Oral Statement of MasterCard Canada
TORONTO, April 22, 2009 – Good afternoon. MasterCard very much appreciates the Committee’s invitation to participate in its study of Canada’s credit and debit systems.
My name is Kevin Stanton, and I am the president of MasterCard Canada. With me today are vice president and counsel for MasterCard Canada, Andrea Cotroneo, and vice president and team lead, Diane Miquelon.
We pride ourselves on being a trusted information source for the study and on payments in general. In the course of addressing these issues, we have realized that the value and economic contribution of the payments industry are not well understood. Moreover, MasterCard Canada realizes it must continue to demystify these highly valuable systems.
In Canada, MasterCard and other electronic payment providers facilitate over half a trillion dollars of commerce flawlessly each year and operate in a highly competitive environment that offers a host of payment alternatives to merchants and consumers.
We believe that the Committee will find that Canada’s credit card systems are well balanced and managed to maximize their value to merchants, cardholders, and the Canadian economy as a whole.
We believe Canada’s current regulatory framework safeguards the interests of all participants and that direct regulatory price controls will suppress innovation, reduce competition, and harm consumers.
Finally, MasterCard believes that the Committee will find that by promoting market forces over monopoly, Canada’s debit system will begin to deliver enhanced value to consumers and merchants through choice, price competition, innovation, and international reach.
MasterCard operates in a highly competitive environment and works hard to earn merchant and consumer loyalty as they consider the payment alternatives available to them, including cash, cheque, Interac, Visa, American Express, retail store cards, pre-authorized debit, and—most recently—unregulated web-based payments like PayPal. This high degree of competition requires MasterCard and its financial institution customers to labour to retain and increase acceptance and usage by providing compelling and tangible benefits to merchants and consumers. As a result, while neither consumers nor merchants are required to use or accept MasterCard, an increasing number choose to do so.
For merchants these benefits include, a payment guarantee, increased sales, improved efficiency, increased safety, billions of dollars in infrastructure investment, innovation, speedier check-out, and easy access to international customers.
For small business in particular, the MasterCard system helps level the playing field, provides lower rates than would likely result from one-on-one negotiations for access to the purchasing power of credit cardholders, and intra-system competition that allows them to shop around for the best merchant processing deal. These efficiencies are further enhanced by the collective credit card acceptance arrangements offered by merchant associations like the RCC and CFIB.
For consumers, increased usage is earned through zero liability, global acceptance, grace periods, rewards and benefits, intra-system competition, and chargeback protection.
Maximizing the benefits of the MasterCard system for both consumers and merchants requires that the system be economically balanced. For MasterCard, the mechanism used to balance system economics is interchange. Interchange is a fee paid by the merchant’s financial institution to the cardholder’s financial institution. Interchange compensates the cardholder’s financial institution for the value they provide to merchants by bringing cardholders into the system and subsidizes costs of features that attract cardholders.
Interchange is determined by MasterCard—not by issuers or acquirers. Interchange makes up a part of the fee paid by a merchant for card acceptance, but ultimately that price is determined by negotiations with their acquirer. Interchange is not MasterCard revenue. And consumers most certainly do not pay interchange.
MasterCard’s only interest in setting interchange fees is to maintain system balance. If interchange is set too high, then merchants will stop accepting MasterCard, and we’ll lose cardholders. If interchange is set too low, issuers will go uncompensated for the value they deliver through their cardholders, and the subsidies of features that attract cardholders will be diminished. This, in turn, reduces cardholder participation, thereby reducing the value of MasterCard to merchants.
MasterCard continuously assesses the value that it delivers to merchants and, in that context, recently reduced interchange in several merchant categories. We also determined that we were at a disadvantage among affluent, rewards-driven cardholders—with American Express and Visa having the majority. For that reason, we adjusted premium card interchange to ensure MasterCard issuers were positioned to attract and retain these valuable cardholders—while still being priced lower than American Express. Finally, to make MasterCard more competitive in the small-purchase category, we dropped rates to compete with cash and debit by eliminating minimum fees.
Overall we moved from three rates to nineteen. Our highest interchange rate went from 2% to 2.13%, and our lowest effective interchange rate was reduced from 1.45% to 1.21%. All these adjustments were the first in seven years. And our rates remain below those of other developed markets.
Government interchange regulation is not the standard elsewhere in the world. Australia is the only country even remotely comparable to Canada that has regulated interchange—and there it has been a disaster for consumers and a text-book example of unintended consequences.
When the Reserve Bank of Australia adopted price controls in 2003, it expected that the savings would be passed on to consumers in the form of lower prices. But nearly six years later, there is no evidence that prices came down. Price controls did reduce interchange revenues to credit card issuers, but that, in turn, forced reductions in credit card features and benefits. Interest rates, which had been subsidized by interchange revenue streams before the RBA price controls, had to be increased for issuers to operate their credit card portfolios within prudent banking guidelines. For similar reasons, grace periods had to be shortened.
Finally, RBA price controls reduced competition. Under the new economics, only issuers with sufficient scale could operate profitably, leaving niche providers and new entrants with no choice but to vacate the field. This is an important consideration in Canada, where new entrants and innovative issuers have led unparalleled price and feature competition.
The RBA price controls did not apply to American Express. This was inexplicable as it transferred considerable advantage to the most expensive merchant proposition in Australia. In fact, we believe that a fulsome review of credit and debit cards in Canada must include American Express.
At heart, this issue involves a commercial dispute in the private sector. It is unfortunate that lobbyists have called for government regulation as a matter of first instance, before providing any recommendations directly to MasterCard. When the RCC and CFIB launched their campaigns in September, I personally invited both organizations to meet with us to discuss their concerns on the very same day. When we met with the CFIB, we had a frank discussion, but they made no specific requests. However, they have since made several recommendations to this Committee and many of them are areas where we can work together. In fact, I have written Catherine Swift and asked for a meeting to better understand some of her recommendations with a view to working co-operatively. The meeting is now set for early May.
We await a response from the RCC.
Finally, I want to address some of the commentary about our entry into debit in Canada. MasterCard understands that Interac, Canada’s debit monopolist, is reforming its governance and seeking a review of strictures on its economic proposition to allow it to respond to the realities of competition. MasterCard supports these reforms provided that Interac loses its monopoly status and becomes subject to market-driven competition from other debit providers. MasterCard believes it is well positioned to provide such competition.
While MasterCard believes Canada’s current regulatory framework is sufficiently robust to ensure competition in payments, and that price controls will result in consumer harm, we believe the system always benefits from greater transparency and education. This will be the focus of our meeting with the CFIB.
We believe Canada has one of the strongest financial systems in the world. Credit cards are an important part of that system, providing one of the few credit delivery mechanisms that remains reliable despite the current economic crisis.
We understand that this system is simple on its surface—allowing you to exercise your purchasing power across the street and around the world—but that simplicity is underpinned by a sophisticated infrastructure that requires continuous investment, innovation, and balance. Therefore, we thank you for the opportunity to participate in this process.
I look forward to your questions.