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Retail Council of Canada Submission in Response to Finance Canada's 2006 Review of Financial Sector Legislation:
Submission on: The 2006 Review of Financial Institutions Legislation
Table of Contents
Retail Council of Canada's (RCC's) submission deals with the sections of the consultation document that discuss electronic transactions, and how to adapt the framework to new developments. We also address the need to include a much more comprehensive set of payments system issues and opportunities in the 2006 review of the legislation. The broad range of inter-related payments system changes and trends must be thoroughly examined to ensure the base legislative framework included in Bill C-8 is enhanced as necessary to continue serving the needs of all payments system stakeholders. Accordingly, RCC's submission includes comments under two additional headings:
- CPA and Governance of Canada's Payments System; and,
- Provision of Payments Processing Services to Retailers.
The submission also notes retailers' ongoing requirements for efficient and competitive financial services that are available locally in communities across Canada, as has been explained extensively in previous RCC submissions on financial services.
The submission reviews some of the complexities that must be considered when deciding how best to protect the interests of consumers when they are making electronic transactions, and recommends the government continue enabling payments system stakeholders to decide risk management measures and deal with liabilities in the context of each specific payment mechanism and service delivery channel (e.g., the Internet). There should be a process to facilitate periodic review of risks, responsibilities, liabilities and prudent risk mitigation practices for methods of payment, as was used in revising the debit card code.
RCC has welcomed the cheque imaging project, undertaken by the CPA and its member financial institutions. However, RCC is concerned that the benefits of cheque imaging may not be fully extended to the organizations that issue and accept cheques, and that fees for cheque services may simply increase to cover the financial industry's costs to introduce and operate cheque imaging systems. RCC recommends the CPA assume responsibility for planning the application of cheque imaging technology to include operations and customer service interests of all its stakeholders, beyond financial institutions.
RCC welcomed the formalization of the Canadian Payments Association (CPA) Stakeholder Advisory Council as an important step in enabling retailers and other stakeholders to have a stronger voice in planning and operating the payments system. However, the effectiveness of this step is severely limited because both the CPA's mandate and the payments system legislation exclude major types of payment transactions. RCC recommends the government organize and undertake a comprehensive review of all payment systems not presently covered by the Canadian Payments Act, including subjects such as their governance structure, processes for involving stakeholders, risks, etc.
In previous submissions and presentations dealing with financial industry legislation, the payments system and potential bank mergers, RCC raised retailers' concerns about the increasing cost of accepting Visa and MasterCard credit card transactions. Recent developments have enhanced our concerns in this regard. RCC recommends the Government initiate a comprehensive review of Visa and MasterCard services that would examine all aspects of the provision of credit card acceptance services to merchants, the processes card associations and their members use to establish interchange fees, and other practices of the card associations that increase retailers' costs and impact service to their customers. The review should take into account the results of studies undertaken in other countries, and consider the applicability in Canada of regulatory and other changes adopted elsewhere, such as in Australia.
History and Mandate:
Retail Council of Canada (RCC) has been the Voice of Retail in Canada since 1963. We speak for an industry that touches the daily lives of Canadians in every corner of the country - by providing jobs, consumer value, world-class product selection, and the colour, sizzle and entertainment of the marketplace.
RCC is a not-for-profit, industry-funded association whose more than 9,000 members embrace all retail formats, including department, specialty, discount and independent stores, and online retailers.
Whenever the opportunity presents itself, RCC is there promoting retail as a profession; as a portal to the world of work; as an economic driver; as a barometer of consumer tastes and confidence; and as an intensely competitive arena that delivers one of the highest standards of living in the world to Canadian consumers.
Retail Council of Canada is a vigorous advocate for retailing in Canada and lobbies all levels of government on a range of retail-oriented issues. RCC also provides members with a full range of cost-saving benefits, as well as educational products and services through the Canadian Retail Institute. RCC hosts a number of national conferences annually, and produces several publications, including the award winning bi-monthly magazine, Canadian Retailer.
Retail Council of Canada (RCC) is the leader in advancing and protecting the interests of the Retail Industry in Canada.
Retail Council of Canada's (RCC) mission is to be the Voice of Retail in Canada by providing advocacy, research, education and services that enhance opportunities for retail success, and increase awareness of retail's contribution to the communities and customers it serves.
Retail Council of Canada (RCC) is pleased to have this opportunity to contribute the views of retailers for consideration in the 2006 review of financial institutions legislation.
