IMGCAP(1)]
Visa Inc. and MasterCard Worldwide are preparing to bring their PIN-debit cards to Canada, and neither merchants nor the lone incumbent debit scheme, Interac, are happy.
Opponents fear Visa and MasterCard will use their competitive clout to damage Interac, and opinions vary as to whether Interac will disappear, get swallowed up by a larger player or survive as a lower-cost payment alternative.
Replacing Interac's system could increase merchants' costs. But for banks, the opportunity to receive fees from issuing cards carrying the international brands' marks and acquiring their transactions for retailers is attractive, analysts say.
"The prime driver for banks to issue Visa or MasterCard debit (cards) is to find a new revenue source, i.e. interchange," says David W. Lott, senior vice president at Speer & Associates, a U.S.-based consultancy.
Canadian merchant coalitions such as the Canadian Federation of Independent Business do not oppose Visa's and MasterCard's right to offer debit cards in Canada, but they do not want the status quo to change. Under current Canadian legislation, Interac charges a flat, per-transaction switch fee of C0.8 cents (US0.7 cents) to both the issuer and the acquirer, and issuers receive no acquirer-paid interchange.
Interac issuers get revenue by charging their cardholders for using their cards to make purchases. (Depending on the banking package a customer holds, such as maintaining a minimum account balance, some of their Interac POS transactions may be free.) Issuers of MasterCard's Maestro cards do not get interchange, so they have to rely on customer fees, such as per-transaction fees and bank-plan fees.
MasterCard says it has no plans to introduce interchange for its debit transactions in Canada, but Visa says interchange is part of its plans.
Whether Visa and MasterCard succeed in their efforts likely depends on whether the Canadian government intervenes and regulates interchange and on how many Canadian debit card issuers switch from Interac. Of Canada's five big national banks, only BMO Bank of Montreal would comment publicly on its debit plans.
For the past 10 years, BMO's Interac cards have offered Maestro for acceptance outside Canada, a spokesperson tells Cards&Payments. BMO already has 2 million debit cards enabled for domestic Maestro transactions, according to Catherine Swift, Canadian Federation of Independent Business CEO. "These are dual-purpose cards with both Interac and Maestro logos on them," she says.
With the volume of Canadian domestic debit transactions growing by 7.5% last year, to 3.71 billion from 3.45 billion in 2007 (
"With their vast global networks, and the massive investments in these networks, why wouldn't Visa and MasterCard offer debit in Canada?" says David Chong, director of prepaid Visa programs at Vancouver City Savings Credit Union. "The incremental cost of offering debit on their Canadian infrastructure will be small."
Canada does not support a domestic signature-debit market; all debit card transactions initiated in that country require a PIN for authorization. Prepaid Visa and MasterCard debit cards offered in Canada are an exception (
With fraud-resilient EMV chip-and-PIN cards, terminals and ATMs coming to Canada, it makes sense for new debit products to be PIN-based, Chong adds. EMV cardholders authorize payments at the point of sale using a PIN, which the payment processor checks against the PIN stored on the card's EMV chip.
Canada's EMV program calls for all domestic ATMs to be EMV-enabled by 2012. All credit and debit cards and all POS terminals must have migrated to EMV by 2015, a process that already has begun. Canadian officials expect EMV cards, ATMs and POS terminals to reach critical mass by 2010.
MasterCard's Canadian debit offering, Maestro, will be PIN-only, running on MasterCard's global debit network. Visa Canada's Visa Debit cards will be PIN-based in Canada but will support signature-debit transactions outside that country.
Both BMO Bank of Montreal and MasterCard Canada say Maestro cards will contain a mag-stripe and an EMV chip. The mag-stripe will enable the Maestro cards to be used in the U.S. and at Canadian POS terminals that have yet to be chip-enabled.
How It Began
The first sign of the revolution in Canadian payments came in fall 2008, with press reports that Visa and MasterCard planned to offer branded debit cards. Canadian Federation of Independent Business' Swift wrote to her members warning that this could increase their card-acceptance fees should Visa and MasterCard assess acquirer-paid interchange.
Interac then announced it had applied to the Competition Bureau, a Canadian regulator, for permission to become a for-profit business. Interac is a nonprofit association owned by its members, Canada's retail financial institutions and payment processors.
At press time, the bureau had not yet made a decision on Interac's request. But Toronto-based Financial Insights senior analyst Rob Burbach sees no legal reason why the authority would bar Interac from becoming a for-profit company.
Separately, the bureau announced in November 2008 that Canadian issuers no longer were barred from offering both MasterCard and Visa cards. A Visa credit card issuer now can offer MasterCard debit cards, and vice versa, says Burbach.
"Even with duality coming to Canada, the banks will still continue to have a 'preferred' card brand," Lott says. "But they'll have the ability to issue the other card brand if the customer wants, or if there is a unique product like a specialized rewards program that a bank wants to offer."
Visa Debit and MasterCard's Maestro cards will need to carry an Interac logo for ATM transactions, as Interac will retain its role as the Canadian ATM switch operator. So there will be some marketing and branding problems for issuers, Lott warns.
