Now that Canada’s banks and mobile operators have staked out their positions in the mobile payments market, the Canadian government has introduced rules to ensure a level playing field. Potentially disruptive new entrants to the market, such as Apple Pay, will have to play ball. Robin Arnfield reports
"A key difference between the US and Canadian mobile payments markets is that there’s been a good deal of experimentation by Canadian banks to develop their own mobile payment solutions independent of Apple or Google," says Thad Peterson, a senior analyst at US-based Aite Group.
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By GlobalData"US banks haven’t developed their own mobile solutions. Instead, they’ve looked to other organisations to develop the capability and have supported these efforts by offering their payment cards to provision the technology."
Tristan Hugo-Webb, associate director of US-based Mercator Advisory Group’s International Advisory Service, adds: "The Canadian market has plenty of perceived consumer interest in mobile payments and some initial mobile wallets offered by leading Canadian banks and mobile network operators."
"While the success of these mobile wallet programs can be considered mixed, a critical difference between Canada and the US is that Canada is already EMV-compliant and many Canadian POS terminals are EMV- and NFC-enabled. Thus, while mobile payments haven’t seen high adoption rates, the foundation in place is strong for the future. However, as in the US, Canadian consumer adoption of mobile payments is likely to be much slower than expected."
"At the last count nearly six months ago, Canada’s contactless-enabled POS terminal penetration was just over 30%," says Jeremy Bornstein, head of payments innovation at RBC.
Code of Conduct
On 13 April 2015, Canada’s Finance Minister Joe Oliver announced an updated version of the Code of Conduct for the Credit and Debit Card Industry in Canada.
The new version includes mobile payments for the first time, plus a requirement that acquirers pass on Visa and MasterCard’s November 2014 Canadian credit card interchange reductions to merchants.
First released in 2010, the Code comprises a set of rules intended to guarantee interchange fee transparency and safeguard the rights of merchants and cardholders. Compliance by its signatories, Canada’s card networks, issuers and acquirers, is monitored by the Financial Consumer Agency of Canada, an independent body established in 2001.
"The updates to the Code were developed in consultation with a broad range of stakeholders, including representatives from the Canadian credit and debit card networks, small business, retailers, and consumers," a Department of Finance spokesperson says. "Bilateral consultations were also conducted with acquirers and small merchant associations."
"RBC was involved in the consultation process for the Code over a long period of time, and is pleased with the outcome," says Bornstein. "The Code’s purpose is to ensure merchants know what they are paying for and to clarify the impact of new technologies and card payments methods."
"The Canadian government’s update of the Code to include mobile payments highlights the maturing of the Canadian mobile payments market," says Mercator’s Hugo-Webb. "Now that mobile wallets and payment services have achieved some traction, regulators believe further adoption could occur in the near future. So creating a stable business and operating environment is key."
Terms and conditions apply
The Code says merchants accepting credit card payments from a card network aren’t required to accept debit card payments from the same network, and vice versa. Merchants can also provide discounts for different methods of payment – cash, debit card and credit card – as well as different levels of discounts for different card networks.
Merchants who accept credit card payments from a particular network via consumers’ mobile wallets cannot be obligated to accept mobile debit card payments from that network, and vice versa.
Debit cards that are co-badged (i.e. contain credentials for different debit networks such as Visa Debit and Canada’s Interac) must be represented as separate payment apps in mobile wallets or mobile devices.
The Code says consumers must have "full and unrestricted control" over their mobile wallets’ default settings so they are free to choose which debit or credit card apps to use.
"All representations of payment apps in a mobile wallet or mobile device, and the payment card network brands associated with them, must be clearly identifiable and equally prominent," it says.
"We’ve always promoted the concept of a truly open mobile wallet, where the customer is in absolute control of what they carry and what they use," a spokesperson for Canadian mobile operator Rogers Communications says. "We’re supportive of the Code’s direction on these issues."
Card networks will not be able to force merchants to accept contactless payments or upgrade their POS terminals to accept contactless payments. However, the Code doesn’t allow merchants to opt for one type of contactless payment in preference for another, provided mobile payments and contactless card-based payments have the same fee structure.
"If mobile payments fees increase relative to fees for card-based contactless payments, the Code establishes a right for merchants to opt out of accepting contactless mobile payments without disabling other forms of contactless payment acceptance," a Department of Finance spokesperson says.
"Merchants will also receive the right to cancel all contactless acceptance services, with 30 days’ notice, while maintaining all other aspects of their existing contract without penalty. These provisions will make it easier for merchants to respond to any future increases in card acceptance fees for mobile payments, without disrupting the rest of their payment services."
"We’ve gone on record as saying RBC mobile transactions have the same cost structure as RBC contactless card transactions," says Bornstein.
The card networks, issuers and acquirers had 30 days from the date of the Code’s release (13 April) to re-commit publicly to the Code. Most elements of the Code will come into force within nine months of the date on which the networks adopt the Code.
However, some elements, such as the measures to facilitate the pass-through of credit card interchange reductions to merchants and merchants’ new rights regarding contactless payments acceptance took effect immediately.
