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Motion to Authorize Committee to Study Credit and Debit Card Systems

Honourable senators, I have tabled a motion proposing that the Standing Senate Committee on Banking, Trade and Commerce be authorized to examine and report on the credit and debit card systems in Canada and their relative rates and fees, in particular for businesses and consumers.

This is my second attempt since I had the misfortune of moving this motion two days before Parliament was prorogued last month. We have lost two precious months of debate and work on this and other important matters.

My research indicates that Canadians hold 68.2 million credit cards with the Visa and MasterCard brands and used them to purchase $267 billion of goods and services in 2008.

Eighty per cent of all credit cards in Canada are Visa or MasterCard. Consumers pay up to 24.75 per cent in interest on their credit cards. Current legal interest rates in Canada can be up to 60 per cent.

Credit card transaction fees or, to use the financial sector's language, the interchange rate, are up to 3 per cent of purchases for businesses, up to 1.8 per cent for governments and 1.5 per cent for charities. The interchange rates are set by the credit card companies and paid to them. For the same volume of sales, Canadian businesses pay up to $6.7 billion more per year in interchange fees than their Australian counterparts.

Some say there is not enough regulation in Canada relating to credit. Can you imagine that even in 2008 the definition of money does not officially include electronic money? Since electronic money is not regulated federally, this could become a major problem.

Consumer groups, such as Option consommateurs, have voiced their concerns and I believe the Banking, Trade and Commerce Committee should be able to hear them.

Interchange rates and other rates set by the credit card companies have gone up since the spring of 2008. The interchange rate is the percentage of the total purchase price that Visa, MasterCard and related banks charge to businesses. In addition, there are also major concerns with the interest rates charged by credit card companies.

Since my first attempt at moving this motion, I have received feedback and encouragement from ordinary Canadians, which has increased my determination that the Senate move forward on this matter. Make no mistakes; Canadians are furious about the sky-high interest rates charged by banks and credit card companies. We all know that the global financial crisis prompted the federal government last fall to buy, unconditionally, $75 billion in mortgages from Canadian banks in an effort to retain their lending capacity to businesses and individuals. In addition, the Bank of Canada has injected $36 billion of additional liquidity into money markets. Moreover, a recent Bank of Canada survey shows widespread tightening of credit and terms. This tightening tells us that the government's billion dollar bailout did not push banks to ease access to credit to help the Canadian economy. Yesterday's budget added another $50 billion in Canadian tax dollars for bank bailouts to total $125 billion, which we must borrow.

To put things into perspective, I will give two examples. First, last October, 13.8 million Canadians voted; the $125 billion bank bailout represents $9,058 per voter. Second, the Canadian banking sector employs about 257,000 people in Canada; the $125 billion unconditional bailout represents $486,380 per bank job.

Why are no conditions imposed on bankers to reduce their high salaries while lower salary conditions were imposed on the auto sector? Why do we have double standards — one for the rich and one for the middle-income citizen?

On December 9, 2008, the Bank of Canada prime rate fell to 1.5 per cent. However, commercial banks did not pass the reduction on to individuals and businesses. Furthermore, on January 20, 2009, the Bank of Canada slashed its interest rate again, bringing it to 1 per cent. Banks have continued to increase fees on other products such as lines of credit, safety deposit boxes, et cetera. While the Bank of Canada's prime rate has been going down, why are credit card interest rates not following the same trend?

In December, the TD Bank drove up interest rates for most Visa customers who miss two consecutive minimum payments. Customers who take 30 days beyond the due date to make the minimum payment will face a 5 per cent increase in the interest rate to 24.75 per cent. We have learned that the Bank of Montreal notified its customers of a 1 per cent increase in the interest rate on lines of credit obtained before October 15, 2008, yet, in that same week, announced that it was buying a financial institution in the U.K. Keep in mind that the Bank of Canada's prime rate is currently set at 1 per cent and that this rate is intended to promote consumer confidence and business investment.

