Documentation

Public version CT-2010-010 THE COMPETITION TRIBUNAL

IN THE MATTER OF the Competition Act, R.S.C. 1985, c. C-34, as amended; AND IN THE MATTER OF an application by the Commissioner of Competition pursuant to section 76 of the Competition Act;

AND IN THE MATTER OF certain agreements or arrangements implemented or enforced by Visa Canada Corporation and MasterCard International Incorporated.

BETWEEN: THE COMMISSIONER OF COMPETITION Applicant - and -

VISA CANADA CORPORATION and MASTERCARD INTERNATIONAL INCORPORATED Respondents - and -

THE TORONTO-DOMINION BANK and CANADIAN BANKERS ASSOCIATION Intervenors

CLOSING ARGUMENT OF THE INTERVENOR, CANADIAN BANKERS ASSOCIATION

OSLER, HOSKIN & HARCOURT LLP P.O. Box 50, 1 First Canadian Place Toronto, ON M5X 1B8

Mahmud Jamal Michelle Lally Jason MacLean

Counsel for the Intervenor, Canadian Bankers Association

LEGAL_1:23905622.1

Public version TABLE OF CONTENTS A. Overview........................................................................................................................- 1 -B. The CBA ........................................................................................................................- 3 -C. The CBA’s Intervention in this Proceeding...................................................................- 4 -D. The CBA’s Intervention Topics.....................................................................................- 5 -E. What Issuers Do.............................................................................................................- 5 -F. The Issuer’s Perspective on the Role of Card Acceptance Fees....................................- 6 -(a) The Relevance of the CBA’s Perspective on the Role of Card Acceptance Fees ....................................................................................................................- 6 -

(b) The CBA’s Evidence on the Role of Card Acceptance Fees.............................- 7 -(i) Revenue flows among the participants in the four-party credit card system ....................................................................................................- 7 -

1. Issuers ........................................................................................- 7 -2. Merchants ..................................................................................- 8 -3. Acquirers....................................................................................- 8 -4. Credit Card Networks ................................................................- 8 -(ii) The role of Interchange and the Merchant Discount Rate (MDR) ........- 9 -(iii) Merchants already recover the MDR because it is embedded in merchants’ retail prices .........................................................................- 9 -

G. The Impact of the Proposed Order on Issuers and Acquirers ......................................- 11 -(a) The Relevance of the CBA’s Perspective On the Impact of the Proposed Order on Issuers and Acquirers........................................................................- 11 -

(b) The Adverse Impacts on Issuers of Eliminating the Honour All Cards Rule..- 11 -1. Harm to smaller Issuers and Issuers without strong brand recognition in Canada ............................................................- 14 -

2. Larger merchants entering into arrangements with particular banks to selectively decline credit cards issued by rival banks...........................................................................- 15 -

3. Loss of point of sale predictability...........................................- 16 -4. Reduced competition amongst Issuers and fewer options and benefits provided by Issuers to cardholders ....................- 17 -

5. Conclusion ...............................................................................- 18 -(c) The Adverse Impacts On Issuers and Acquirers of Eliminating the No Surcharge Rule................................................................................................- 18 -

1. Widespread excessive surcharging and blended surcharging ..............................................................................- 19 -

LEGAL_1:23905622.1

3

2. Issuers may offer fewer rewards for cardholders, cardholder fees may increase, while the networks may increase interchange................................................................- 25 -

3. Partnerships between large merchants and large Issuers agreeing not to surcharge credit cards issued by large Issuers ......................................................................................- 27 -

4. The law of unintended consequences.......................................- 27 -5. The Minister of Finance decided not to abolish the No Surcharge Rule in the Code of Conduct for the Debit and Credit Card Industry in Canada and continues to believe that price regulation is not the answer ....................................- 28 -

H. Conclusion ...................................................................................................................- 30 -LEGAL_1:23905622.1

Public version

Public version A. Overview 1. The Canadian Bankers Association (“CBA”) was granted leave to intervene in this proceeding to address “[t]he Issuer’s perspective on the role of Card Acceptance Fees” and “[t]he impact of the Proposed Order on Issuers and Acquirers.” 1 2. The CBA is the national voice of the Canadian banking industry. It brings the unique perspective of the Canadian banks (large and small) in their capacities as the principal customers of the Respondents and the principal Issuers of credit cards in Canada. The Commissioner has stated that the Proposed Order she seeks in this case would impact some 20 million Canadians who hold Visa or MasterCard credit cards. 2 The vast majority of these Canadian cardholders are customers of Canada’s banks. As Issuers derive their revenue exclusively from cardholders, any impact of the Commissioner’s Proposed Order on cardholders will necessarily have a substantial impact on Issuers.

