The merger of Royal Bank of Canada and Bank of Montreal would pose a thorny question for the huge new bank: MasterCard or Visa?
Bank card association rules prevent banks in that country from issuing both card brands-it is a "non-dual" market, in industry parlance.
Today, Royal Bank of Canada offers Visa cards exclusively, and Bank of Montreal issues only MasterCard cards.
The banks' plans to merge have brought the policy against duality to the forefront. Canadian bank card officials are reevaluating the 30-year-old policy that restricts banks from becoming members of both card associations, which has become normal practice in the United States.
Executives at the two Canadian banks, at Visa Canada, and at MasterCard International say it is too early to speculate about how the situation will be resolved.
But industry experts are envisioning a variety of scenarios, from the Canadian government's disallowing the merger to the new bank's choosing one card brand over the other.
A decision to go with Visa exclusively would be a huge loss for MasterCard. Visa controls 70% of the Canadian card market in terms of merchant transactions, and MasterCard's largest member in the country is Bank of Montreal.
By some estimates, Bank of Montreal represents two-thirds of MasterCard's market share in Canada. MasterCard does not disclose this information.
Bank of Montreal is also the third-largest credit card issuer in Canada, and has $1.92 billion in card receivables.
Royal Bank of Canada is the second-largest, with $2.3 billion, and it trails Canadian Imperial Bank of Commerce, another Visa bank.
A MasterCard spokeswoman held out the possibility that the Canadian government would make "recommendations to MasterCard and Visa." In other words, Canadian Finance Minister Paul Martin, who is responsible for approving the merger, could tell the associations that the new bank must issue MasterCard, lest that company's competitive strength be decimated.
MasterCard said it is not concerned about the outcome of the proposed merger. "We have no reason to think at the moment that our business situation is going to change materially," said Gary Heatherington, president of MasterCard Canada.
MasterCard won a competitive victory last year when all the major Canadian banks decided to join its Mondex smart card program.
But Mondex remains in a pilot stage, and Visa's competing product, Visa Cash, still has one big bank loyalist in Bank of Nova Scotia.
Mr. Heatherington said MasterCard's credit card market share in Canada is 27% and growing. Several U.S.-owned MasterCard members, including MBNA Canada Bank and Capital One Financial Corp., have recently entered the Canadian market, he noted.
Many industry experts say the card business in Canada is particularly competitive because of non-duality.
"Competition between MasterCard and Visa is far more vibrant in Canada than in the United States," wrote David A. Balto, an attorney adviser for Chairman Robert Pitofsky of the Federal Trade Commission, in a Banking & Financial Services article about duality in payment systems.
If the merged bank did try to drop MasterCard, it could raise antitrust issues, according to lawyers.
"Depending on the antitrust laws, if it looked like (a merger in Visa's favor) would create a monopolistic situation, I think the Canadian government would weigh in on this," said an attorney who spoke on the condition of anonymity.
Nevertheless, Visa executives predict that when the merger is complete, their brand will come out on top.
"I'm assuming that I will end up with more Visa cards, because Visa is more popular with Canadians," said Derek A. Fry, president of Visa Canada.
Bank of Montreal may not give up its MasterCard affiliation so easily, however.
"We brought MasterCard to Canada about 24 years ago, and we have been a very loyal member since then," said Robert W. Pearce, who heads up Bank of Montreal's card business.
Moreover, MasterCard's history in Canada suggests it will fiercely defend its turf.
In 1979, two banks-one a MasterCard member, and one a Visa member- merged. Bank of Montreal insisted that the Visa bank, Provincial, give up its Visa business. Provincial refused, and MasterCard expelled it. Litigation ensued, and eventually the Canadian courts ruled that the new bank, National Bank of Canada, should be a MasterCard issuer.
The current drama will not be resolved quickly. For one thing, the finance minister, Mr. Martin, does not plan to make a decision on the merger soon. He has appointed a task force to examine the future of the Canadian financial services sector, and to issue a report by September.
Mr. Martin has expressed concern over bank consolidation in Canada, where there are only six major financial institutions.