The use of cash is not centrally recorded in Canada. However, various economists have used survey data and ATM use figures to estimate that the average cash transaction was around C$15 ($14) in 2004. It has also been estimated that the number of cash transactions in 2004 was around 6.2 billion, representing total spend of about C$92 billion.
Many observers – including the central bank, the Bank of Canada (BoC) – believe that the displacement of cash is likely to continue as the public perceives electronic payments to be a more efficient payment method than cash.
Cheque use is extremely low in Canada and is estimated by national payment association Interac to represent less than 1 percent of all retail transactions. (See Figure 1.)
Research carried out by the BoC found that cash is the preferred method for making purchases of less than C$25, debit is preferred for purchases between C$25 and C$100, and credit is the preferred method for purchases greater than C$100. The BoC also found that 72 percent of survey respondents used cash at least once a week, followed by debit cards (64 percent) and credit cards (36 percent).
There are 61.1 million credit cards in circulation, approximately 26.4 million of which are considered active due to having a balance on them (including those paid off in full every month). The value of credit cards grew at a compound annual growth rate (CAGR) of 11.8 percent in the period 2000 to 2006. (See Figure 2.)
According to the Canadian Bankers Association (CBA), there are over 550 issuers of Visa– and MasterCard-branded cards. This includes 23 primary issuers and hundreds of affiliated issuers.
According to the CBA, the delinquency rate (90 days or over) was 0.9 percent in 2006. MasterCard estimates that two-thirds of Canadians pay off their credit card balances each month, and the network believes that credit cards in Canada are generally used as a payment tool rather than a borrowing tool. For its part, Visa has estimated that around 71 percent of its cardholders pay off their debt all or most of the time.
Consumers in Canada are regarded as somewhat more conservative than those in the US.
Debit payments at the point of sale in Canada are organised through the Interac Association. Interac was founded in 1984 by five financial institutions, and by June 2006 it had more than 80 members. Interac is responsible for the development of a national network of two shared electronic financial services. They are:
• Shared Cash Dispensing (SCD) service: cash withdrawals from any ATM (known as an automatic banking machine or ABM in Canada) not belonging to a cardholder’s financial institution; and • Interac Direct Payment (IDP) service: Canada’s national debit service.
Interac is the only brand used for domestic debit card transactions, although banks issue Visa Debit and MasterCard Maestro cards for use outside Canada. In 2001, IDP overtook cash as the most popular way of paying for purchases. Canadians have one of the highest rates of debit card use in the world. (See Figure 3.)
A recent survey commissioned by Interac found that 86 percent of Canadians have a banking card and 85 percent of cardholders have used IDP to make a purchase. Each Canadian makes an average of 101 IDP payments per year. Even among cardholders aged 65 and over, 32 percent said they used cash most, 34 percent said they used credit cards most and 28 percent reported using IDP most frequently.
A key feature of the Canadian credit market is that duality is not permitted in Canada: banks cannot be members of both Visa and MasterCard. This leaves MasterCard and Visa vulnerable to any consolidation among the six largest banks in Canada, which dominate the banking landscape.
So far, the government has not allowed merger and acquisition activity to occur, but the possibility has led to worries that one scheme could risk losing a significant part of its business. Although a fiscally conservative government was elected in 2006, large-scale consolidation does not look likely in the short to medium term.
According to Visa Canada, 29.6 million Visa cards had been issued in Canada as of April 2007. As there are 61.1 MasterCard and Visa cards in circulation, this implies that approximately 31.5 MasterCard credit cards have been issued in Canada.
Migration to chip-enabled cards
In March 2006, the payment industry (including MasterCard, Visa Canada, Interac and many of their respective card issuers) announced a firm commitment to a broad industry migration to chip technology. The migration has already begun, with many merchants and cardholders starting to see the introduction of cards that feature chip technology.
It is expected that by 2010, the majority of cards in Canada will be chip-enabled. Magnetic stripe transactions will not be permitted in the SCD service for debit card cash withdrawals from ATMs after 31 December 2012, and magnetic stripe transactions will not be permitted in the IDP service at POS terminals after 31 December 2015. The Canadian payments system will utilise the established EMV chip standard.