The association consults regularly with its members on matters relating to financial services and the payments system, which are ranked as critical issues for retailers and their customers. Throughout its history, RCC has strongly advocated legislation and policies that facilitate the availability of competitively-priced financial services that its members rely on in their day-to-day operations.
RCC's submission deals with the following topics listed specifically in the government's consultation document:
1. Enhancing Interests of Consumers - Electronic Transactions – views on how best to address disclosure and assignment of liability for all forms of electronic transactions.
2. Adapting the Framework to New Developments – Canadian Payments Systems and Cheque Imaging – views on allowing financial institutions to electronically process cheque images in place of paper cheques and on ways to improve the Canadian payments system's operation and efficiency.
In addition, RCC's submission addresses the need to include a much more comprehensive set of payments system issues and opportunities in the 2006 review of the legislation. This is necessary because the payments system is continuing to change at an accelerating pace. Many of the significant changes, including specific payment mechanisms and in the provision of payment processing services to retailers are taking place largely outside provisions of current payments system legislation and the agenda of the Canadian Payments Association (CPA). RCC believes the broad range of inter-related payments system changes and trends must be thoroughly examined to ensure the base legislative framework included in Bill C-8 is enhanced as necessary to continue serving the needs of all payments system stakeholders. Accordingly, RCC's submission includes comments under two additional headings:
- CPA and Governance of Canada's Payments System; and,
- Provision of Payments Processing Services to Retailers.
The consultation paper raises possibilities for further changes to the legislation dealing with the provision of competitive financial services in Canada, including "Foreign Bank Entry" and "Credit Unions and Caisses Populaires". We are not commenting specifically on these two topics but rather, wish to emphasize retailers' ongoing requirements for efficient and competitive financial services that are 'available locally' in communities across Canada.
Enhancing Interests of Consumers – Electronic Transactions
The term 'electronic payment transactions' includes payment transactions initiated over open communications networks such as the Internet and telephone, and payment systems that rely more fully on technology rather than on physical documentation and signatures to complete transactions. For retailers, one of the central features of these types of transactions is that they are usually made by means of information recorded on or associated with a consumer's payment or financial services access card. By the nature of electronic payment transactions, the card is not present, meaning that the retailer is not able to verify the card or confirm that the customer is authorized to use it or to access funds in an account or line of credit.
The card most commonly used by consumers for electronic transactions at present is a credit card, and in response to consumer concerns about using credit cards on-line, the card associations have implemented voluntary "zero consumer liability" policies. The consultation document included in the federal budget and a number of other consumer payments system risk-related papers refer to these policies and appear to suggest they might be a model for other electronic payment systems.
RCC would strongly caution against any attempts to standardize responsibilities and procedures for mitigating risks, and policies pertaining to liabilities of payments system stakeholders, across numerous different payment mechanisms. Each method of payment such as credit cards, debit cards, payment systems that use contactless devices such as 'key tags' and cell phones, cheques, and other emerging new methods of payment typically has its own operational characteristics and levels of risk. Furthermore the costs and liabilities of all participants must be carefully considered when establishing policies in this area.
In the case of credit cards used in a card-not-present transaction, retailers, not the card associations or their members, largely bear the costs of the card associations' zero liability policies. It is crucial to keep in mind that retailers bear all the risks in credit card payments over electronic networks (e.g., Internet, telephone) because the retailer cannot obtain a customer signature and does not see the credit card in such card-not-present transactions. When a cardholder subsequently challenges an electronic credit card transaction, the practice of the card associations and their members is to automatically charge such transactions back to the retailer that accepted the payment.
Retailers incur the risks and costs in card-not-present credit card transactions even in situations where a financial institution may be increasing the risks by issuing credit cards and promoting their use in higher risk market segments. Policies such as "zero consumer liability" in certain credit card systems may not be in the best interests of all payments system stakeholders, and indeed result in greater risks and costs for retailers accepting credit cards for on-line merchandise transactions and may lead them to limit such services.
Work done by special payments system committees in Australia and several other countries suggests the final burden of credit card costs rests largely with merchants and their customers. All consumers, including those who use cash and cheques, may be paying more for goods and services due to the high costs merchants must pay for credit card services, and the cost of policies such as "zero consumer liability."
We believe the current consultation processes in place for electronic and other payment systems that are under the jurisdiction of the CPA are providing an appropriate and balanced approach to dealing with disclosure of risks and assignment of liabilities during the planning stages for a new method of payment. For example, the consultation process leading up to the CPA's December 2004 adoption of the framework and CPA Rule governing electronic on-line payments provided opportunities for all payments systems stakeholders to comment on and debate disclosure, risk, and liability. Consumer representatives and many others participated in developing the initial rules and procedures.
