Long curious about the Canadian debit card system, in which consumers rather than merchants foot the bill, U.S. payments executives are trying to quantify the costs to consumers and gauge whether Americans could swallow similar fees.
In the United States, merchants pay card issuers a "discount" off each card transaction, which covers the costs of processing and generates income for the issuer and the merchant acquirer. In Canada, merchants pay processors for their services but do not pay additional fees to banks, which charge their cardholders directly for usage.
Indeed, Canadian banks deliberately charge consumers less for debit card transactions than for paper checks - a fact that has contributed substantially to the reduction in check writing in Canada. But Canadian debit fees are, on the whole, higher than the merchant fees that U.S. issuers charge: Merchants pay an average of 19 cents for a PIN debit transaction, whereas Canadian consumers pay about 37 to 45 cents for each debit card purchase they make.
Signature debit, which in the United States carries an average interchange rate of 38 cents per transaction, does not exist in Canada, where all debit transactions are authorized by PIN.
Pulse EFT Association, the Houston electronic funds transfer network, says Americans would not be willing to pay the same fees for debit cards that Canadians do. But the question of whether the Canadian system might be a useful model for the United States has been raised so frequently that Pulse decided to commission a study comparing the two systems. That study, published this month and conducted by Dove Consulting Inc. of Boston, is the source of the preceding figures about PIN debit fees.
Under a Canadian-style system, Americans debit users would pay $4.3 billion a year to their banks, the study concludes. That assumes they would pay approximately the same per-transaction fees that Canadian debit customers pay, said Tony Hayes, the author of the study and the managing director of the financial services practice for Dove.
Such charges - especially if, as in Canada, they applied to cash withdrawals from automated teller machines at the customer's bank - would result in a "huge outcry" from American consumers and possibly backlash against debit, he said.
Though Pulse's study did conclude that the Canadian system was moderately more efficient, it also determined that it would be utterly unworkable in the United States, because the two countries "operate in distinctly different environments" with respect to banking, processing, and competition. Stan Paur, the president and chief executive officer of Pulse, called it "both unlikely and impractical" for the United States to switch to a system that requires consumers to pay most of the fees.
There are other major differences between the debit systems in the United States, over and above the fact that Canada lacks signature debit.
For instance, there are fewer banks in Canada, and only one major EFT network, Interac Association. Banks must move their own transactions through Interac, which acts very much like a national utility.
By contrast, the U.S. has more than 30 EFT networks, with several conducting most transactions and competing fiercely for bank and merchant contracts. And with more than 17,000 financial institutions in the United States, "it would be overly burdensome to have a network system that required every bank and credit union to act as its own switch," the study said.
Sara Feldman, a spokeswoman for Interac, of Toronto, disputed the Pulse study's hypothetical $4.3 billion bill to American debit users.
Most Canadians do not, in fact, pay for each and every transaction, she said; well over 50% and perhaps as many as 80% have package deals with their banks. For example, a Canadian consumer may pay $30 a month for additional banking accounts, safety deposit boxes, and in many cases unlimited and free debit transactions, she said.
Ms. Feldman also said that American merchants add the cost of payment processing to the price of goods, so consumers end up paying for the use of the system indirectly.
Mr. Hayes of Dove concurred, but said that after the Wal-Mart settlement in which Visa and MasterCard lowered interchange, the costs of goods were not slashed accordingly.