"The Code’s extension to mobile will accelerate the adoption of mobile payments in Canada, as merchants will now be more open to accept contactless transactions including mobile," says Ramesh Siromani, a partner in A.T. Kearney’s financial services practice.
Host Card Emulation
The advent of Host Card Emulation (HCE) technology means issuers can offer cloud-based mobile payments on NFC-enabled Android-based smartphones without storing card credentials on SIM card secure elements.
In December, RBC became the first North American bank to announce support for HCE by adding HCE capability to its RBC Mobile app. RBC said the development will allow Canadians to pay at the point of sale with Android smartphones without worrying about needing the correct mobile network or SIM card. Following an internal trial with RBC employees, the bank is launching its HCE wallet.
"Our HCE wallet will be open to all Android smartphones running KitKat 4.4 and higher," says Bornstein.
RBC’s HCE wallet builds on, and will replace, its existing mobile payments product, RBC Secure Cloud, which RBC developed in 2013 before HCE became available.
RBC Secure Cloud stores card credentials in the cloud and allows users to select which card to use for an individual transaction, but, unlike HCE, also uses smartphone SIM cards.
"We launched the Secure Cloud app for the Blackberry in March 2013," says Bornstein. "Then in December 2013 we created a Secure Cloud app for Android which works on SIM card secure elements. We launched the RBC Wallet powered by RBC Secure Cloud in January 2014, which is available for the Bell Mobility and Virgin Mobile networks.
"With RBC Secure Cloud, the payment card applet and cryptogram are generated in the cloud and a one-time token representing the card is transmitted to the customer’s smartphone.
"Then the smartphone’s SIM transmits the token to the merchant. No card credentials get stored on the SIM secure element, as we think this runs the risk of mobile malware attacks."
Bornstein says RBC has been seeing strong month-on-month growth in adoption of its mobile payments solution. "Our goal is to have 90% of our Canadian clients using mobile to interact with us in the next two years," he says. "Our mobile app integrates both our banking and payments applications."
Currently, customers can add their RBC MasterCard and Visa credit cards and their Interac debit card to their RBC Wallet. The bank’s plan is to allow customers to add other issuers’ cards to their RBC Wallet in the future.
Other banks
CIBC was the first Canadian bank to introduce a mobile wallet in 2012, through a partnership with Rogers. The bank has since launched mobile wallets with Telus Mobility, Bell and Virgin. Last month CIBC and Telus launched the CIBC Telus Rewards Visa card, which offers Telus loyalty rewards to cardholders.
TD offers its TD Mobile Payment app for NFC-enabled Android and Blackberry devices on the Bell, Rogers, SaskTel, Telus and Virgin networks.
In addition, TD and PC Financial, the banking subsidiary of Canadian retailer Loblaw, offer the Ugo Wallet, which stores consumers’ credit cards and loyalty cards on NFC-enabled Android smartphones and Blackberry devices connected to the Bell, Rogers and Telus networks.
"The Ugo Wallet currently incorporates all 12 TD Visa credit cards and two PC Financial MasterCards," says a UGO Mobile Solutions spokesperson. "Customers can also store a wide variety of loyalty cards in their Ugo Wallet to collect and redeem reward points at the point of sale. As an open wallet provider, we’re exploring opportunities to expand the openness of Ugo with access to additional cards, loyalty programmes and merchants."
While Quebec-based National Bank of Canada has yet to develop a mobile wallet, its Quebec rival Desjardins offers a mobile wallet for the Bell, Rogers, Telus and Virgin networks.
Scotiabank’s mobile wallet is currently only available for Rogers smartphones, but the bank says it’s working to add other mobile networks.
Rogers
In March 2014, Rogers launched its own mobile wallet, suretap, which currently stores the Rogers prepaid MasterCard, the Rogers First Rewards MasterCard-branded credit card, and various retailer-issued gift cards and loyalty cards on Rogers smartphones equipped with a suretap SIM card.
"We’ve had significant success in customer adoption and usage of the suretap wallet," a Rogers spokesperson says. "The wallet is designed to store credit cards from any Canadian issuer, and we are working towards adding debit card functionality within the wallet.
The spokesperson continues: "We think SIM-based secure elements are the safest and most secure way to store credentials, and suretap’s open wallet model has the ability to support different ways of storing credentials in the future."
Wearable technology
RBC, Scotiabank and TD have each made forays into wearables. "To date, the prevalent model with wearable payments is for issuers to strap a credit card to the cardholder’s wrist in a wearable," says Bornstein. "We don’t think this model of a single credit card being linked to a wearable is interesting to customers, as it doesn’t give them choice. It’s an important principle in banking to give customers choice."
In November 2014, RBC created the RBC PayBand wristband and RBC PayTag proof of concept devices. "We said: why don’t we put a secure element and the Secure Cloud app on these devices and let the customer’s smartphone dictate what type of payment card to link to the devices," Bornstein says. "The industry wasn’t developing these kinds of wearable payment devices, and we decided we would do so to understand the client dynamics. However, RBC doesn’t plan to develop a watch-based payment device."
