Canada’s domestic debit network
Interac has so far been able to fend off the threat of the
international networks entering the local debit market. However,
its future remains uncertain as Interac’s not-for-profit status
means that it is limited in its ability to compete against further
challenges from the likes of Visa and MasterCard, writes Jane
Cooper.
Go deeper with GlobalData
Unlike commercial
profit-generating companies, Interac struggles to invest in
innovation and development, and it has been feared that it could
lose out to the competition of its larger US-based rival networks.
Interac has so far been able to stay innovative, with, for example,
its plans to introduce contactless technology to its cards.
Canadian issuers RBC and Scotiabank were the first to announce that
they would be adding the Interac Flash contactless functionality to
its debit cards, which are planned to be rolled out this summer.
Such a move puts Interac’s cards on a par with technology elsewhere
in the world, but there is a question mark hanging over Interac’s
ability to maintain its dominant position in the Canadian debit
market in.
Canada’s debit market is unique in that
Interac has held such a strong position that it has been difficult
for Visa and MasterCard to gain a foothold. In recent years that
has begun to change, and Interac’s future is threatened because the
banks that own the association are also tempted by the propositions
of issuing Visa and MasterCard debit cards. A grassroots campaign
by retailers and government action has dampened the international
networks’ ambitions, but the threat has not gone away.
Functioning as a utility
US Tariffs are shifting - will you react or anticipate?
Don’t let policy changes catch you off guard. Stay proactive with real-time data and expert analysis.
By GlobalData
Interac has
voiced its concern that because it is a non-profit organisation it
does not have the deep pockets to continue to innovate. It is,
however, because of this non-profit status that Interac offers
low-cost transactions and has been so successful. From the
international networks’ point of view, the debit market in Canada
is ‘broken’ in the sense that Interac is a monopoly and commercial
players are unable to enter and compete.
Interac functions as a utility and its pricing
is on a cost-recovery basis. If new commercial entrants entered the
debit space, that would introduce different pricing structures to
the market. Currently Interac transactions are charged at a flat
rate of around CAD0.07 regardless of the purchase amount. Interac’s
position is threatened by the scenario that the international
networks entrench the market and charge fees based as a percentage
of the transaction. Such a notion prompted an outcry from retailers
who foresaw that their costs could jump up and follow the path of
US interchange fees, which some observers estimate are
approximately 10 times the amount of those in Canada.
With higher fees come more revenue, and more
incentive for banks to issue cards on the international networks.
Interac’s future could be in jeopardy because banks govern it, and
those banks may not be motivated to keep Interac competitive when
Visa and MasterCard could be offering those bank issuers a more
attractive proposition.
For this reason, Interac wanted to change its
governance so that it would be run independently of its
stakeholders and to become a commercial organisation so that it
could change its pricing to raise funds for research and
development.
The reason behind Interac’s initial consent
order to be a not-for-profit entity was so that it would not engage
in anti-competitive practices and take advantage of its dominant
position. Since it was a cooperative formed by financial
institutions, the non-profit status meant that the price setting
was done to provide a low-cost service, and not provide profits to
the banks that made up the association. In February 2010 the
Competition Bureau rejected Interac’s application for it to change
its consent order and become a for-profit organisation but it did
allow for it to make changes to its governance model.
At the time of the decision, the regulator
said in a statement: “Based on currently available information,
including Interac’s current dominant position in the market, the
bureau cannot support changing or removing the safeguards in the
consent order… In particular, the bureau does not agree that the
removal of the restriction against for-profit activities by Interac
would be pro-competitive, or is necessary to allow Interac to
remain competitive.”
Dan Kelly, senior vice president, Legislative
Affairs for the Canadian Federation of Independent Business (CFIB)
describes Interac as a “sitting duck” and says some of the banks
that are controlling Interac are also drooling over the debit
proposition offered by Visa and MasterCard. CFIB’s president
Catherine Swift has described this situation as being akin to
“Colonel Sanders looking after your pet chicken.” Kelly adds that
with the current set-up those in charge of Interac could kill it
off if they wanted to.
At the time the change in consent order was
rejected, CFIB’s Swift says: “Since the mid-1980s, Interac has
served Canadian consumers and businesses very well with its low
cost debit network, and small businesses in particular will be
outraged if it is permitted to be substantially diminished or
eliminated by these new market entrants.
“When Visa and MasterCard have entered the
debit markets in other countries, the result has typically been to
eliminate the domestic incumbent debit provider in one way or
another, following which debit costs would be ratcheted up to
merchants. This should not be allowed to happen in Canada.”
She added that the changes in the governance
structure meant that one of Interac’s hands had been “somewhat
untied” but the ability of Interac to compete with Visa and
MasterCard to compete on an equal basis remained limited.