In November 2006, Interac, MasterCard Canada, Visa Canada and many issuers and processors announced their commitment to conduct a chip technology trial in Kitchener-Waterloo, Ontario. The first chip transactions will occur in the autumn of 2007. Card issuance and device deployment will increase over the following months, reaching a sufficient volume for research by March 2008.
According to Interac, the migration from magnetic stripe to chip and PIN cards is taking place in response to rising levels of debit card fraud, particularly skimming. “It’s fair to say that the decision to move to chip is based on security, but there has been interest in exploiting the opportunities that chip creates to offer products not feasible in a magnetic stripe environment,” said Kirkland Morris, assistant vice-president for strategic policies and programmes at Interac.
The announcement that Canadian card players have committed themselves to chip and smart card technology, and have put a time line in place to achieve this, has attracted a flurry of initiatives from issuers, processors and other players in the card industry. In December 2006, MasterCard Canada announced that Chase Paymentech Solutions had become the first acquirer in Canada to receive approval from MasterCard to process chip transactions.
The issuers are busy showing that they are preparing for the introduction of chip technology. National Bank of Canada recently announced a smart card pilot scheme for the summer of 2008. This project will enable the bank to “test the compatibility of its ATMs and systems with this new technology in a controlled environment, while ensuring the reliability of various other elements involved in payment and transaction processes”, it said.
Other recent announcements make it clear that the shift to chip is well under way. For example, in May of this year, retailer Canadian Tire and MasterCard Canada announced that all of Canadian Tire Retail’s 468 stores will be ready to accept MasterCard chip cards by the end of 2008. Canadian Tire, a major national retailer, claims its stores are visited by 40 percent of all Canadians every week.
Many marketing initiatives in the Canadian market centre on earning loyalty points (linked to airlines, hotels, etc) or donations to charities. Other cards highlight the access to events they can give cardholders.
Canadian consumers are regarded as quite price-sensitive. A survey carried out in 2007 by card issuer Capital One Canada, for example, found that 82 percent of respondents preferred cards that offered one low rate and “had no give-aways or time-limited offers on interest rates”.
In the debit card market, there is an interchange fee for cash withdrawals from ATMs, whereby banks pay a fee to allow their cardholders to use a machine that is not part of the bank’s ATM network, but interchange has been set to zero for debit card transactions at the point of sale. As a result, Canada’s regulators have not been as interested in debit card structures as have regulators in other countries.
However, surcharges have attracted government attention as these can be levied on both ATM and POS transactions for both financial institution and white-label transactions. There are no rules in Canada that regulate the nature or size of surcharges, but there are rules that demand full disclosure to customers. Surcharges at ATMs range from C$1.50 to C$2.
Canada’s federal government has asked the country’s top five banks to explain why they charge their customers a fee for using another bank’s ATMs. However, although the federal opposition party is calling for Canadian banks to abolish these so-called ‘convenience’ fees, a ban has not been imposed.
Processing and merchant acquiring
The largest acquirers in Canada include First Data Loan, Global Payments, Moneris, Chase Paymentech Canada and United Network Payment Solutions. TNS Smart Network is Canada’s largest privately owned transaction processor. Credit Union Electronic Transaction Services is a provider of MasterCard issuing and acquiring products and services to over 450 credit unions, caisses populaires (a type of credit union located mainly in the province of Quebec) and other organisations throughout Canada.
Canadian financial institutions have traditionally handled issuing, merchant acquiring and processing themselves. Over the past decade, this has changed and there has been a fairly rapid shift to third-party processing.
As in a number of other markets, some consolidation is under way in the Canadian processing sector. Moneris, created in 2000, is a 50/50 joint venture of the merchant acquiring businesses of RBC Royal Bank and BMO Bank of Montreal. It processes more than 1.8 billion credit card transactions a year and processes card transactions for 350,000 small- and medium-sized merchants in North America.
In other recent transactions, Global Payments acquired the processing businesses of CIBC and National Bank of Canada, while Paymentech purchased the acquiring arm of Scotiabank. Other banks such as TD Bank do their processing in-house.
First Data International continues to make inroads in the Canadian market. In October 2006, the global payment processor became a member of Interac. As an Interac member, First Data will have the ability to capture and process debit transactions in Canada, allowing First Data merchant clients to accept the Interac-branded card at the point of sale. In May 2007, First Data signed a merchant acquiring agreement with WestJet, Canada’s second-largest airline.