3. The CBA called two witnesses in this proceeding: Mr. Robert Livingston, President of Capital One Bank (Canada Branch) (“Capital One Canada”) and Ms Karen Leggett, Executive Vice President, Marketing, National Bank of Canada (formerly Senior Vice President, Cards and Payment Solutions, Royal Bank of Canada).

4. Mr. Livingston is responsible for the strategic guidance of Capital One Canada’s credit card business, its operations, and everything customer-facing and market-facing. 3 Mr. Livingston testified that eliminating the Honour All Cards Rule would substantially harm Issuers by: (i) reducing competition among Issuers, with smaller Issuers and Issuers without strong brand recognition in Canada being placed at a competitive disadvantage relative to larger Issuers and Issuers with strong brand recognition; (ii) reducing Issuers’ ability and incentive to offer a broad range of credit card options to cardholders; and (iii) causing cardholder frustration, embarrassment, and inconvenience at the point of sale.

1 The Commissioner of Competition v. Visa Canada Corporation and MasterCard International Incorporated, 2011 Comp. Trib 2, ¶51 (“Intervention Reasons”).

2 Id., ¶31. 3 Livingston Evidence, Hearing Transcript, volume 15 (Public), p. 2528. LEGAL_1:23905622.1

- 2 -

5. Ms Leggett is currently responsible for National Bank’s credit card portfolio 4 and, until recently, headed up Royal Bank’s credit card business and served as Chair of the Board of Moneris Solutions Corporation, an Acquirer jointly owned by the Royal Bank of Canada and the Bank of Montreal. 5 6. Ms Leggett testified that: (i) assuming surcharging becomes widespread and has the effects contended by the Commissioner, eliminating the No Surcharge Rule would harm Issuers by reducing credit card benefits, rewards, and overall credit card usage, but at the same time, would create a new profit centre for merchants; and (ii) eliminating the Honour All Cards Rule would harm Issuers by undermining the core value proposition of credit cards – namely, their ubiquity and certainty of acceptance.

7. The CBA submits that the Visa and MasterCard credit card networks are complex, competitive ecosystems involving cardholders, merchants, Acquirers, Issuers, and the networks themselves. Changes to this system can have unintended, adverse consequences, just as they did in Australia in 2003 following the Reserve Bank of Australia’s regulatory intervention in the marketplace by capping interchange and eliminating the No Surcharge Rule. In Canada, following extensive and lengthy consultation and Parliamentary hearings involving merchants, the networks, Issuers, and Acquirers, the Minister of Finance very carefully considered whether to eliminate the No Surcharge Rule and, in 2010, expressly decided not to do so. Instead, the Minister of Finance expressly affirmed the powerful right of merchants to discount for cash and other payment methods – which the Minister himself recently confirmed is “the best of all reward programs.”

8. For these reasons, and the reasons elaborated below, the CBA respectfully submits that the Tribunal should be cautious in accepting the Commissioner’s invitation to stretch the law of price maintenance in an unprecedented fashion. This Application should be dismissed.

4 Leggett Evidence, Hearing Transcript, volume 16 (Public), pp. 2583-2584. 5 Id., p. 2584. LEGAL_1:23905622.1

Public version

- 3 -

B. The CBA 9. The CBA is the national voice of the Canadian banking industry. Its members are 53 domestic chartered banks, subsidiaries of foreign banks, and foreign bank branches operating in Canada. The CBA deals with matters of concern to the banking industry as a whole. Its main activities are in the fields of legislation, education, publications, public relations, and information. 6 The CBA’s members are listed in Schedules I, II, and III to the Bank Act, 7 and currently include the following 53 banks:

Schedule I banks Schedule II banks Schedule III banks (Domestic chartered banks) (Foreign bank subsidiaries) (Foreign bank branches) Bank of Montreal Amex Bank of Canada Bank of America, National Bank West Bank of America Canada Association Bridgewater Bank Bank of China (Canada) The Bank of New York Mellon Canadian Imperial Bank of Commerce Bank of Tokyo-Mitsubishi UFJ Barclays Bank PLC Canadian Tire Bank (Canada) Capital One Bank (Canada Branch) Canadian Western Bank BNP Paribas (Canada) Citibank, N.A. Citizens Bank of Canada Citibank Canada Comerica Bank Dundee Bank of Canada Habib Canadian Bank Credit Suisse AG Laurentian Bank of Canada HSBC Bank Canada Deutsche Bank A.G. Manulife Bank of Canada ICICI Bank Canada HSBC Bank USA, N.A. National Bank of Canada Industrial and Commercial Bank of JPMorgan Chase Bank, National The Bank of Nova Scotia China (Canada) Association Pacific & Western Bank of Canada ING Bank of Canada Maple Bank GmbH President’s Choice Bank J.P. Morgan Bank Canada Mizuho Corporate Bank Ltd. Royal Bank of Canada Korea Exchange Bank of Canada Société Général (Canada Branch) The Toronto-Dominion Bank Mega International Commercial The Royal Bank of Scotland, N.V. Bank (Canada) State Street Bank and Trust Société Général (Canada) UBS AG State Bank of India (Canada) PNC Bank, National Association Sumitomo Mitsui Banking Corporation of Canada The Royal Bank of Scotland (Can.) UBS Bank (Canada) Walmart Canada Bank