The challenge in initially establishing disclosure and assignment of liability for a specific new payment mechanism is that individual stakeholder groups, such as consumers and retailers, are typically discussing only the concept and general understanding of the system at the time initial CPA rules are established. Often, as was the case with debit cards and the more recent on-line electronic payments service, details of a service will become more clear and better understood only when the service is introduced by financial institutions and service providers and all stakeholders gain experience with the service. Accordingly, we believe it is essential to have a process that ensures risk and liability provisions are reviewed regularly, and adjusted, as the method of payment evolves with time and experience. An example is the review process for the Canadian Code of Practice for Debit Card Services. This code has been reviewed and enhanced several times since debit card services were introduced. Perhaps the Electronic Funds Working Group, that covers a broad range of stakeholders and played the key role in revising the debit card code, would be an appropriate forum for the review process.
RCC recommends the government continue enabling payments system stakeholders to decide risk management measures and deal with liabilities in the context of each specific payment mechanism and service delivery channel (e.g., the Internet). There should be a process to facilitate periodic review of risks, responsibilities, liabilities and prudent risk mitigation practices for methods of payment, as was used in revising the debit card code.
Also, as covered later in this submission, prudent action should be taken to ensure all new payment mechanisms intended for broad market application are subject to a consultative approach that involves all key stakeholders.
Adapting the Framework to New Developments - Canadian Payments Systems and Cheque Imaging
The cheque imaging project, as presently structured by the CPA and its member financial institutions, will deliver benefits to financial institutions, and enable them to extend benefits to their customers if they choose to do so. RCC is concerned that the benefits of cheque imaging may not be fully extended to the organizations that issue and accept cheques, and that fees for cheque services may simply increase to cover the financial industry's costs to introduce and operate cheque imaging systems. RCC is hopeful, given the investments retailers will make to facilitate cheque imaging, that financial institutions will share the benefits and potential for service innovations and that imaging will not be an additional cost to retailers.
One important way to achieve this would be to ensure application of the technology is not constrained to financial institutions' operations and the cheque clearing process between financial institutions but rather, is fully leveraged to provide improved financial services to consumers and business. In particular, RCC would urge that remote imaging be offered to merchants and others that receive payment by cheque and that meet the standards for the system. Most retailers do not receive many payments or large dollar amounts by cheque, but the service is very important to some retailers. A specific example is a Canadian retailer providing essential services to consumers, and accepting cheques as payment, in many remote and rural locations in Canada. A large number of the retailer's customer's pay by cheque, but few of the retailer's locations have a physical financial institution branch at which cheques can be deposited. The retailer must mail or courier cheques to its bank and thus incur substantial delays and costs. If a retailer could capture images of the cheques it accepts from customers and process the cheque images electronically to its bank for deposit, this could reduce its costs and improve its cashflow. This process would deliver benefits to the retailers, consumers and to all participants in the cheque processing system.
RCC recognizes the shift to cheque imaging is a major long-term undertaking. We endorse the cheque imaging project as a solid first step in improving cheque processing between financial institutions and as a base for additional applications that add benefits for retailers.
RCC recommends the CPA assume responsibility for planning the application of cheque imaging technology to include operations and customer service interests of all its stakeholders, beyond financial institutions.
CPA and Governance of Canada's Payments System
RCC welcomed the recognition of the importance of Canada's payments system reflected in Bill C-8, and particularly the formalization of the Canadian Payments Association (CPA) Stakeholder Advisory Council. RCC had long advocated a CPA structure that enabled retailers and other stakeholders to have a stronger voice in planning and operating the payments system.
In its submission on Bill C-8 in 2001, RCC noted the legislation did not define the specific types of transactions to be included in the payments system and that the payments system had historically not included Visa and MasterCard products. RCC pointed out that Visa and MasterCard credit card systems were a very high-cost payment service to retailers and encouraged the government to undertake dialogue on the systems when establishing the implementation details for the Canadian Payments Act and the provision in Bill C-8 for "designated payment systems." We specifically suggested the dialogue include topics such as user/stakeholder representation and processes for establishing Visa and MasterCard interchange fees that are fully passed on to retailers. RCC further noted that Visa and MasterCard payment systems were under review in several other countries.
The consultative processes established by the CPA, including the Stakeholder Advisory Council, periodic plenary meetings dealing with important changes in the payments system, and formal consultation on specific CPA rules, continue to work well. However, the effectiveness of the process for retailers is severely limited because both the CPA's mandate and the payments system legislation exclude major types of payment transactions.
