4 – Facing Stalled Negotiations with Visa, Linda Lapointe Did Some Arm-Twisting… and Won

Since Visa and MasterCard largely increased credit card transaction fees in 2008, retailers across the board have been urging Ottawa to limit these abusive costs by imposing a regulatory rate cap, as in Europe.
However, 10 years later, Ottawa still rejects this solution, preferring cosmetic reductions through voluntary agreements. Why?
In a series of articles entitled “The Secret Memos of Bill Morneau”, DepQuébec tries to understand the Federal government point of view on this issue after having obtained for the first time highly secret and sensitive ministerial memos through the access to information Act.
Today, for the series fourth part, DepQuébec is looking at the behind-the-scenes negotiations and dealings that led to a second voluntary agreement with the credit card companies.

Here you can find all the ingredients of a good thriller movie.

First, what was thought to be a walk in the park ended up quite more challenging than anticipated.

The credit card leader, it seems, would not go along as easily as expected.

However, since retailers’ expectations were set quite high, backing down was out of question.

Finally, at some crucial moment, the low-profile Liberal MP who started it all after winning a private bill lottery (see article here) saved the day through some well-timed intervention!

And all that to finally suspect that it may have been a bit… orchestrated.

Indeed, Bill Morneau’s secret memos never cease to surprise and entertain us!

Get the popcorn.

On April 2nd, 2018, DepQuébec was first in Canada to report on the upcoming Bill C-236 second reading, a nightmarish prospect for Visa then in the middle of intense negotiations with Finance Canada, but exciting for retailers hoping to see a regulatory cap on rates. As it happened, the second reading date was being continuously postponed in sync with progress made with Visa until June 12, 2018, the day it finally gave in. It appears that, unknowingly, DepQuébec somehow helped the Federal government in reaching a second voluntary undertakings set to generate $250 million in savings for SMEs from 2020 to 2025!
Separate negotiations

In the fall of 2017, the Department of Finance had everything it needed to move forward on interchange fees.

Indeed, the card payment assessment, launched in September 2016, was now complete. All key stakeholder groups were met and needed analyses completed.

The government was also aware of the outcome following class action lawsuits against Visa and MasterCard (see Part 3 of our series).

Finally, there was only two years left to the first voluntary undertakings signed with Visa | MasterCard by the previous government in 2014 and it was therefore time to prepare for what could replace it in 2020.

Finance Canada then adopted three guiding principles of its policy aimed at “greater fairness and transparency” in the payment card market:

1 – a reduction in the overall level of interchange rates charged to Canadian businesses;

2 – a significant narrowing of the range of interchange rates (the gap between the lowest and highest rates charged to businesses); and

3 – greater transparency on the range of interchange rates.

“These objectives are aimed at levelling the playing field, between small and medium-sized and larger businesses, which have greater bargaining power when it comes to negotiating lower rates”, declared Finance Canada in response to questions from DepQuébec.

And to achieve such goals, the plan is simple: to negotiate a second voluntary agreement with credit card companies with the threat of a new regulation should negotiation fails. Success depends, therefore, on posing a credible threat!

Come on credit card people, move on!

Finance Canada officials are so confident in their strategy that they adopted a very tight timeline with little room for arguing.

In a secret key memo, Bill Morneau’s Deputy Minister, Paul Rochon, gave the big picture:

“We are preparing to engage separately with Visa and MasterCard to seek new voluntary undertakings as discussed in the previous memo (Sept. 26, 2017) (…) We recommend launching negotiations with the networks and indicating that you are prepared to regulate if negotiations fail”, wrote the Deputy Minister.

The proposed critical path aims at speeding things up:

  • A letter from the Minister shall be sent to Visa, MasterCard and Amex Presidents in mid-October 2017;
  • They will have two weeks only to respond and submit back a draft voluntary undertakings that meets the three guiding principles put forward by the Minister;
  • At the beginning of November, discussions will start with either Visa or MasterCard (the one with the best proposal), with a three month period window to reach an agreement;
  • Then, in early February, another three months of discussions are scheduled with the second network, after which negotiations with Amex will kick-off in early May so that a new agreement could be announced as soon as June 2018.

“The last voluntary undertakings took almost a year to negotiate. As per our previous memo, we recommend allowing a period of 6 months to conclude the negotiations given the proposed sequential negotiation process and complexities noted above”, wrote the Deputy Minister.

The secret memo dated October 6th, 2017 unveils key components of the Federal strategy towards credit card companies that were detailed in a previous memo which was mostly redacted.