10. As can be seen, the CBA’s member banks include the largest banks in Canada, as well as the smallest banks in Canada, and everything in between. Among the CBA’s members are:

6 The Commissioner of Competition v. Visa Canada Corporation and MasterCard International Incorporated, 2011 Comp. Trib. 2 (“Intervention Reasons”), ¶8.

7 S.C. 1991, as amended. LEGAL_1:23905622.1

Public version

- 4 -

 16 domestic chartered banks (Schedule I banks), including the “big 5” domestic banks (Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, and Canadian Imperial Bank of Commerce), as well as smaller domestic banks such as Canadian Tire Bank and President’s Choice Bank.

 20 foreign bank subsidiaries (Schedule II banks), such as Amex Bank of Canada, Citibank Canada, and Walmart Canada Bank.

 17 foreign bank branches operating in Canada (Schedule III banks), such as Barclays Bank, Credit Suisse, and Capital One Bank (Canada Branch).

C. The CBA’s Intervention in this Proceeding 11. The CBA has intervened in this case to speak not just for Canada’s big banks, but also for Canada’s smaller banks – it speaks for the Canadian banking industry as a whole.

12. The Commissioner has acknowledged that her Proposed Order would impact the 670,000 merchants who accept credit cards in Canada and the 20 million Canadians who hold such credit cards. 8 The vast majority of these Canadian credit cardholders are customers of Canada’s banks – they hold Visa or MasterCards issued by Canada’s banks, and many of them also have broader banking relationships with Canada’s banks. As Madam Justice Simpson found, these relationships with the banks’ cardholders would be directly impacted if the Commissioner’s Proposed Order were granted. 9 13. Madam Justice Simpson allowed the CBA to intervene over the Commissioner’s strenuous objections. She said that she was “satisfied” that many of the CBA member banks are directly affected by the Commissioner’s Proposed Order. 10 She also accepted the CBA’s evidence that if the Tribunal grants the Commissioner’s Proposed Order, so that merchants could refuse to honour all cards and start surcharging Visa and MasterCard cardholders, cardholders

8 Intervention Reasons, ¶31. 9 Id., ¶41. 10 Id., ¶41. LEGAL_1:23905622.1

Public version

- 5 -

“will complain to Issuers and cancel their credit cards if these cards are refused by merchants.” 11 She also acknowledged that two of the CBA’s members (Royal Bank of Canada and Bank of Montreal) have a 50% interest in an acquirer business (Moneris), and that “their contracts with merchants will change if the Proposed Order is made.” 12 14. Importantly, Madam Justice Simpson noted that even though issuing banks and banks with interests in acquirers are participants in Visa’s and MasterCard’s respective four-party credit card networks, the Commissioner has not alleged that any of Canada’s banks or their acquirers has engaged in any anticompetitive conduct. She noted that the Commissioner has alleged “no impropriety” whatsoever against Toronto-Dominion Bank, nor against any of the 13 CBA’s other member banks. Nor has the Commissioner alleged that any of the CBA member banks has engaged in collusion with Visa or MasterCard, or with each other. Lastly, the Commissioner seeks no order against any of Canada’s banks: her application is targeted solely against Visa and MasterCard. 14 D. The CBA’s Intervention Topics 15. Madam Justice Simpson granted the CBA leave to intervene on two intervention topics: (A) The Issuer’s perspective on the role of Card Acceptance Fees; and (B) the impact of the Proposed Order on Issuers and Acquirers. 15 Following a brief discussion of what Issuers do, each topic is addressed in turn below.

E. What Issuers Do 16. In order to address the intervention topics, it is important to explain what Issuers do. Ms Leggett explained that Issuers perform several different functions, “which include everything from the creation of credit card products,” to the “marketing of products to consumers and to

11 Id., ¶39. 12 Id., ¶40. 13 Id., ¶34. 14 Notice of Application dated 2010-12-14, The Commissioner of Competition v. Visa Canada Corporation and MasterCard International Incorporated, CT-2010-10.

