June 8, 2012
Québec

Archived - Speech by the Honourable Jim Flaherty, Minister of Finance, at the 15th Payments Panorama Conference

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Good afternoon. I want to thank Guy Legault and the Canadian Payments Association for hosting us here in Quebec City—a wonderful place to host a meeting in early summer, as was Vancouver two years ago, the last time we met. 

I also want to extend my congratulations to Ron Matthews on his well-earned retirement from both Imperial Oil and as Chair of the Stakeholder Advisory Committee within the CPA, a position which he has held for 13 years.

The work that you do matters a lot for our country and because our country matters, it matters a lot for the rest of the world, particularly the modelling we do here in Canada. This is an important gathering and an important organization for me.

It was two years ago at this conference that I announced the appointment of Pat Meredith as Chair of the Task Force for the Payments System Review. Thanks to her and all the other members of the Task Force, we are much further down the road of understanding the technological changes that are upon us due to the advent of mobile technology, and we are much closer to seizing hold of the potential of digital payments.

I don’t need to tell the people in this room that the uncertainty of the world economy has been the big story of the last four or five years. In fact, since our Government came to office in February 2006 the vast majority of my tenure as Finance Minister has been a challenging exercise in fiscal management, as we worked to keep Canada’s economy among the world’s best.

I am going to talk for a moment about the big picture and then I’ll come back to payments.

Some of the risks we have—some of them unprecedented in scale—have challenged us to make difficult decisions in the best interests of all Canadians. It has given us tremendous opportunity as well.

One advantage of being dealt a difficult hand is that it teaches you patience under pressure. It carves out a space where, with no easy solution to any given problem, you are forced to consider longer and more complex ones instead.

When it comes to vision, you must never blow an uncertain trumpet. So I hope you will indulge me when I talk for a moment about where we are in Canada and where we are in the world.

The global context, as you know, is a difficult one. The situation in Europe is very challenging, not only with countries with severe sovereign indebtedness but also with banks that are undercapitalized. This is not a new story. We saw this story in 2008 in the United States. That was a difficult time.

I remember being in the Cash Room of the Treasury in the United States just before our election. It was Friday, October 10, 2008, and the Europeans were very critical of U.S. Treasury Secretary Hank Paulson for letting Lehman Brothers fail. They had a chart that showed how the credit spreads had grown very large in the month since Lehman Brothers had failed.

We have to be careful when we criticize each other because the reality today is that the Americans dealt with their issue. They overwhelmed their issue with trillions of dollars, all of which was paid back by the American banks. And now the Europeans are in a similar situation to what the Americans were in.

Both at that time and this time, the Prime Minister and I have both been saying to our European allies and friends that it’s very important for them to take a position that restores market confidence and say they will take the necessary steps, as the Americans did in October 2008, to ensure that their financial and banking systems are stable and solid. We will both be at Los Cabos in Mexico in 10 days or so for a meeting of the G-20. These are important issues because they affect all of us around the world.

I will now discuss our fiscal record in Canada, which is very good. We are a stable economy. We have sound fiscal fundamentals. We have sound economic fundamentals. We have the lowest debt-to-GDP ratio in the G-7.

The OECD and the IMF predict that our economy will be among the leaders of the industrial world in the next two years.

We are only one of two countries to have recouped all of the jobs that we lost during the Great Recession in 2008–2009. In fact, since July 2009 we have recouped more than 750,000 net new jobs in Canada.

Forbes magazine ranks Canada number one in its annual review of the best countries for business.

All three credit rating agencies have reaffirmed Canada’s top credit rating in the world. They expect us to maintain it going forward.

I gave a speech in New York a while ago, and there were a lot of investment bankers there. I talked about what I just talked about here—about all our banking fundamentals being good. An investment banker came up to me afterwards and said what I didn’t mention is that Canada has a government that can make decisions and implement them. 

This is a great challenge in those jurisdictions that are suffering from political gridlock, like the United States now. We are able to move forward. It doesn’t make us always the most popular government, but we are able to make decisions together and to move forward.

Canada is in good shape. The budget which I brought in earlier this year is not just about numbers. It’s the policy document of the Government of Canada. It’s where we are going. It’s not looking forward just to tomorrow morning or next year. Because we have a majority government, we now look out a decade from now, 20 years from now.

What is the positioning of our country going to be? We look at the world. We know that European financial and economic performance is flat or worse than flat. We know that the U.S. economy is challenged. We look at what we can do with the emerging economies in the world. This is Canada’s moment. This is an incredible opportunity for us together to seize these opportunities that are available to us.

We structured the budget to do that by doing two things. First of all, we want to make sure that our financial plan is sustainable. In the medium term, we will have a balanced budget again. Secondly, in the longer term—and this is important looking at things like Equalization payments, the Canada Health Transfer and Old Age Security—we need to look at the structural part of our spending, making sure that those social programs that are important to all of us will be there for Canadians 10, 15 and 20 years from now.