Local players are fighting their corner hard. In April 2007, for example, Desjardins Group, Canada’s largest integrated co-operative financial group, announced that its card services business, DCS, had signed an agreement with GE Money to supply MasterCard payment solutions to merchants. This means that Desjardins is now the first traditional Canadian financial institution that offers merchants an integrated MasterCard and Visa service.
Innovations in the market
Apart from the migration to chip-enabled cards, the main innovation currently in the Canadian market is the introduction of contactless technology. In May 2007, Visa Canada announced that it was introducing its contactless payWave technology to the Canadian market.
Visa payWave in Canada is based on EMV chip technology, which can securely store and encrypt confidential information. MasterCard is pressing ahead with the introduction of its PayPass technology. In September 2006, telecommunications giant Rogers Communications announced that it would be conducting a market trial of the Mint PayPass MasterCard at its Toronto headquarters.
Mint, in partnership with Peoples Trust, is the first to deploy and support MasterCard PayPass-enabled card products and prepaid payment cards in Canada.
Another PayPass roll-out was a 2006 venture between Citi Cards Canada and petrol retailer Petro-Canada. The PayPass feature was added to the Citi Petro-points MasterCard. In the future, cardmembers will be able to tap their MasterCard PayPass-enabled cards at Petro-Canada pumps.
Contactless payment options are becoming increasingly popular with consumers. For example, in March 2006, RBC Royal Bank began rolling out Speedpass with Debit, a key-ring device that transmits payment instructions to specially fitted terminals at ExxonMobil petrol stations in Canada.
Major players RBC Royal Bank
RBC Royal Bank is Canada’s largest bank as measured by assets and market capitalisation. It has over 5 million credit card accounts and says its market share of Canada’s credit card purchase volume is around 20 percent. Overall card balances were C$9.9 billion in 2006, calculated on an average daily basis, up from C$8.8 billion the previous year. Loans outstanding in its Canadian credit card business were C$6.9 billion in 2006. The bank also securitised C$1.2 billion in credit card loans. Card service revenue amounted to C$496 million in 2006, a fall from C$579 million in 2005.
RBC Royal Bank operated 3,847 ATMs in Canada at the end of 2006. It has around 3.5 million online and 2.5 million telephone clients.
TD is Canada’s second-largest bank by assets. Card services revenues increased in 2006 by C$104 million, or 37 percent, from 2005, primarily due to increased net retail sales and fee initiatives. The net interest income on average earnings balances was C$3.83 billion in 2006. Income from card services (TD Bank Card Services) was C$383 million. Credit card lending volume grew by C$700 million or 18 percent in 2006. Credit card purchase volume and outstanding balances increased 15 percent and 18 percent, respectively, over the previous year. As of 31 October 2006, the bank had outstanding securitised credit card receivables of C$800 million compared with C$1.3 billion as at 31 October 2005.
TD has a network of 1,014 branches and 2,400 ATMs.
CIBC is the country’s third-largest bank. Its managed loans amounted to a total of C$11.5 billion in 2006 (of which C$7.04 billion was reported and C$4.4 billion was securitised). CIBC card fees were C$251 million in 2006, down from C$317 million in 2005 and C$407 million in 2004. This was primarily due, the bank said, to higher levels of securitised assets, partially offset by higher purchase volumes. Card fees comprise mainly interchange income, late fees, cash advance fees and annual fees. CIBC total revenues from cards amounted to C$1.4 billion in 2006.
CIBC has a national network of around 3,800 ATMs. It has a deal in which it operates almost 500 ATMs in 7-Eleven shops across the country.
BMO Bank of Montreal
BMO Bank of Montreal is part of the BMO Financial Group, which had total assets of C$320 billion as of 2006. Its Personal and Commercial Banking division provides bank accounts, loans and credit card to over 8.5 million customers across Canada and the US. In 2006, card fees rose C$62 million or 19 percent to C$396 million, driven largely by the success of the Mosaik MasterCard and by the 2005 maturity of a portion of credit card loans that were previously securitised.
ScotiabankScotiabank is Canada’s most international brand, being represented in more than 50 countries. Its card revenues were C$307 million in 2006 (up from C$251 million the previous year); however, it should be noted that this includes international business. Total loans outstanding for personal and credit cards was C$32.6 billion in Canada for 2006.