Facing a difficult financial situation, some Canadians will depend more and more on credit, especially during the winter season. Given the current state of our economy, consumers need to pay lower interest rates to sustain their purchasing power. Honourable senators, Canadians are paying high credit card rates even though Canadian banks have received a handout from the federal government.

Aggressive marketing of credit cards to various target groups — youth and students being prime examples — is another issue.

This brings me to talk about solicitation since many cards are, for the most part, unsolicited and are practically imposed by default on card holders. The aggressive marketing strategies used by credit card issuers to give consumers premium cards are directly responsible for increased interchange rates on the business community and eventually on consumers themselves.

This is another aspect that the Standing Senate Committee on Banking, Trade and Commerce may wish to tackle if the Senate authorizes a thorough study through this motion.

Credit card companies are also marketing sub-products, such as credit balance insurance — and we all know that Canadians are the population group that owns the most insurance throughout the world.

The fees charged to businesses, charities, educational institutions, government services and others for accepting payments by credit card have been rising. My research indicates that businesses pay fees to credit card issuers of up to 3 per cent of the purchase price, and indications are that credit card issuers are increasing these fees for premium cards and for higher risk customers.

Businesses are not informed of the customer's risk factor and associated fees, and they have not had any input with regard to the number of premium cards issued. As of last year the number of premium cards constituted 20 per cent of the market, which represents roughly 14 million premium cards. Businesses have no option. The terms of the contracts that businesses sign with their processor include a clause dictated by the card companies. It requires them to "honour all cards" and thus they cannot refuse to accept premium cards, which carry increased fees. The higher cost to the business community is either transferred as higher product cost or at lower profit margins depending on the market.

The Canadian Federation of Independent Business, which represents 105,000 small businesses in every sector, has denounced through a press release the introduction of new types of cards called "premier" or "infinite" cards. In addition to being unsolicited, many Canadians find it very difficult to refuse these cards. Canadians are told that their credit will be cut off if they do not activate their new premium card, and it is almost impossible to return the card. Interchange rates vary considerably and the complexity of their structure becomes a burden for businesses. I have received different statements from businesses indicating this fact.

Business interchange rates on major credit cards generate $4.5 billion in revenue for credit card companies and banks. Canadian rates are currently among the highest in the industrialized world. Of course, credit card issuers need to generate revenue for their shareholders. However, I believe that rates must be fair, transparent and accountable. Therefore, they should be regulated.

An independent study conducted in 2006 by Diamond Management Consultants in the U.S. estimated that only 13 per cent of the fees charged to businesses went to the actual cost of facilitating the transaction. The remaining 87 per cent funded aggressive marketing campaigns and the profit lines of the credit card companies and their issuers.

Visa Inc.'s 2008 fourth fiscal quarter earnings figures show that the company has a net income of $800 million from total operating revenues of $6.3 billion. The MasterCard Worldwide 2007 Annual Report indicates a net income of $1 billion from net revenue of $4.1 billion. MasterCard Worldwide's net income has more than doubled between 2006 and 2007.

Honourable senators, credit cards are an important payment option for consumers and businesses. In 2008, 68.2 million Visa and MasterCard credit cards were issued in Canada to purchase $267 billion worth of merchandise. Visa and MasterCard hold about 80 per cent of the national credit card market. Credit card companies are, therefore, extremely wealthy and powerful. Is this a collusion situation because of this quasi-monopoly situation? Could the credit card issuers' proposed increases be a means to move to fill the void left by the 2 per cent of sales vacated by the reduction of the GST?

There is no turning back. Electronic payments and electronic money are an essential part of monetary transactions. Therefore, if 80 per cent of the credit card transactions go through two companies it should be a serious concern for parliamentarians and government.

Commenting in numerous news articles regarding interchange rate increases, Visa and MasterCard indicate that the Canadian credit card market is very competitive. How can they qualify the market as competitive if they hold 80 per cent of it? Can you identify another market in Canada where fierce competition leads to higher prices?