We also need to look at the pillars of growth for the Canadian economy.

Trade is one such pillar. We are a relatively small country in terms of population. We would not have our quality of life and standard of living were it not for trade. We have signed nine bilateral free trade agreements since we took office in 2006. We are going to sign more with the European Union, I hope, and then very importantly, with some of the Asian economies as we go forward.

Another important pillar is regulatory reform, which is controversial. We have Plan Nord here in Quebec. We have oil and gas development in Newfoundland and Labrador. We have potash development in New Brunswick. We have the Circle of Fire in Ontario, hydroelectric projects in northern Manitoba, and potash and mineral development in Saskatchewan. We have incredible oil and gas development in Alberta, as well as the ports that are being developed and minerals and forestry in British Columbia. This is our opportunity as a nation together to build these big projects.

We have to have environmental protection, of course, but for those who say that environmental protection comes at the price of economic growth, I say you are wrong. There can be a balance. We can have environmental protection and we should have environmental protection. We need to balance it with the need for jobs, growth and long-term prosperity in our country. We do need to seize this historic opportunity for this great country of Canada. Therefore, we are pursuing regulatory reform, which will result in one project, one review with limited time frames.

The third pillar is jobs. We have a demographic challenge. We all know we have an aging population. I’m a baby boomer. Some of you are too. We’re not going to work forever. It’s very important that we try to make sure we have enough people for the jobs we’re going to have in this growing economy.

So the budget has initiatives for seniors, Aboriginal youth, training to match people with the available jobs across the country, and people with disabilities so that they have the opportunity to engage in the labour force.

The fourth pillar is the immigration system. We are increasingly going to encourage people to come to Canada who have skills that can help grow our economy.

Yes, it’s a big budget bill that’s before Parliament. It’s a big economic plan for our country for the next 10 or 20 years. I think it will result in substantial prosperity for Canada over time. 

Now, I will discuss why payments matter, which is the theme of your conference.

It is a fascinating time for payments. In the past year, we’ve seen a telecommunications firm take steps toward becoming a bank.

We’ve watched the Code of Conduct for the Credit and Debit Card Industry celebrate its first birthday and come fully into force.

The Canadian Bankers Association has recently published voluntary guidelines to help set the stage for the deployment of payment options through mobile phones.

I was encouraged to see the announcement of new partnerships between the banking and telecommunications sectors in Canada working on the development of digital wallets.

As a government, we are taking steps to modernize the way we do business and save taxpayers’ dollars by phasing out government cheques and increasing the usage of direct deposit for all government payments. This initiative is being led by Public Works and Government Services Canada, and I am happy that Murielle Boucher of the Department of Public Works, who is the co-chair of this conference, has spoken to this group about plans in this area. 

Notably, we had the pleasure of receiving the report of the Task Force for the Payments System Review.

As Minister of Finance, all of these things matter to me because I am responsible for the overall policy framework for the payments system at the federal level, including its safety, soundness, levels of innovation and competition, and ensuring that consumers and businesses are well-served. The payments system is integral to the economy and is responsible for the movement of money within this economy. More than 24 billion payments worth over $44 trillion are made every year in Canada. Our economy simply wouldn’t function without this system.

The final report of the Task Force, entitled Moving Canada into the Digital Age, strikes a number of chords quite in line with some of the main pillars our government is focusing on. They include the need for private sector innovation and a thorough look at our back offices to make sure the needs of our clients (in my case, taxpayers) are being met and even exceeded at the best possible price.

To accommodate the digital era, the Task Force has stated that changes to the governance of payments and its supporting infrastructure will be required. The Task Force has also proposed a roadmap that addresses important stages in the evolution toward digital payments like implementing electronic invoicing and payments, and advancing digital identification and authentication for online commerce and payments.

Let me take this opportunity to applaud the tireless efforts of the Task Force members. I have to thank all of you as well because I know so many of you participated in the work of the Task Force, the many seminars that were held and the consultations. You made very valuable contributions and the report is very valuable to the Government of Canada. I want to thank Pat Meredith. I am delighted at the truly collaborative approach you have taken and I hope to harness the spirit of the dialogue in the future.

Some of you may be thinking: Now that the Task Force has reported, what can you expect from the Government?

We are already on similar pages. The Government has taken action in response to the Task Force.

First, I agree that dialogue is instrumental to adapting to change. We’ve taken steps to establish a consultative committee made up of public and private sector stakeholders to discuss emerging payments system issues.

We will call this committee the Finance Canada Payments Consultative Committee, or FinPay. Led by the Department of Finance, FinPay will be made up of stakeholders from across the payments industry and user community.

