The Canadian acquiring market is highly competitive and consolidated into a small number of major players. Innovative technologies offer scope for further market growth while doubts are cast over some ISO’s sales practices. Robin Arnfield reports.
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The largest Canada acquirer is Moneris Solutions, a joint venture between RBC Royal Bank of Canada and BMO Bank of Montreal. "Moneris has around 40% of the market in terms of merchant numbers," says Malcolm Fowler, vice-president of marketing at Moneris.
According to US-based consultancy Speer & Associates, Global Payments has 20% of the Canadian acquiring market, followed by TD Merchant Services (TDMS) with 16%, Chase Paymentech with 8%, Desjardins Group with 7%, Elavon with 4%, and other acquirers with 5%.
"It’s normal for a mature acquiring market such as Canada to have consolidated into a few large players," says Aite Group senior analyst Rick Oglesby.
According to the Canadian Bankers Association, total Canadian Visa and MasterCard credit card net retail volumes rose 8% year-on-year to CAD301.86 billion (USD301.15 billion) in 2011. Canadian debit card scheme Interac says Interac debit transactions rose by 4% year-on-year in 2011 to CAD182.7 billion.
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By GlobalDataCanadian issuers and acquirers are implementing contactless card and NFC payments technology in the hope that card transaction volumes will be boosted by the migration of previously cash-only transactions to electronic payments.
"Contactless cards are a success story in Canada," says Cory Taylor, senior vice president of Elavon Canada. "I see a lot of contactless payments at petrol stations and at Tim Hortons fast food outlets."
"The consensus is that it will be about five years before we see mass-market acceptance in Canada for mobile payments at the point of sale," says Les Riedl, Speer & Associates’ chief executive. "It will take this amount of time to get sufficient NFC-enabled smartphones and POS terminals into the market."
A crowded competitive landscape
"The Canadian acquiring market is highly competitive," says Riedl. "Margins have eroded by 30-40% in the last 10 years due to pricing competition. Also, the market is fairly fluid. You will get 20-30% annual turnover of merchants based on new business formations, business failures, and merchants looking to other acquirers for better deals."
"We have seen pricing competition at the top layer of the market," Jeff van Duynhoven, president of TDMS, says. "Competition is especially keen in the large corporate sector."
Global Payments’ Canadian revenues seem to have been a casualty of pricing competition. In the three months to 29 February 2012, its Canadian operation’s revenues fell 5% from USD81.07 million in the year-earlier quarter to USD 76.68 million. However, for the nine months to 29 February 2012, Global Payments’ Canadian revenues rose 4% from USD243.73 million a year earlier to USD253.42 million.
"Desjardins is a significant competitor, even though it has a small market share," says Riedl. Quebec-based cooperative financial group Desjardins, which also has operations in Ontario, New Brunswick and Manitoba, signed a collaboration agreement with France’s Crédit Mutuel in October 2011. "Desjardins and Crédit Mutuel plan to work together in the Canadian acquiring market," says Riedl.
In April 2011, in a move to expand its nationwide presence, Desjardins acquired Western Financial, the owner of Bank West which has 550,000 clients in the Western provinces of Canada.
Moneris
"Moneris processes 42 out of the top 50 largest merchants in Canada," says Fowler. "We also provide acquiring services right down to the smallest merchants including the SOHO (Small Office Home Office) market."
According to Fowler, Moneris processes for around 350,000 merchant locations in Canada and the US. "Most of these merchants are in Canada," he says. "Our annual dollar value volume is CAD170 bn a year, mostly in Canada."
In the second quarter of 2012, Moneris reported 4.67% growth in Canadian same-store transactions year-on-year, with transactions in the fast-food sector growing by 10.9%. "Our transaction volume growth is in line with the growth in the Canadian cards industry," says Fowler. "We’ve seen particularly significant growth for Moneris in fast food, as the card schemes are targeting fast food more quickly than other sectors."
According to Fowler, e-commerce transactions account for under 10% of Moneris’ total transaction volumes.
"Moneris has installed a large number of contactless card readers in Canada that accept Interac Flash, Visa PayWave and MasterCard PayPass," says Fowler. "These readers will accept NFC payments. However, it’s still early days for NFC in Canada."
TDMS
"TDMS sees itself as the only nationwide bank-owned acquirer, as the other Canadian banks that owned acquiring businesses have sold these businesses, or, in RBC and BMO’s case, formed a joint venture," says van Duynhoven.
When Global Payments entered the Canadian market in 2000, it bought CIBC’s acquiring business. It subsequently bought National Bank of Canada’s (NBC) merchant portfolio, and in 2009 added HSBC Canada as a marketing partner. Both CIBC and NBC act as agent banks for Global Payments. In 2002 Chase Paymentech bought Scotiabank and Citibank Canada’s merchant portfolios.
