Our current association and cost recovery structures are outdated and are not sustainable. Since 1996, we've operated under a consent order that is tremendously constraining across all facets of our business. Throughout the world, it has been recognized that associations tend to be slow and ponderous, moving at the pace of the slowest. We are clearly at a competitive disadvantage.
The debit products that Visa and MasterCard are putting into the market today are similar to the Interac product, whereby your bank account is debited when you make a purchase using your debit card. These companies have tremendous experience in gaining market share rapidly at the expense of domestic providers. Through the debit wars in the United States this is evidenced, and we are seeing the same type of strategies being employed here, as they aggressively work to sign up issuers, acquirers, and merchants.
You heard directly from the acquirers that this was happening. They are receiving financial incentives to develop and market these products and applications and are now facing penalties if they do not. Time is of the essence. Change needs to happen, and it needs to happen quickly.
Arriving at this point, we are in discussions with the Competition Bureau regarding the consent order and changes to our internal structure. Our governance structure needs to change, and we need to generate organic capital for reinvestment in the business and to be governed independently from our participants.
Third, preserving Interac requires greater investment in infrastructure and innovation, and this means some changes to the pricing system for Interac products in a manner that meets the needs of the business but also respects our legacy and ongoing strategy of being a low-cost provider.
As I was saying, preserving Interac requires greater investment in infrastructure and innovation. This does mean changes to the pricing system for Interac products in a manner that meets the needs of the business but also respects our strategy of being a low-cost provider. This is important.
Without firm numbers, I know that this is a “trust me” statement, and I have faced questions about our intent in pursuing a for-profit status. I've heard clearly the concerns expressed about the potential for excessive profit-taking. I can tell you that we are committed to staying a low-cost provider. In this regard, I offer to make available our financial statements on an annual basis for scrutiny by the Department of Finance, and we are willing to enshrine this commitment. We will stand up and we will be accountable.
Interac needs to change, as you will see on slide 8. I hope this has been well established, but my point here today is that internal changes to our organization are not enough to ensure a healthy debit marketplace in Canada. The Canadian payments system is a national infrastructure and it should be viewed through that lens.
A level playing field is an essential foundation of any competitive market. This committee has heard testimony from all stakeholders about the need for transparency in cardholder choice, in merchant choice, and in having the same basic rules for all players in the game. I echo these sentiments, but unfortunately, this level playing field is not a reality today.
Clear information on service offerings and their associated costs and being able to act on this information with choice should be hallmarks of the Canadian debit market and of competition in this market. They are at the heart of our business model and our strategy. We are going to continue to be upfront with our customers about our service offerings and our fees, and we hope the marketplace can follow this example and provide consumers and merchants with clear and understandable choices.
When given the right foundations, and if this level playing field is in effect, competition can indeed be effective in delivering the best outcomes to all participants. When these foundations are not in place, however, the result will not benefit the users of the system, and Interac will not be successful.
In conclusion, let me restate that we welcome new competition, but we firmly believe that participants should operate on a level playing field and that transparency should be a hallmark of our debit system, where choice is given to its users. Interac competing against the Visas and MasterCards of the world does not mean that we will adopt their strategies. In fact, from consulting with and watching our counterparts from around the world, that is a no win approach. Interac will instead continue to operate true to its Canadian roots, capitalizing on and leveraging our differences, not seeking to eliminate them.
One of the strategic advantages for Interac comes from being a low-cost payment option with per transaction flat-fee pricing. Any changes to the pricing structure will be mindful of those principles, and we are committed to proving that by opening our books to the federal government.
Given the forces at play, however, the change that I have identified must happen. If it doesn't, if we are not allowed to compete on a level playing field with these U.S. competitors, Canada's only payment brand and network will be hobbled, and we will not able to provide Canadians with the services they demand and deserve.
Thank you very much.
Thank you for coming this morning, Mr. O'Connell, and for your presentation.
I have two quick follow-ups before I get into a couple of questions. In your opening statement you say...and I'm quoting from what you have here. It's why I think there's a little bit of confusion. You say in one paragraph that you do not charge fees to merchants or consumers, and then two paragraphs later you say that you have a record of being Canadian merchants' low-cost payment option.
So there's some confusion. When I heard that, I thought, well, didn't you just tell us that you're not...? You actually do charge a fee to the acquirer, they bundle it together with all their other fees, and they do charge the merchants for it. Eventually, it gets to them. It's a flat fee, and I understand that, and I understand why. This is just a clarification.
I'm not sure if Mr. McTeague was on that route or not, but one of my initial questions was this. You're clearly not here to say we should keep competition out of the marketplace. Is it your opinion and your organization's opinion that Visa Debit and Debit MasterCard are coming to Canada regardless? Would that be your opinion?
On a switch fee basis, I am confident that we will continue on a low-cost basis and will respect the roots of Interac, and we'll be opening up the books.
When you talk about interchange, remember that it's not a revenue for the network. You are right that it's a mechanism that my competing networks will be utilizing to try to take away my issuers on the bank side. That's the competitive reality I face: a multi-network environment that is occurring.
When you look at this movement to provide an incentive to move and at the fact that the issuers' costs are also rising—fraud, for example.... I mentioned we had a great success in 2008 at $104 million. Well, I can tell you now that due to organized crime, they have gone back to their usual trajectory. The issuers share in the burden of all fraud costs, which are well north of $100 million, and they have customers who are increasingly demanding in respect of the new payment vehicles and the features they want. So the issuers have these costs. They believe they're not readily able to recoup these costs, and so there is a point at which the incentives being offered by my competitors are going to amount to an offer the issuers can't refuse.
So in our strategy, we need to look at, in terms of the issuing value proposition, what I call a keep-from-going rate, if you will. But given the base of our acceptance, you have to realize that the keep-from-going rate can be significantly and distinctly lower than what Visa and MasterCard have to offer as they penetrate this market. And I believe that if we stay true to our roots with the merchant value proposition we have, the merchants will be the architects of their own cost future and will continue to accept Interac on a preponderance basis, which will allow our rates to be significantly lower than those of our competitors but still give the issuers a value proposition they need and deserve.