FinPay will help the Government stay current about market developments and will contribute to the elaboration of effective policy that supports an innovative and safe payments system that meets the needs of consumers and merchants. We are currently finalizing the terms of reference and membership of this committee. Following that, we will convene the first meeting. 

FinPay is just one step. Secondly, we expect that mobile technology will be the next significant technological wave in payments. We are reviewing our Code of Conduct for the Credit and Debit Card Industry so that it guides the evolution of mobile payments in Canada in line with the Code’s principles of transparency, fairness and competition.

As many of you will recall, the Code was the result of extensive stakeholder consultations, including with many of you in this room, and has improved disclosure and transparency and has promoted fair business practices among payment card network operators and their participants.

With the benefit of the Task Force’s findings and the input of stakeholders, my officials in Finance are currently reviewing the application of the Code in light of the emerging mobile payments products now entering the market.

As before, we will consult publicly so the Code remains guided by the collective voices of all payments stakeholders.

I believe that when problems do arise, it is often industry itself that is in the best position to respond. For the Code to work, the networks must ensure their business partners in supplying card services fully embrace the spirit of the Code, including independent service operators who supply services to merchant acquirers.I would now like to say a few words about governance.

We are taking a fresh look at how the Canadian payments system and its participants are governed to ensure the continued safety and soundness of the payments system, spur innovation and promote the consideration of user interests.

Important questions we need to ask include: Are new players and technologies posing challenges to our current governance arrangements? What is the appropriate scope and nature of public sector oversight in this highly dynamic and rapidly evolving sector? Should the scope of existing governance arrangements be broadened to include new players, new roles and responsibilities, and possibly new structures?

Going forward, we plan to work with key stakeholders to assess how best to align the needs of Canadians with the change underway in payments today. The recommendations of the Task Force on governance will guide our analysis.

Throughout all of these initiatives, our view of the Government’s role is to set overarching principles and a healthy regulatory environment for payments so that competition and innovation can take place.

Card networks and the financial system must remember that while there is nothing bad with profits, they are there first and foremost to serve their users, who are consumers and merchants.

Some jurisdictions around the world have chosen highly prescriptive and constraining rules governing credit and debit payments, even dictating prices. As practices evolve, these rules are bound to become obsolete and to have significant unintended consequences.

I understand that some players in the payments system would like me to cap interchange rates. Similarly, many people would like the price of gas to be capped, their cell phone bills to be capped, and the price of their groceries to be capped. We all know that controlling prices does not work and that what we need is healthy, competitive, innovative markets. That is why rate regulation has never been the name of the game in the Canadian financial sector.

Canada benefits from a good low-cost debit option that almost all consumers have access to. With the Code of Conduct, I have taken steps to preserve Canada’s low-cost debit system by prohibiting competing domestic payment applications on a single card and empowering merchants to steer consumers toward low-cost options through steering and discounting.

With this Code of Conduct, merchants have the power to offer consumers discounts for paying with a low-cost payment method. I suggest to you: Isn’t that the best of all reward programs? Before calling for rate regulation and asking the Government to limit reward programs for consumers, merchants should realize that they hold a significant competitive advantage and can change the way consumers choose payment options.

Canada has chosen a Code of Conduct for the Credit and Debit Card Industry that is fundamentally principles-based and that clearly places the responsibility of acting ethically and responsibly with each industry player.

This Code is focused on fairness, transparency and soundness, and it should be quite obvious to all payments industry players what is expected of them under the Code. The intent was always that the Code would apply throughout the payments system, from networks all the way to consumers.

While the Code has been a great success and the vast majority of payments players have been playing by the rules, there are unfortunately some players, especially in the merchant acquiring/ISO business, who have not been as transparent as they should be and have been using a narrow interpretation of the Code to justify, how shall I say, troubling business practices.

This is an issue of concern to me as the Minister of Finance. It imperils the value proposition of the Code, which so many support.

This is why I applaud the recent efforts by the payment card networks who are working in conjunction with the Financial Consumer Agency of Canada to develop solutions to these issues. I believe that the industry can and should first attempt to work together to find solutions to ensure that not only the letter, but also the spirit, of the Code is fully respected.

The Task Force did wonderful work. They demonstrated through their own actions that carving out a clear vision is made easier with the benefit of many different perspectives, not just a few.

This is a lesson that I apply when I am managing our economy. It’s why our budget planning benefits from cross-country and online consultations. It is one I am equally certain will bridge the old, analogue world with the emergent digital one.

We have an important industry here and I thank you for inviting me. I look forward to working with you so that we can continue to match the progress in this industry with the needs of the Canadian people and the Canadian economy and we can be world leaders in all of this.

Always remember in your work that we are living in the best country in the world, the True North strong and free.

Thank you very much.