We should also look at the potential impact of rising interchange rates on the three levels of government — that is, Crown corporations and government agencies, museums and parks, and licensing departments — which are all paying interchange rates when Canadians purchase government services. Any increase in the rates paid by these entities would logically raise a government's costs for services. Being from New Brunswick, my office has been in contact with Service New Brunswick, and we have discovered that they have a blended interchange rate of 1.813 per cent.

Rates charged to government agencies and Crown corporations are significant. A report from the United States Government Accountability Office states that for fiscal year 2007, "federal entities accepted cards for over $27 billion in revenue and paid at least $433 million in associated merchant discount fees. For those able to separately identify interchange costs, these entities collected $18.6 billion in card revenue and paid $208 million in interchange fees."

All things being equal, let us assume that Canada, having 10 per cent of the U.S. population, has government credit card costs at 10 per cent of the U.S. figure. This would infer that government costs are at about $20 million. Imagine what we could do to any given government program with an additional $20 million a year. Honourable senators would all agree that these taxpayer dollars could have a more efficient use. While Australia's legislated credit card interchange rate for governments and agencies is at 0.33 per cent, Canada's rate for governments and agencies is at 1.8 per cent, which is 1.5 per cent more.

Honourable senators, when Canadians use a credit card to donate to a charitable organization, they have no idea that part of their donation is used to pay the companies that issue credit cards. When I discussed this with representatives of some large charitable organizations, I found out that the credit card companies charge an average of 1.5 per cent of all donations as an interchange fee. I should note that these companies have suspended their fees in certain cases, such as when the tsunami hit.

In Australia, MasterCard and Visa have voluntarily eliminated interchange fees for charitable organizations. Why can they not demonstrate that kind of corporate citizenship in Canada by applying the same policy here? In the difficult times that lie ahead, many Canadians will need to rely on charities, and it would be a good thing to help these organizations.

Similarly, we are concerned about the impact on businesses and consumers of the likely fee increase for debit card purchases, such as those using Interac.

Apparently, Interac is in talks with the Competition Bureau about giving up its not-for-profit status. The committee's study should provide information for the Competition Bureau.

In 2006, the Bank of Canada did a survey revealing that each debit card purchase cost the vendor about 12 cents. In addition, certain debit card holders were paying a monthly fee or a per-use fee. If Interac were no longer a not-for-profit operation, the fees businesses pay on debit card transactions would go up, leading to higher consumer prices. Would fees go up for consumers who use their debit card to make purchases or use bank machines?

Last December, I invited honourable senators to visit a website called This group, made up of Canadian associations led by the Retail Council of Canada, represents more than 160,000 businesses and continues to grow.

According to the campaign's website, Canada has some of the highest interchange rates in the world. Rates in Canada average 2 per cent while regulated rates in Australia are 0.45 per cent and in the U.K, they are 0.78 per cent. It is important to keep in mind that the Australian authorities have been regulating interchange rates for the past five years.

There is also a related campaign headed by the Canadian Federation of Independent Business. The federation says that there is also a lack of transparency in rates for businesses given that they are unable to easily recognize credit card fees at the point of sale.

Honourable senators, I strongly believe the Senate must refer this motion to committee. We must make sure businesses are respected and that their work and efforts are not undermined by over-the-top interchange rates. All things being equal, the rates in Canada should be competitive, as they are in Australia.

We must untangle the complex web of fees and rates to ensure that Canadian businesses and consumers are treated with fairness, respect and in a manner that promotes a sustainable and competitive economic environment. We must ensure fair interest rates for consumers, taking into consideration that the current Bank of Canada rate is 1 per cent while credit card issuers are charging up to 24.75 per cent.

Honourable senators, these issues are not about the Senate. They are not about party politics. They are about regulation, accountability and oversight. They are about our economy.

We need to ensure that the voices of Canadians are heard and we need to pressure the government to intervene. Since the first step is getting all the facts on the table, I hope the Senate will allow the committee to do its work and pursue this study sooner rather than later.