15 Intervention Reasons, ¶51. LEGAL_1:23905622.1

Public version

- 6 -

cardholders. Issuers also create the reward and value propositions associated with the different products, as well as all of the operational as well as technological aspects of managing a credit card business.” 16 Ms Leggett testified that this includes “everything from adjudicating a consumer that applies for a credit card and assessing what limit they’re entitled to, as well as, once [...] a cardholder starts using the card, accepting payment, collections functions if there is a bad debt that needs to be written off – that’s the sole responsibility of the issuer – as well as fraud monitoring, investigations, full call centre infrastructure and other [...] activities.” 17 17. In short, an Issuer’s business begins and ends with cardholders. Issuers derive their revenue exclusively from cardholders both directly (from cardholder fees and interest) and indirectly when cardholders use their cards (from interchange fees paid by Acquirers to Issuers). Accordingly, assessing the impact of the Proposed Order on Issuers necessarily involves assessing the impact of the Proposed Order on Issuers’ customers, the cardholders.

F. The Issuer’s Perspective on the Role of Card Acceptance Fees (a) The Relevance of the CBA’s Perspective on the Role of Card Acceptance Fees 18. In granting the CBA leave to intervene, Madam Justice Simpson noted that “the application also deals with the portion of Card Acceptance Fees known as ‘Interchange Fees’. Interchange Fees are retained by Issuers and represent a significant portion of Card Acceptance Fees. The Commissioner asks the Tribunal to order the abolition of the Merchant Restraints (the ‘Proposed Order’) saying that such an order will promote competition in the setting of Card Acceptance Fees. The suggestion is that, if competition is introduced, Card Acceptance Fees will decline.” 18 19. Madam Justice Simpson further stated that the Commissioner “alleges that, with the Proposed Order, there will be an incentive for Issuers to compete with one another by issuing credit cards with reduced Interchange Fees so that merchants will accept their cards without surcharges. In view of this allegation, it would be relevant for the Proposed Intervenors to

16 Leggett Evidence, Hearing Transcript, volume 16 (Public), p. 2585. 17 Id.. 18 Intervention Reasons, ¶4 (emphasis added). LEGAL_1:23905622.1

Public version

- 7 -

adduce evidence about the likely impact of the Proposed Order on Interchange Fees.” 19 Madam Justice Simpson concluded that “[t]he Issuers’ perspective on the role of Card Acceptance Fees and, in particular, Interchange Fees is relevant.” 20 (b) The CBA’s Evidence on the Role of Card Acceptance Fees (i) Revenue flows among the participants in the four-party credit card system 20. The four-party credit card networks of Visa and MasterCard include Issuers (whose customers are credit cardholders), Acquirers, merchants, and the credit card networks. 21 Ms Leggett noted that “each of those parties perform very, very different functions in the payment system, earn their revenues from very different sources, and, as well, have a very varied cost base they need to take into account when establishing their pricing for their services.” 22 The revenue sources for each party are described below.

1. Issuers 21. Issuers earn revenue from three primary sources: “cardholder fees, the interest we [Issuers] earn on revolving balances, as well as the interchange fees that are earned from acquirers.” 23 22. Ms Leggett testified that interchange “is not the most important source of [Issuers’] revenue. And it helps to offset all of the costs, the resulting costs, that are required to actually run an issuing business.” 24 All three sources of Issuers’ revenue offset the costs of issuing reward cards, be they premium or non-premium cards, including the “accumulation of benefits – whether that is points accumulation, or cash-back rewards, or the insurances that are offered, the warranty redemptions, the various redemption options available on a credit card, [...] gift

19 Id., ¶47. 20 Id., ¶49. 21 Witness Statement of Karen Leggett dated 2012-04-05, Exhibit IB-471, ¶26. 22 Leggett Evidence, Hearing Transcript, volume 16 (Public), p. 2594; see also Witness Statement of Karen Leggett dated 2012-04-05, Exhibit IB-471, ¶¶26-27, 38-41.

23 Leggett Evidence, Hearing Transcript, volume 16 (Public), p. 2595; see also Witness Statement of Karen Leggett dated 2012-04-05, Exhibit IB-471, ¶26.