"As we are bank-owned, we have a different approach in the market to the other acquirers," says van Duynhoven. "Because our parent TD has a relatively conservative risk approach, there are several sectors where we have not played strongly due to their risky nature, for example airlines and travel. We only offer acquiring to providers of delayed delivery services if they have an existing banking relationship with TD."
Van Duynhoven says that, although historically TDMS hasn’t been big in the Canadian e-commerce sector, it is seeking to expand its presence in online payments processing. "Face-to-face payments has been our strength," he says. "We are dominant in a number of verticals such as retail and alcohol sales [In many Canadian provinces, consumers can only buy alcohol at separate stores]."
"You don’t need a banking relationship with TD to become a TDMS client," says van Duynhoven. "But I estimate that 85% of TDMS customers are TD banking clients. This forces TDMS to operate in a more transparent manner, because we don’t want to damage the bank’s relationship with its clients who are also our customers."
Elavon
"Elavon follows the same business model in Canada as it does in the US," says Taylor. "We focus on the airline market in Canada, as we do in the US, and we sell low-cost terminals to small merchants through Costco in both Canada and the US."
U.S. Bank, Elavon’s parent, entered the Canadian market in 2000 when it bought RBC’s commercial and procurement card portfolios. It bought CIBC’s commercial and procurement card portfolio in 2006. "Some of U.S. Bank’s Canadian corporate card clients are also our merchant clients," says Taylor.
ISOs represent a significant part of Elavon’s business in Canada. "We have over 50 ISO partners," Taylor says. "In dollar terms, airlines are our largest Canadian merchant channel. But, in terms of numbers of merchants, ISOs represent our largest Canadian channel."
Riedl estimates that Elavon has around 55,000 Canadian merchants.
Migrating to EMV
Acquirers say they are on track to meet the deadline for migrating Canada’s payments infrastructure to EMV.
Visa Canada and MasterCard Canada both implemented a 31 March 2011 liability shift for domestic POS terminals and a 31 December 2012 liability shift for pay-at-pump automatic fuel dispensers. Instead of a liability shift, Interac has mandated that, by the end of 2012, all Canadian-issued debit cards and ATMs must have migrated to EMV, and that, by the end of 2015, all other acceptance devices (including POS terminals and pay-at-pump automatic fuel dispensers) must be EMV-compliant.
"2015 is the hard stop for EMV migration in Canada," says Riedl.
"TDMS has virtually completed its merchants’ EMV migration," van Duynhoven says. "We’ve migrated all our merchants with integrated point-of-sale systems except for a couple of merchants who decided not to roll out EMV yet. All our stand-alone POS terminals are EMV-compliant, and we can accept NFC payments at our terminals that have a contactless capability. Now we want to see how we can leverage our EMV expertise in the US through our US subsidiary."
"Moneris has been moving very aggressively to migrate its Canadian merchants to EMV, and has over 250,000 EMV devices in the market," says Fowler. "We’re on track to migrate all our merchants to EMV by the 2015 end date. We took the approach of initially targeting our high-volume, high-risk merchants for EMV migration."
However, Rohit Patni, executive vice president, sales and marketing, at EMV gateway provider YESpay, says Canada is still seeing slow EMV uptake. "There are still many retailers that haven’t implemented EMV," he says. "Canadian acquirers haven’t been as aggressive in enforcing EMV migration as they were in the UK. In Toronto, a lot of merchants still only have magnetic-stripe card readers. If retailers do have EMV, what they’ve done is install stand-alone EMV devices rather than integrate EMV to their POS system."
"Many Canadian merchants are deploying stand-alone EMV devices as a cost-effective way to achieve EMV and Payment Card Industry Data Security Standard (PCI DSS) compliance," says Fowler.
Van Duynhoven says Canada is behind the US on PCI compliance. "Level 1 merchants (processing over 6m Visa or MasterCard transactions annually) are not as PCI-compliant in Canada as they are in the US," he says. "Also, Canadian acquirers have not yet made Level 4 PCI compliance mandatory (ie for e-commerce merchants processing fewer than 20,000 e-commerce transactions)."
The Code of Conduct
In April 2010, Canadian Finance Minister Jim Flaherty introduced a voluntary Code of Conduct for the Canadian credit and debit card industry. The Code was introduced following merchant complaints about issues such as the rollout of high-interchange Visa Infinite and MasterCard World credit cards.
"As Visa Canada and MasterCard Canada have adopted the Code of Conduct into their operating regulations, it’s not really voluntary," says Taylor. "All Canadian acquirers follow the Code."
"The Code has increased acquirers’ compliance costs, as there are a lot more eyes looking over the business now," Taylor adds.
"The Code calls for greater transparency on acquirer pricing," van Duynhoven says. "Acquirers have to transparently display the cost of accepting cards in merchants’ monthly statements. This means displaying the effective merchant discount rate (MDR), which is the sum of all the fees charged for processing each type of payment card, including per-item transaction fees and assessment fees to cover the costs of managing their network, divided by the total sales volume for that card type. In addition, acquirers have to either provide the interchange rates for each card type, or give a link to the card scheme’s interchange website."