Mike Bradley, Visa Canada head of products, tells Cards&Payments Visa chose not to bring Interlink, its U.S. PIN-based point-of-sale debit brand, to Canada. "From a branding perspective, we thought it would be simpler to use Visa Debit in Canada, as people are already familiar with Visa," he says.
Burbach says he does not believe banks will give their debit cardholders a choice. They will just get new cards with a Visa Debit or Maestro chip on them, as well as an Interac capability.
Legislative Efforts
Earlier this year, Canadian lawmakers held hearings about payments cards, and all the principal players submitted comment. The Senate Standing Committee on Banking, Trade and Commerce issued its final report on June 30; the House of Commons Standing Committee on Finance's study is ongoing.
The Senate's report "Transparency, Balance and Choice: Canada's Credit Card and Debit Card Systems" urges the government to set interchange at zero for three years on all Canadian debit transactions. It also recommends that the government require debit card switch fees and debit interchange rates to be based on a flat fee per transaction.
"The fee structure should be on a flat-fee basis, as debit transactions are instantaneous and, unlike credit cards, there is no unsecured loan and, therefore, little or no risk," says Sen. Michael Meighen, the standing committee's chairman.
Other recommendations include the creation of a payment-system oversight board to "ensure fairness for participants in the card payments systems," a ban on Visa's and MasterCard's "honor-all-cards" rules that require merchants to take all cards carrying the brands' names, and allowing merchants to surcharge or discount for different transaction types.
The Senate report's recommendations are nonbinding, which means the government does not have to act on or respond to them, according to Meighen.
In response to the recommendations, Kevin Stanton, MasterCard Canada president, said in a statement abolishing the honor-all-cards policy would create difficulty for consumers and merchants. "Consumers expect to be able to pay with their card of choice wherever the brand is displayed," he said. "Arbitrary acceptance by merchants will create unpredictability and confusion for retailers and consumers."
Visa's Bradley says Canadian merchants will be able to choose whether to accept Visa Debit. "This is a slight variation of our honor-all-cards rule," he admits. "But, given that our Visa Debit interchange rate is significantly less than our Visa credit interchange, I would expect most merchants to accept Visa Debit."
Code Of Conduct
The Canadian Federation of Independent Business wants Canada's "toothless" competition laws to be strengthened to prevent Visa and MasterCard from harming Interac and calls on the government to require greater transparency in interchange, Swift says.
The federation has published an open letter asking the Canadian government to introduce a code of conduct for card payments, under which Visa and MasterCard debit transactions would be charged under a 'cents-per-transaction' basis instead of on a percentage-of-value basis. "We want a very low 'cents per transaction' fee for Visa Debit and Maestro," Swift says.
Swift claims the Federal Department of Finance is looking at developing a code of conduct for cards that will contain elements of the federation's code of conduct. A department spokesperson would only say "department officials are meeting with stakeholders, including merchant groups, card networks, issuers and acquirers. We're considering different options going forward in order to achieve a solution that is durable."
Unlike Swift, industry analysts are not convinced of the need for regulation. Indeed, no one interviewed for this story thought it likely the government would intervene, despite the Senate report recommending regulation.
"Regulation is probably not needed in Canada," Peter Dunn, a founding partner in U.S. consultancy Edgar, Dunn & Co., tells Cards&Payments. "There's already enough oversight in Canada, and there is already a lot of competition in payment mechanisms," including cash, checks, American Express, Diners Club, Visa credit, MasterCard credit and Interac, plus now Visa Debit and Maestro.
"Government intervention is always a wild card, although I see direct intervention (by the Canadian government) as unlikely," Speer & Associates' Lott says. "But I'm sure that all the interested parties are using their legislative contacts to advance their particular point of view as to how the Canadian payments landscape should evolve."
Interchange Debate
For Interac, the risk of Visa and MasterCard entering the Canadian debit market is that banks will be attracted to the fee revenue both schemes offer. The Senate committee's report noted concern that, in response to Visa and MasterCard's entry into the Canadian debit market, Interac might seek to introduce interchange, pushing up merchant prices.
Visa and MasterCard have adopted different pricing postures on debit in Canada. MasterCard says its Canadian Maestro switch fee charged to both the issuer and the acquirer is C0.5 cents per transaction. "There is no percentage-based fee and no interchange for Maestro transactions in Canada," says Julie Wilson, a MasterCard Canada spokesperson.
Swift agrees that Maestro's flat fee for Canadian merchants would be slightly below Interac's flat fee. "Interac increased its fee in 2009, and MasterCard decided not to, enabling it to say it charges less than Interac," she says.
According to a researcher in Meighen's office, the Senate committee's belief was that, while Maestro initially would undercut Interac, MasterCard eventually would use its huge network and competitive clout to push Maestro fees up. "The committee based this opinion on what's happened in the U.S., where Visa and MasterCard were able to suppress rival debit schemes," the researcher says.
Burbach accedes that MasterCard reserves the right to introduce interchange for Maestro in Canada.
Visa will combine an "ad valorem" interchange rate with a flat fee rate. According to a statement from Visa Canada, the interchange rate on Canadian Visa Debit card gas and grocery purchase will be 0.15% of the sale plus C5 cents, or C11 cents on a C$40 purchase. The rate for other Visa Debit purchases will be 0.25% plus C5 cents, or C15 cents on a similar sale.