Credit cards and other services offered by the Visa and MasterCard associations and their members remain outside the payments system and mandate of the CPA. Retailers do not have access to detailed Visa and MasterCard rules that directly impact their costs, service to customers and operations. They have no voice in setting credit card interchange fees that are charged to them. Numerous new payment mechanisms and developments, such as the use of chip card technology in payments systems, are also evolving outside the present scope of the CPA and payments system legislation. Overall, statistics published by the CPA, Canadian Bankers Association, and the card associations indicate the percentage of payment transactions under CPA governance is relatively small and decreasing.
RCC is not advocating that all payment mechanisms should be immediately moved under the jurisdiction of the CPA. Rather, RCC recommends:
a. The government organizes and undertakes a comprehensive review of all payment systems not presently covered by the Canadian Payments Act, including subjects such as their governance structure, processes for involving stakeholders, risks, etc. This review could build on research already underway by the CPA. The primary objective would be to determine, with broad consultation, the changes necessary to strengthen the effectiveness of payments system legislation. The review would include the following topics:
- Whether the role of the CPA should be limited to matters directly related to clearing and settlement as is largely the case now, or whether it should have responsibility for a wider spectrum of payments systems and activities.
- Whether there is a need for a more comprehensive mechanism of oversight and consultation for the operation and evolution of the various payment systems. (RCC believes this would facilitate the evolution of the market for payments services and provide a valuable place for the interests of the differing stakeholders to be discussed). One example of the role would be to track emerging new payment systems and make recommendations to the CPA Board and/or Finance on which systems should be brought under the CPA's mandate or mandate of an alternative entity, and when.
- If there is an agreed need for such a forum, whether the CPA Stakeholder Advisory Council or the Electronic Funds Transfer Working Group should be expanded to play this role, or whether another body should be established.
- Whether such a forum's responsibility should include consideration of major technology changes in any payment mechanism operating in Canada, and whether rules and standards pertaining to such changes should be subject to approval by all payments system stakeholders. An example of such a change is the planned use of chip card technology, where standards and practices of all the card associations and financial institutions must be harmonized for practical and cost effective use of the cards by retailers and consumers. The costs, benefits and risks of introducing chip card technology must be fully understood and allocated in a reasonable and responsible manner.
b) If the CPA is determined to be the most appropriate home for additional payments systems planning, rules, etc., the composition of the CPA Board and Stakeholder Advisory Council may need changes.
Provision of Payments Processing Services to Retailers
In previous submissions and presentations dealing with financial industry legislation, the payments system and potential bank mergers, RCC raised retailers' concerns about the increasing cost of accepting Visa and MasterCard credit card transactions. These costs that are arbitrarily imposed on retailers are severe and continue to increase without any demonstrated justification. Given the high usage of Visa and MasterCard credit cards by consumers and increasingly by business, retailers have no practical choice at present other than to accept the cards and the charges imposed on them.
A number of changes in the merchant services aspects of Visa and MasterCard services have heightened retailers concerns and the need for action. The major changes and their implications include:
a) Since 2000, the banks have sold or outsourced virtually all the merchant aspects of their Visa and MasterCard credit card business to third-party processors. Large processors that include Moneris Solutions, Global Payments Canada, Paymentech Canada and First Data, dominate the supply of credit card acceptance services to retailers.
b) The banks, when they initially discussed the sale/outsourcing of their merchant services business, stated they would continue to play a role in assuring quality of the service to retailers and would be involved in negotiating service contracts and prices. They said competition in the marketplace would not decrease. This posture changed quickly, and the banks have largely abandoned any role in merchant services. At least one large bank has publicly stated it "does not provide Visa merchant services." The financial institutions focus on the card issuing part of the credit card business, benefit from the high fees paid by retailers, but do not take any responsibility for credit card processing services provided to retailers, including those who are their customers for other financial services.
c) The consolidation in credit card processing, from financial institutions to a small number of large processors, has brought about many of the same issues RCC raised at the time bank mergers were under active consideration. The acceptance and processing of credit card and debit card transactions is a crucial financial service that retailers must have; however, retailers can no longer obtain this important service from a majority of financial institutions. A retailer must contract credit and debit card services with a processor, and may also require a new separate line of credit with the processor. If the retailer experiences a problem with a card processing service or the service provider, the retailer can no longer discuss the situation with a financial institution that the retailer deals with. There is no single entity dealing with a retailer's financial services needs and assuming responsibility for the quality of services. Complaints and concerns are directed elsewhere, and at times they go in circles with no responsive action to the retailer. For many retailers, and particularly those outside a few large Canadian cities, support for crucial credit card services is ever more distant and less accessible.