In a separate project, RBC is testing Toronto-based Nymi’s Nymi Band, a wearable device which authenticates users through their heartbeat, in place of a MasterCard credit card for point of sale payments.
RBC’s vision is that customers should be able to replicate the contents of their physical wallet in a wearable.
"Suppose a customer wants to go for a run and then go to Starbucks, but doesn’t want to take a phone or physical wallet," Bornstein says.
Bornstein continues: "So they open up the RBC Wallet on their smartphone and click the card they want to associate with their RBC PayBand. Their smartphone links to their wearable via Bluetooth. When they get to Starbucks, they tap their RBC PayBand against the contactless card reader to make a payment."
Scotiabank doesn’t offer payments via wearables, but its customers can check their bank balance on their Samsung Gear 2 smartwatch, provided they’ve downloaded Scotiabank’s mobile banking app to their Android smartphone and enabled the Quick Balance function on their wearable.
Bharat Masrani, TD’s group president and CEO, told the bank’s AGM in March that TD Labs is developing "banking solutions in areas such as wearables and personal financial management".
Apple Pay
Apple plans to launch Apple Pay in Canada in November 2015, The Wall Street Journal reported.
The company is in talks with RBC, TD, Scotiabank, BMO Bank of Montreal, CIBC and National Bank of Canada to introduce the payment service on iPhones and the Apple Watch, The Journal said.
"We constantly look for ways to give our clients the choice and flexibility to manage their finances and payments and are committed to bringing innovations like Apple Pay that offer them new levels of convenience and security," RBC said in a statement.
The statement continues: "We don’t comment on rumours or speculation on behalf of third parties. At this time, Apple Pay is available in the US only. Apple hasn’t yet announced Apple Pay plans for Canada."
"It seems that Canadian banks, with the support of telcos, will choose to both compete directly with Apple Pay and Google Wallet with their own offerings, and also allow their customers to provision Apple Pay or Google Wallet with cards from their bank," says Aite Group’s Peterson.
The Journal said it is uncertain if all six Canadian banks will launch Apple Pay at the same time, as the banks have expressed concerns over the fees they would receive and about fraud conducted through Apple Pay.
As a result, the six banks have created a consortium and hired McKinsey to develop a secondary security protocol for Apple Pay.
Costly fees
According to The Journal, Canadian banks may face higher fees than their US counterparts and are concerned that costs could rise once the use of mobile payments spreads.
Apple is expected to charge Canadian banks 15-25 basis points on credit card transactions, while in the US Apple charges 15 basis points per credit card transaction and half-a-cent per debit transaction on Apple Pay.
"The news emerging around Apple struggling to convince Canadian banks to surrender a larger take of the transaction fee isn’t surprising, given that there already are some mobile payment services in the market and competition should push Apple’s fees down," says Mercator’s Hugo-Webb.
He continues: "Security concerns following Apple Pay’s US launch mean banks have to invest in better systems or risk consumers avoiding mobile payments altogether. Thus Canadian banks believe this investment should result in lower fees from Apple. Reports have emerged that Apple is also struggling to convince banks in China and the UK due to the same security issues."
"Addressing Apple Pay as a consortium demonstrates that the banks are willing to cooperate and think of payment structure as a utility," says A.T. Kearney’s Siromani. He continues: "Addressing issues like merchant adoption, reset of interchange, creating the right infrastructure and facing up to new intermediaries like Apple and Google will require cooperation among the banks."
Competitive threat
Canadian banks’ CEOs have commented publicly about the potential disruptive effect that non-bank entrants can make to the Canadian market.
In March 2015, Dave McKay, RBC’s president and CEO, told a conference in New York of the threat from mobile payment systems such as Apple Pay and Google Wallet, which can push incumbent banks into a lower-profile relationship with their customers.
The Globe and Mail quoted McKay as saying banks are "on a collision course with the Googles and Apples of the world. The last thing anybody wants is to have someone between you and your customer, and that’s what we now have in the payments space."
Although RBC would be paid for participating in Apple Pay transactions, it would lose an important connection with its customers which exists with existing payment methods such as credit cards, McKay said.
Speaking at RBC’s AGM in April, McKay said RBC competes "with technology firms that have expanded into the money-moving business, and yet don’t bear the financial and social costs of a deposit-taking organisation – or the obligations of financial regulation.
"Many of these new entrants are excellent competitors – innovative, driven, and responsive to their clients – but they also may distort the financial system with unintended risks that regulators cannot clearly see."
TD’s Masrani echoed McKay’s call for regulation of new entrants at his bank’s AGM in March.
"New technologies are raising consumer expectations of what banks do, and how they do it," he says. "In many cases, they’re being deployed by non-traditional entities to compete in the banking space.
"People expect their banking needs to be carried out in a safe, sound and secure manner. That’s why regulatory oversight on some of the financial services provided by these new entities would be appropriate."
"Research has shown that customers prefer banks to be the primary vehicle for payments versus other intermediaries," concludes A.T. Kearney’s Siromani. "However, banks will have to catch up quickly with technology innovations, or risk being left out."
