Aided by Canadians’ enthusiastic adoption of new payment
methods, electronic payments have made substantial inroads over the
past decade. Despite this, considerable scope exists to further
displace paper instruments as a payment medium, something the
payments industry is working hard to achieve.
Canada can look back on more than a decade of remarkable growth
in the use of electronic payments, not least of the driving forces
being the introduction of debit cards in 1994. Running on the
national Interac Direct Payment (IDP) network, debit card
transactions have soared, sustaining a CAGR of 13.5 percent between
1997 and 2007 to reach C$156.8 billion ($152 billion) in 2007.
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According to international central bank organisation the Bank
for International Settlements (BIS), enthusiastic adoption of debit
cards has made Canadians among the world’s top debit card users.
Based on BIS data, Canadians made 95.1 debit card transactions per
person in 2005, second only to Sweden at 97.2 transactions and well
above the remaining top countries including the Netherlands (81.7),
the US (74.8) and the UK (69.9).
According to the country’s central bank, the Bank of Canada
(BC), debit cards have almost completely displaced cheques and, to
an extent, cash as a method of making payments at retail POS. The
BC gives considerable credit to the IDP’s operator, the Interac
Association, for not only driving the move to debit cards but for
fostering the adoption of electronic payments in general.
Interac is a not-for-profit organisation comprising 95 members,
including banks, trust companies, credit unions and payment-related
companies, and was established in 1984 to create the Shared Cash
Dispensing Network linking Canada’s ATMs. In Canada, ATMs are
referred to as automated banking machines, or ABMs.
ATM numbers still growing
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By GlobalDataDespite having already achieved a high penetration in the 1990s,
the number of ATMs has continued to grow, rising from 40,000 in
2002 to 56,600 in 2006. According to BIS data, this has led to
Canada having the world’s highest ATM density: 1,735 per million
inhabitants in 2006, up from 1,128 per million in 2002.
However, there are signs that the ATM market has reached near
saturation: data from industry body the Canada Banking Association
(CBA) shows total ATM transactions falling from 1.21 billion in
2002 to 1.02 billion in 2007. All ATM transactions also reflected
falling volumes between 2002 and 2007. This included transfers that
fell 4 percent to 44 million and bill payments that fell 0.4
percent to 59.6 million. In part, this reflects the growing
adoption of the internet as an alternative payments platform.
The biggest decline in ATM use was seen in cash withdrawal
transactions, which fell 20 percent between 2002 and 2007 to 667
million after having remained almost unchanged at about 830 million
transactions annually between 1998 and 2002. Declining cash
withdrawals appear to be reflected in BC data showing that, by
volume, the use of cash at POS has fallen from about 75 percent of
transactions in 1998 to about 55 percent at present. In value
terms, cash accounts for about 20 percent of POS transactions, down
from just over 40 percent in 1998.
Growth in EFTPOS terminals
Supporting a declining use of cash, Canada has also experienced a
proliferation in EFTPOS (electronic funds transfer at point of
sale) deployments supporting debit and credit card use; Interac
reports that between 2000 and 2007, the number of EFTPOS terminals
increased by almost 40 percent to 603,248. According to the BIS,
Canada at the end of 2006 had one of the world’s highest EFTPOS
densities: 10,886 per million inhabitants. This penetration was
exceeded only by Sweden at 20,107 per million inhabitants and Italy
at 19,984 per million inhabitants.
High EFTPOS density has also supported strong growth in the use
of credit cards in Canada. CBA data shows that between 1997 and
2006, total transactions using MasterCard and Visa credit cards
achieved a CAGR of 12.2 percent, reaching C$214.7 billion in 2006.
Reflecting the dominance of MasterCard and Visa in Canada, all
credit card transactions in Canada totalled C$233.3 billion in
2006, according to the BIS. In addition, out of 61.8 million credit
cards in issue at the end of 2006, 61.1 million were branded either
MasterCard or Visa.
At the end of 2006, BIS data shows that Canada had a credit card
density of 1.89 cards per person, the third highest in the world
after the US at 4.39 per person and Japan at 2.26 per person. About
550 institutions offer credit card products in Canada, according to
the CBA.
Rapid uptake of online banking
Canadians’ quick and enthusiastic adoption of new banking
technology has also been reflected in the adoption of the internet
for banking and commerce, a move that is anticipated by the BC to
continue being a key driver of the growing use of electronic
payments. Notably, high internet use makes Canada a receptive
market for online banking and commerce. At the end of 2007, 22
million Canadians, 67.8 percent of the population, were internet
users, according to United Nations agency the International
Telecommunication Union.
In terms of online banking, rapid uptake is reflected in growth
in transaction volumes that increased from 100.9 million in 2001 to
343.5 million in 2007, according to the CBA. The swing to online
banking has been accompanied by a sharp fall in the use of
telephone banking with transactions via this medium falling from
94.6 million in 2001 to 79.2 million in 2007.