d) The card transaction processors have adopted pricing practices that pass on to retailers the full extent of fees that are decided by the card associations and their respective card-issuing members. The most significant fee is the interchange fee; a percentage of the dollar value of each transaction that is charged by processors to retailers accepting Visa and MasterCard credit cards. The processors retain a per transaction portion of the fee and pay the balance to the credit card issuers. Processors write contracts with retailers that enable them to pass on all increases in interchange and other fees levied by the card associations, with no opportunity for negotiation. The processors typically blame the card associations for high card processing fees and interchange fee increases. The card associations say the processors are responsible for deciding fees. No organization is accountable to retailers, and of course, financial institutions that benefit directly from fee increases say they have no role in merchant services. Retailers are not consulted or involved in any manner in the interchange fee setting processes of the card associations, and there is no mechanism for retailers to challenge the continuing increases in fees they pay for credit card processing.
e) Visa and MasterCard recently established separate and higher interchange fees for their commercial/corporate card transactions, stating the higher fees assessed to retailers would help card issuers promote commercial/corporate cards. Retailers legitimately question why they should pay higher fees to assist financial institutions to cover their marketing costs to promote commercial credit cards that will further increase retailers' costs. Retailers also see commercial/corporate credit cards as having lower risk to the card issuers and thus believe interchange fees should be lower than for consumer cards, rather than higher.
f) Visa and MasterCard have changed their interchange fee structures in ways that push increasing costs to retailers. MasterCard, for example, has increased its base interchange fee for consumer card transactions by about 40 per cent since 2000. MasterCard typically states that one reason for interchange fee increases is to cover credit card marketing costs of MasterCard and its card issuers, and to increase acceptance of MasterCard. Retailers pay the bills because the card associations and their card-issuing members know retailers have no practical choice other than to accept their cards.
g) The MasterCard and Visa associations and their card-issuer members are expanding their business beyond consumer credit cards. They are actively promoting commercial cards as mentioned above. They are planning, and in some cases have implemented, pre-paid card services such as gift cards. Retailers, if they accept Visa or MasterCard, are required to accept all transactions, including new products bearing the respective Visa and MasterCard brands. Retailers are paying part of the costs to help the card associations expand their business; business expansion that will continue pushing retailers' costs higher and without benefits.
In several countries, practices of Visa and MasterCard organizations and their members that directly impact the provision and pricing of credit card acceptance services to retailers have been examined, challenged and changed. Other studies and challenges are in progress. In Australia, for example, the Reserve Bank took control of certain aspects of Visa and MasterCard credit card systems and introduced changes that included a cost-justification formula for setting interchange fees. Credit card interchange fees and thus fees charged to retailers in Australia decreased substantially. In the U.K., the Office of Fair Trading expressed serious concerns about the MasterCard interchange process and subsequently organized a special task force to undertake extensive research. Visa and MasterCard interchange fees and the processes for establishing the fees are under review in many other countries.
RCC recommends the Government initiate a comprehensive review of Visa and MasterCard services with particular emphasis on:
- all aspects of the provision of credit card acceptance services to merchants, including the supply of services, transparency of card associations' rules, competition in merchant market segments, governance of processing companies serving the Canadian market, service quality, etc.;
- the processes card associations and their members use to establish interchange fees, what organizations are involved, and the degree to which card association interchange fees influence prices processors charge retailers;
- the justification for interchange fees, including a complete detailed quantitative analysis of the costs to retailers, and which organizations (e.g., card issuers) benefit from interchange fees;
- other practices of the card associations that increase retailers' costs and impact service to their customers.
The review should take into account the results of studies undertaken in other countries, and consider the applicability in Canada of regulatory and other changes adopted elsewhere, such as in Australia.
The Ongoing Needs of Retailers for Local, Efficient and Competitive Financial Services
In previous submissions dealing with financial services legislation and potential mergers in the financial industry, RCC emphasised the significant importance of "local" financial services. Our submissions detailed the many services retailers obtain at a financial institution branch office. This requirement has not changed. Market penetration of electronic banking has been significant, but retailers must continue to rely heavily on a physical branch office of a financial institution. In this submission, RCC is asking the government to continue taking into account the needs for local availability of financial services in any aspect of legislation that might alter the number, location and role of branches of financial institutions serving local communities across Canada.
All of which is respectfully submitted.
Vice President Policy Analysis & Research