Visa Debit will open new payment channels for issuers, such as online payments, where Visa Debit interchange is set at 1.15%, or C60 cents on a C$40 purchase, Bradley says. Interac cards cannot be used on the Internet, though it does offer a direct funds-transfer service, Interac Online.
Tim Wilson, head of Visa Canada, was asked during parliamentary hearings about what fees Visa Canada charges issuers and acquirers for use of VisaNet, and he declined to give a precise amount, saying the information was commercially sensitive. He did say issuers and acquirers each pay a few basis points to Visa Canada for use of its network. Visa also gets a flat fee of a few cents for transaction authorization, clearing and settlement. Typically, these total fees would amount to less than 10% of interchange on a transaction, he said.
Interac has a flat-fee structure in which merchants pay as little as C7 cents per transaction to their acquirers, which do not share the revenue with card issuers. An August 2008 study by the Bank of Canada "Merchant Acceptance, Costs, and Perceptions of Retail Payments: A Canadian Survey" found that the median debit card fee merchants pay acquirers is 12 cents.
Unlike Visa and MasterCard, Interac allows merchants to surcharge, provided that they clearly display the rate information on their POS terminals. Surcharging also is permissible if debit transactions fall below a minimum amount, for example C$5. Depending on the checking-account package, issuers also may charge Interac cardholders each time they use their cards.
Caroline Hubberstey, an Interac spokesperson, says the government regulates the network's switch fee.
"We want a level playing field, as our debit rivals' fees are not regulated by the government," she says. "We want all players in the Canadian payments market to be governed by the same rules. For Interac to be able to offer a sustainable, low-cost network as an alternative to Visa Debit and Maestro, it needs to be allowed to change its status from a not-for-profit to a for-profit."
Changing Interac's status would allow it to set its own fees and also to raise funds needed for investment in its network and service offerings, Hubberstey says.
As with other Canadian card schemes, Interac is moving to EMV, and it wants to support contactless payments. In July, Interac signed a deal with France-based Inside Contactless to develop contactless chips to make Interac cards faster to use for small-ticket purchases.
With the exception of a cross-border deal with U.S. network NYCE, Interac cards cannot be used for purchases outside Canada, which is another disadvantage. Interac wants to boost international acceptance for its cards in Europe and the U.S. through agreements with domestic networks, Hubberstey says.
Product Launches
Visa Canada will be launching Canada's first Visa Debit cards in collaboration with unnamed issuers either late this fall or in early 2010, Bradley says. "The uncertainty is due to the technological complexity involved," he says. "We are aggressively selling Visa Debit to Canadian merchants."
In Canada, the issuer brand is on the front of the card, and debit-network logos such as Maestro or Interac are on the back, Wilson says.
"BMO bankcards currently carry this type of branding," Swift says. "If a Canadian POS terminal is enabled to accept Maestro, and a BMO Maestro- and Interac-badged card is used on it, then the terminal will priority-route the transaction to Maestro," Swift says.
MasterCard is speaking with several Canadian issuers about Maestro and is building out its Maestro acceptance network, Wilson adds.
Swift believes MasterCard's priority routing, which she claims does not enable merchants to choose which network to use, is a "stealthy" business practice. Visa will offer consumers a choice of routing their co-badged Visa and Interac debit cards via either network, but the default will be Visa Debit, she says.
"If the consumer inserts a Visa debit card into the (terminal's) card reader, the screen will ask them to type 'yes' or 'no' to routing via Visa Debit, and if they type 'yes' it will go via Visa," Swift says. "Consumers won't understand the difference between Visa and Interac, and some retailers may not realize what is happening."
Visa will not practice priority routing for its debit cards in Canada, Bradley says. "Most merchant terminals will have a sufficiently large screen on their card reader for both Visa Debit and Interac to be displayed," he says. "This means that consumers will clearly see what their choices are with debit."
Greg Erwin, a Competition Bureau senior competition law officer, says the watchdog group will be monitoring priority routing. "We're concerned about the routing of debit transactions on terminals away from Interac to Visa or MasterCard," he says.
Banning priority routing is one of the recommendations in the Senate's report, which says cardholders should be able to choose their preferred payment method when using co-badged cards at the point of sale.
Asked what effect the merchants' campaigns will have on Visa Debit and Maestro, Burbach says the opinion he has now is different from what it was in May.
"The merchants have lost the war, and Interac has been left hanging out to dry," he says. "I don't think the government is going to do anything to stop the launch of Visa Debit and Maestro. … I wouldn't be surprised to see further regulation on fee transparency for both debit and credit, as the U.S. moves to do the same thing."
With Visa and MasterCard entering the Canadian debit market, Interac is at risk of disappearing, Burbach warns.
Erwin is not so sure that will be the case. "EFTPOS, the Australian PIN-based domestic debit scheme, didn't disappear when Visa Debit and MasterCard debit came to Australia," he says.
Without competition, an incumbent would have no incentive to invest in new products and services and to cut its prices, Erwin says. CP