Intrigued, DepQuébec wanted to know if such approach could be conducive to collusion, as Visa and MasterCard could easily talk to each other and share their proposal. Finance Canada defended itself:

“The Competition Bureau is responsible for the administration and enforcement of the Competition Act to ensure that Canadian businesses and consumers prosper in a competitive and innovative marketplace. Throughout this process, the Department of Finance has emphasized to Visa and MasterCard the importance of fulfilling their obligations under this Act”, wrote Finance Canada to DepQuébec.

Tough time with Visa

As planned, the letters to credit card companies are sent on October 12, 2017 and by the 26th, the proposals are received.

Finance Canada officials then meet separately with each network to make sure they master each proposal’s fine print.

For the first round of discussion, MasterCard is chosen for having submitted the best proposal. The goal is “to identify a framework that will address the objectives while still permitting diverse and innovative business models”, noted the secret memo dated May 17th, 2018.

The complete version of the letters sent to Visa and MasterCard are found in the secret memos. It is clearly mentioned that should negotiation fails, the Minister will then consider “a regulatory solution.”

On February 1st, 2018 — right on schedule — Finance reaches an agreement with MasterCard that it considers satisfactory and which includes the famous interchange rate reduction of 6.7%, dropping from an average of 1.50% to 1.40% for the 2020 to 2025 period.

On February 5th, discussions with Visa begin and that’s where things started to go off course.

Signs of trouble

Knowing that MasterCard account for about 30% of the market and Visa, 60%, one can imagine from the outset that wanting to impose on the leader conditions negotiated with the number two is certainly clever but potentially problematic.

Although we do not know precisely the nature of the issues encountered – Finance Canada insisting that all discussions with Visa and MasterCard are confidential – the existence of the said difficulties – that Finance has not denied nor confirmed – is demonstrated by three elements.

  • 1) Extended discussion period: while less than three months were needed to negotiate with MasterCard, Visa’s discussions were not completed until June 12, 2018, a good four months and a week after their beginning and this, despite knowing in advance the agreement terms sought since they had already been negotiated and concluded with MasterCard;
  • 2) Recommendations to the Minister: In a highly redacted secret memo dated May 17th, 2018, Visa’s ongoing discussions look a lot like a problem requiring a solution. After three months of discussions, a paragraph is titled “Preferred Approach to Visa Discussions”, another “Voluntary Nature of Undertakings and Visa’s proposal” as well as “Competition Act Concerns”. Finally, the Minister is asked to choose between four options of which one is strongly recommended, all this over several pages. And it ends like this: “If Visa accepts our offer, we will ask that they send you the voluntary agreement”.
  • 3) Linda Lapointe: the MP for Rivière-des-Milles-Îles chooses this key period to announce the second reading of her Bill C-236 proposing to cap rates, sending the message that she has the government backing and thereby, maximizing the pressure on Visa.
Coincidences? We don’t think so

In this regard, the announcement timing of C-236’s second reading and especially, of its many successive postponements, is quite revealing. See by yourself:

  • On February 5, 2018, negotiations begin with Visa to be completed hopefully within the next three months;
  • On March 26 (in an effort to jump-start stalled negotiations), Linda Lapointe announced to DepQuébec that Bill C-236’s second reading was now officially planned for May 2 (a news published on April 2);
  • On April 27, DepQuébec learned that the second reading was postponed until May 29;
  • On May 17 (date of the memo above), we learned that the bill was postponed until June 7;
  • On May 28, that it was pushed back to June 20;

In an interview with DepQuébec last Thursday, Linda Lapointe refused to admit that this maneuver was part of a strategy cleverly orchestrated with Finance to maximize pressure on Visa.

She recognized, however, that by allowing interchange rates to be capped through regulation, her Private Member’s bill added lots of pressure on credit card companies with a second reading, consequently, bringing this pressure to a climax.

Finally, faced with the obvious similarities between the successive postponements of the second reading and ongoing negotiations with Visa, she conceded the following with a smile:

“Nobody told me do this or do that. I was aware of certain things, I sat in meetings and got involved in discussions. I felt that it would be appropriate to go ahead at that time, to make a move to help negotiations. I was kept informed to a certain extent but ultimately, it was my bill, so it was up to me to decide and ultimately, I decided. ” — Linda Lapointe in interview with DepQuébec

The final count is therefore: Linda Lapointe = 1, Visa = 0.

And as for the unfamous C-236 Private Bill, it simply died on the Order Paper last October without being noticed by anyone.

Mission accomplished.

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