The Financial Consumer Agency of Canada (FCAC), a federal regulator, is responsible for monitoring the payment card networks’ compliance with the Code. "It doesn’t get involved in individual disputes between merchants and ISOs (Independent Sales Organisations) or acquirers," says van Duynhoven. "The payment card networks are responsible for monitoring ISOs and acquirers."
The Code also calls for acquirers’ agreements with merchants to be written in clear language and to provide sufficient detail. If an acquirer increases its fees, a merchant must have 90 days to cancel the agreement without incurring an exit penalty, the Code stipulates.
In 2011, the Canadian Federation of Independent Business (CFIB) complained to the FCAC about a letter about price increases from Moneris which the merchant association said was very unclear. In response, Moneris agreed to give affected merchants an extra 90 days in which to exit their contract penalty-free. "The CFIB has now obtained a ruling from the FCAC that, if an acquirer’s letter about price changes is unclear, merchants have the right to a total of 180 days in which to exit their contracts without penalty," says Dan Kelly, the CFIB’s president and CEO.
Questioning unfair practices
There is a strong feeling in the industry that the Code is ineffective in preventing unfair sales practices. "The Code does a good job once the merchant is signed up to an acquirer," says van Duynhoven. "But there is nothing in the Code about sales practices."
Kelly is critical of the sales practices employed by a number of Canadian ISOs. "It’s these ISOs that are the problem, not the acquirers," he says. "The acquirers for the main part have aggressive business practices, but their practices are above board."
Kelly says there have been cases where ISOs have quoted a flat-rate of 1.5% for all transactions to new clients. "The merchants then find they are really paying 3% because the 1.5% didn’t include non-qualifying fees," he says. Non-qualifying fees are charged where merchants have to type in a card number, or where payment is made by premium credit card.
One of the biggest problems relates to the leasing of payments terminals. While terminal rental is the prevalent model among acquirers, many ISOs lease or sell terminals to clients.
"Some ISOs have realised that leasing terminals is a way to get round the Code’s requirement that they give merchants a 90-day penalty-free exit period after the announcement of price increases," Kelly says. "What they do is to get merchants to sign a separate leasing agreement with a third-party leasing firm, in addition to the processing agreement with the ISO. Then a month later, they increase their processing fees. If the merchant wants to exit their contract, the ISO says the merchant will have to pay a substantial penalty to the leasing firm."
"The CFIB has been talking about these unfair leasing deals with the FCAC, the Department of Finance and, most specifically, with Visa, MasterCard and the other card networks," says Kelly. "We’re optimistic that, with the publicity this issue has generated and as a result of our negotiations, a solution will be found for the leasing problem. We think the payments industry will adopt one of the three solutions we’ve recommended: no leasing by third-parties; a 90-day penalty-free exit period from leasing contracts; or retention of existing penalties for exiting leasing contracts, but contracts must contain a warning in large type about these penalties."
In 2011, the CFIB received 1,800 calls from merchants complaining about ISOs, says Kelly. "One of the problems is that ISOs use independent sales agents, who are not employed by them," he says.
Another disadvantage of leasing or buying terminals in Canada is that, unlike the US, Canadian terminals are not portable between acquirers. "This is because each acquirer has its unique encryption keys for Canada’s Interac debit scheme plus EMV keys," says van Duynhoven. "This means that, if you lease a terminal from one acquirer or ISO, then want to move to another acquirer, you are stuck with the original terminal."
Merchants’ vulnerability
Kelly says small merchants are vulnerable to questionable sales practices by some ISOs, because they are trying to reduce their costs for accepting credit cards. "This is partly because of the current economic climate, and also because in the last two and a half years credit card processing fees have risen by 20-30% following the introduction of premium credit cards," he says. "The Canadian banks have been pumping out these premium cards, and the CFIB has had a lot of calls from merchants about the high cost of accepting them."
Some ISOs tell merchants they can reduce their credit card processing costs by half if they sign a contract, Kelly says.
Kelly notes that MasterCard Canada currently has a policy of reclassifying regular credit cards as premium cards if the cardholder spends more than a certain amount per year. "MasterCard has told us it will phase out this practise, but it is still in place today with many cards," he says.
The CFIB recommends that the Government amend the Code, so merchants have the right to surcharge for more expensive cards. Currently, the Code allows merchants to discount for cheaper payment methods, which the CFIB says erodes merchants’ already-thin margins. The CFIB also wants the Government to ban the "Honour All Cards" rules that require merchants to accept all card types from a payments network brand.
In May 2012, the Competition Bureau, Canada’s competition regulator, commenced its case before the Competition Tribunal against Visa and MasterCard Canada’s Honour All Cards rules and their ban on surcharging. According to the CFIB, the Competition Tribunal is expected to issue a ruling on the Competition Bureau’s view that these rules are anti-competitive, in the next few months.