Keeping costs down
The flip side of
Interac becoming a commercial organisation is that it could go down
the same path as the international networks and increase its fees
and be spurred to offer rewards programmes that bring in extra
revenue for the issuing banks, and be less interested in offering a
low-cost service. Kelly, however, comments to Cards
International that it does not look as if Interac would go
down that road. If Interac was a commercial organisation, it is
possible that it would be overshadowed by the larger firepower of
the international brands and still would not be able to
compete.
A spokesman for the Retail Council of Canada
told Cards International that merchants are most
interested in preserving the secure, low cost nature of Interac.
“Retailers prefer Interac because it is a secure, low cost form of
payment. Merchants also don’t want to see the anti-competitive
practices and high interchange that are present in credit payments
migrate in debit payments,” he says.
Interac remains attractive to merchants
because it is able to offer low-cost debit transactions. But
merchants have argued that this position has been threatened
because Visa and MasterCard attempted to enter the market in such
as way that merchants would not have the option to choose Interac
transactions. Kelly explains that retailers objected to the way in
which Visa and MasterCard first tried to enter the market by
co-badging. Under the initial plans of the networks, explains
Kelly, an issuer of a co-badged card would issue the card on both
the Interac network and brand it with Visa Debit or Maestro as
well. If a retailer were not on the acceptance network of either
Visa Debit or Maestro, then the card would be processed as an
Interac transaction. What was particularly objectionable, argues
Kelly, was that if a merchant had signed up to Visa Debit, when
they accepted the co-badged card it would automatically be
processed on the international – i.e. higher cost – network.
Kelly says that retailers are not suggesting
that Visa and MasterCard should not compete in the debit card
market in Canada. “If they want to get into the market they should
do it on their own,” says Kelly, rather than piggybacking off the
existing Interac network.
Independent business
support
CFIB campaigned so that merchants would still
have the option of choosing Interac. They were concerned that Visa
Debit and Maestro would get into the market through the backdoor
because they were using the acceptance of Interac to fall back on
where merchants were not signed up to the international acceptance
brands.
As part of the campaign for a Code of Conduct
for the industry, retailers argued that they should be allowed to
choose which network the co-badged cards were processed on. That
choice should lie with the merchant, they argued, because they are
the ones paying the fees.
However, Visa had a different view of the
situation. The US-based company argued that it should be consumers
who had the choice and it was hoped that consumers would be able to
make the choice of network when they entered their PIN. After
submitting Visa Canada’s comments on the draft voluntary Code of
Conduct, Tim Wilson head of Visa Canada said: “Our main concern,
and one that we’ve highlighted in our submission to the government,
is that the draft Code does not go far enough to protect consumer
choice at point of sale and may discourage innovation.” He also
argued that merchants could already choose whether to accept or not
to accept Visa Debit cards and this should already be enough to
steer consumers at the point of sale. Also, Visa argued, if the
merchant chooses which network this overrides the consumer’s choice
without their consent and prevents competition in the debit market
in Canada.
Visa Canada argued, as did the processor
Moneris, that it would be too technically difficult to have a
system in place whereby the merchant could choose which network to
route the payment on. While the industry worked out a way to do
this, merchants feared that Maestro and Visa Debit would push ahead
with their expansion plans, and so the merchants called for a ban
on co-badged cards altogether in the Code of Conduct.
Now co-badged cards can only be used on the
Interac network at the point of sale. For example, if a card is
co-badged with Visa Debit, the international network will not be an
option when the card is used at a physical point of sale in Canada
and will be processed as an Interac transaction.
The Canadian issuer CIBC was the first to
introduce Visa Debit to the market in October 2010. Its co-badged
card – the CIBC Advantage Card – means that the Visa Debit network
can be used for cardholder not present transactions – i.e. online,
telephone and mail order transactions – and international
transactions. This is similar to the co-badging arrangements in
other markets, such as China where the domestic transaction runs on
CUP and Visa is used for international transactions. The Canadian
situation is slightly different as the Visa Debit can be used
domestically for non-physical transactions.
However, the online transactions and the
acceptance of Visa Debit have also proved to be a bone of
contention for retailers. Interac has traditionally been weaker in
its online transactions and so has been a fertile ground for Visa
and MasterCard’s credit networks and an opportunity for their debit
acceptance. However, Kelly explains that Visa Debit branded cards
were being accepted and processed on the Visa credit rails so that
in effect merchants were accepting Visa Debit cards without
realising or choosing to do so. Kelly says that because of the
lobbying of retailers that practice has now been stopped. When
contacted by Cards International, neither Visa Canada nor
MasterCard Canada responded to an interview request.
Debit cards that are issued solely on the Visa
Debit or Maestro network – without the co-branding with Interac –
are not yet a feature of the Canadian market. So far, Interac has
been able to defend itself against the challenges of the
international networks, but its future still remains uncertain.