Confirming internet banking’s popularity, a survey by research
company TNS Canadian Facts revealed that in 2006 37 percent of
Canadians did their banking online, up from 8 percent in 2000 .In
addition, 60 percent of people with internet access said they had
signed up for online banking.
Adoption of online commerce has been impressive: federal
government body Statistics Canada (StatsCan) reported in a study
published in 2007 that private and public sector online sales
combined surged 40 percent to C$49.9 billion in 2006. Online sales
by private companies increased 42 percent to C$46.5 billion, while
those by the public sector rose 17 percent to C$3.4 billion.
However, StatsCan added that though online retail sales almost
doubled in 2006 to $4.7 billion, they represented only slightly
more than 1 percent of total Canadian retail market sales. The vast
majority of online sales in 2006, C$31.4 billion, was accounted for
by business-to-business sales. In total, 8 percent of Canadian
companies conducted online commerce in 2006, up slightly from 7
percent in 2005, while 15 percent of Canadian retail companies sold
online in 2006, up from 10 percent in 2005.
Helping to spur online retail sales is Interac Online, a service
developed by Acxsys. In essence, Interac Online, launched in May
2005, enables customers to purchase online and pay merchants
directly via their online banking account.
Acxsys, a for-profit company, was founded in 1996 by eight major
Canadian financial institutions to manage existing electronic
payments services and develop new services. The company manages
Interac’s services and is also responsible for the migration from
magnetic stripe to chip and PIN cards in Canada. The first chip and
PIN card transaction was undertaken in September 2007; migration is
due for completion in 2010.
From a broader economic perspective, probably the best indicator
of progress made by electronic payments in Canada is the growth in
transactions via the Canadian Payments Association’s (CPA) Large
Value Transfer System (LVTS). The CPA is a not-for-profit industry
body created in 1980.
The LVTS is by far Canada’s largest payments conduit. In 2007
the CPA reported that more than C$46 trillion was settled via the
LVTS, an amount equal to 89.8 percent of all value flowing through
Canada’s payments system. An average of 21,000 LVTS payments was
carried out daily in 2007 with the highest ever daily volume,
37,364, recorded in July. The LVTS ensures that each payment is
final and settlement is immediate.
In volume terms, electronic payments via the LVTS have made
exceptional progress, increasing from 38.2 percent of total payment
instruments in 1995 to 80.4 percent in 2007. In value terms,
paper-based payments remain dominant and accounted for 64.6 percent
of the total value that flowed through the LVTS in 2007, though
this was considerably lower than the 97.3 percent in 1997 and 99.3
percent in 1995.
Cheques not gone yet
Though in decline, cheques remain a significant part of Canada’s
payments market. According to the BIS, in 2006 cheques accounted
for 35 percent of the value of all transactions with payment
instruments, down from 50.2 percent in 2002. The volume of cheques
in 2006 was 1.33 billion, down from 1.52 billion in 2002.
While cheques will not disappear in the immediate future, their
settlement in Canada is set to change significantly with the
implementation in late 2008 of the Truncation and Electronic Cheque
Presentment initiative being led by the CPA. This will enable the
electronic imaging of all cheques for clearance and settlement
purposes.
In a country as vast as Canada, cheque imaging will result in
significant efficiency gains. According to the CPA, at present
about 5 million cheques are transported every business day in
Canada, often over thousands of kilometres and passing through two
or three processing centres en route. This process can take as much
as five to seven business days. If a cheque is dishonoured, the
whole process of moving the paper cheque through the clearing
system and rerouting it to the financial institution is
repeated.
M-banking and contactless creep in
Another development in the electronic payments market, mobile
banking, is taking its first tentative steps into the Canadian
market. Though early initiatives have been focused on basic
services such as text alerts and access to account information, a
survey conducted in mid-2007 on behalf of US payments hardware and
software vendor NCR indicates that scope exists for far more
comprehensive banking service offerings. According to NCR, over 90
percent of respondents indicated that they would value combining
mobile devices with the internet and ATMs in order to improve their
overall service experience.
Contactless payment technology has also made an appearance in
Canada, first in 2004 with MasterCard’s launch of its PayPass
solution and in mid-2007 Visa’s launch of its payWave solution.
Though in November 2007 MasterCard talked up PayPass as “fuelling
the storm of contactless cards sweeping through the Canadian
marketplace”, no details of cards in issue were provided.
However, PayPass has scored notable successes, including its
adoption in 2007 by Canadian donut chain Tim Hortons, which now
offers contactless payment facilities at its more than 2,200
outlets nationally. McDonald’s Canada has also announced that it
will begin accepting PayPass transactions at certain restaurant
outlets in 2008.
Whether tech-savvy Canadians will outdo their American
neighbours in the uptake of contactless payments remains to be
seen. However, when launching its PayPass offering Tim Hortons
noted that its decision was supported by research that indicated
nearly half of adult consumers carry C$20 or less in their wallet
and that 86 percent of these people want to make cashless
transactions more frequently.