24 Leggett Evidence, Hearing Transcript, volume 16 (Public), p. 2614. LEGAL_1:23905622.1

Public version

- 8 -

certificates, merchandise, [...] online travel booking tools that are established – all of those costs are offset by those three sources of revenue.” 25 2. Merchants 23. Merchants earn revenue by providing goods and services to their customers, who can use many forms of payment, including credit cards if the merchant chooses to accept them. 26 3. Acquirers 24. Acquirers earn revenue “from providing a diverse suite of value-added services, including your typical processing, clearing, [and] settlement, but they also invest in value-added services, such as having the ability to integrate into a merchant’s account payable system, a merchant’s sales system. They will sell services for competitive analytical benchmarking to their merchant.” 27 Merchants are “free to select which [Acquirer] services they would like to take advantage of, and the pricing for that is then embedded into the merchant’s cost, which is the merchant discount rate, the price to the merchant.” 28 4. Credit Card Networks 25. Ms Leggett testified that “if you take Visa and MasterCard as technology companies, they in fact earn their fees from acquirers and issuers in order to utilize their brand, their right to use the clearing and settlement functions, as well as any other value-added services that they may provide.” 29 25 Id., pp. 2614-2615. 26 Id., pp. 2594-2595; Witness Statement of Karen Leggett dated 2012-04-05, Exhibit IB-471, ¶26. 27 Leggett Evidence, Hearing Transcript, volume 16 (Public), p. 2595; Witness Statement of Karen Leggett dated 2012-04-05, Exhibit IB-471, ¶¶26, 41.

28 Leggett Evidence, Hearing Transcript, volume 16 (Public), p. 2595. 29 Id., pp. 2595-2596; Witness Statement of Karen Leggett dated 2012-04-05, Exhibit IB-471, ¶26. LEGAL_1:23905622.1

Public version

- 9 -

(ii) The role of Interchange and the Merchant Discount Rate (MDR) 26. Ms Leggett explained that “[i]nterchange is clearly one of the input costs that acquirers have to take into account when establishing the price to the merchant, and the price to the merchant is the merchant discount rate.” 30 27. She noted that the MDR “is assessed on a number of different factors, and this is done by each respective acquirer. And what they will do is clearly assess the price and different number of services that the merchant will want to take advantage of. It [the MDR] will also be based on the transaction volume that [the] individual merchant will generate, as well as the average transaction price expected by that merchant to generate, and will also take into account the industry risk, as well as the individual merchant risk profile, which is all taken into account in assessing the acquirer’s price to the merchant.” 31 (iii) Merchants already recover the MDR because it is embedded in merchants’ retail prices

28. Based on Ms Leggett’s experience in overseeing credit card issuing and acquiring businesses, she stated that “this MDR, or cost, would be embedded in a merchant’s retail prices to their customers,” 32 just “like any other merchant cost, whether it would be heating, or property taxes or staff”. 33 She noted that “merchants have been accepting credit cards for over 40 years. They’ve had card acceptance fees that have been a part of their input costs for over 40 years. And the way that they have treated those [costs] has been to include them and embed them in their retail prices.” 34 30 Leggett Evidence, Hearing Transcript, volume 16 (Public), p. 2596; Witness Statement of Karen Leggett dated 2012-04-05, Exhibit IB-471, ¶28.

31 Leggett Evidence, Hearing Transcript, volume 16 (Public), p. 2596; Witness Statement of Karen Leggett dated 2012-04-05, Exhibit IB-471, ¶32.

32 Leggett Evidence, Hearing Transcript, volume 16 (Public), p. 2597. 33 Id., pp. 2596-2597. 34 Id., p. 2618; Witness Statement of Karen Leggett dated 2012-04-05, Exhibit IB-471, ¶¶35-36. LEGAL_1:23905622.1

Public version

- 10 -

29. Ms Leggett also noted that merchants’ various input costs – including card acceptance costs – are embedded in merchants’ retail prices, “irrespective of whether a customer actually utilizes all of the services that a merchant makes available or not.” 35 30. Ms Leggett’s evidence that merchants recover the MDR for credit card acceptance through their retail prices is hardly controversial. The Commissioner admitted this in her Notice of Application, stating that “[m]erchants typically pass some or all of the increased costs resulting from high Card Acceptance Fees onto their customers in the form of higher retail prices for goods and services.” 36 The Commissioner’s merchant witnesses also accepted that they generally recover the MDR for credit card acceptance from their customers. 37 As Mr. de Armas of Walmart acknowledged, “interchange fees are baked into the overall costs of the goods sold.” 38 31. In sum, interchange fees are one component of Card Acceptance Fees, and an input cost for Acquirers, who typically incorporate that cost into their prices (the MDRs) to merchants. Similarly, Card Acceptance Fees are merely one of many input costs for those merchants who choose to accept credit cards, which merchants have incorporated into their retail prices for the last 40 years.