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September 22, 2008

Canada’s card scheme feels the heat

Interac, the Canadian national debit and ATM scheme, is looking at strategies to fendoff competition from Visa and MasterCard including a possible IPO.

By Verdict Staff

Interac, the Canadian national debit and ATM scheme, is looking at strategies to fend off competition from Visa and MasterCard – including a possible IPO.

Interac spokeswoman Tina Romero told CI that there were a number of routes that Interac could pursue to achieve this, including “an initial public offering of shares, private equity investment or a different type of commercial model”.

High usage levels of debit cards have helped Interac record year-on-year rises for debit card transactions and merchant acceptance, with transactions rising to 3.45 billion at the end of 2007, compared to 3.07 billion in 2005.

Interac runs on an association model, and has been able to dominate the Canadian debit landscape thanks to a unique duality prohibition operated by both Visa and MasterCard which means that banks can only be members of one scheme and not both. Interac is the only brand used for domestic debit card transactions, although Canadian issuers can issue Visa debit or MasterCard Maestro cards for use outside Canada.

In recent years, the duality rule has come under closer scrutiny, with Visa and MasterCard relaxing some of their own restrictions to allow dual memberships, enabling their member issuers to co-brand debit cards with Interac or issue debit cards with just the Visa or MasterCard brand. However, their Canadian member banks, who are also members of Interac, have declined to do so, and both international schemes have been effectively frozen out of the Canadian debit space.

Interac’s domination of the market has come at a price, however.

In the mid-1990s, it was forced by Canadian competition authorities to change its business model to a not-for-profit structure, allowing it to only charge fees to members that covered its costs. Interchange fees were set to zero for POS transactions, with interchange levied only for ATM cash withdrawals.

Interac considers options

Fearing the threat that both card schemes could present should they decide to flex their IPO-enhanced muscles in Canada, Interac is now in talks with Canada’s federal government to switch to a for-profit structure in order to bolster its position.

Romero also told CI that Interac has established an independent board of directors, which would be evaluating the pricing structure of the services that Interac offers.

“It is still early days yet as to what, if any changes, will be adopted,” she said.

One of the motivations behind Interac’s possible for-profit move is a fear that it is lagging behind the rest of the industry in new areas such as contactless and mobile payments, fields in which Visa and MasterCard have played a leading role in bringing to payment markets worldwide. The threat posed by non-bank players such as PayPal and others is also bringing into sharp focus the fact that Interac is in a weak competitive position compared to its peers in terms of innovation.

Merchant opposition

Interac is not the only entity wary of Visa and MasterCard encroaching into Canada. Earlier this month, Catherine Swift, CEO of the Canadian Federation of Independent Business (CFIB), wrote to merchant members of the CFIB, warning them that Visa and MasterCard “now want in” to Canada’s debit market.

“In the US, both Visa and MasterCard allow their credit cards to double as debit cards; in most cases, debit transactions also attract the interchange rate, not the flat fee charged by Interac,” Swift said.

“We believe that if Visa and MasterCard were to bring the same service to Canada, debit rates would go up dramatically,” she added, claiming that smaller merchants would be facing sharply higher costs as a result.

However, the card schemes are used to howls of outrage from merchant groups, and MasterCard was quick to rebuff Swift’s claims, with Jennifer Reed, MasterCard’s vice-president of government relations and communications, saying in a statement:

“Neither the CFIB nor the Retail Council of Canada has discussed the question of MasterCard’s possible entry into debit payments in Canada with MasterCard,” Reed said. “As such their statements are founded on rumour and speculation at best or a complete lack of information at worst.”

For the card schemes, the lure of the Canadian debit market is not likely to dissipate any time soon. For Canadian banks, the promise of greater fee income from debit cards could prove to be an attractive one, especially in a time of tougher credit conditions, and one which may ultimately override any ties they may feel to Interac.

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