Canada’s payments industry is set to change
dramatically, driven by a radical restructuring of the cards
sector, the emergence of PayPal as a significant alternate payments
player, and a major refocusing by clearing system operator the
Canadian Payments Association. Robin Arnfield investigates.
Canada’s payments industry is set to
alter dramatically, driven in no small measure by a radical change
in the domestic debit cards marketplace. Heralding the change were
the official launches by Visa Canada and MasterCard Canada of their
respective debit platforms – Visa Debit and MasterCard’s Maestro in
the autumn of 2009.
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Until the arrival of Visa Debit and Maestro,
all domestic Canadian debit card transactions took place
exclusively via Interac – Canada’s sole debit scheme since the
1980s.
Highlighting the significance of this
development, Ali Raza, executive vice-president at US-based
consultancy Speer & Associates, emphasised in an interview with
EPI: “Canada is a well-developed payment card market, and
Canadians’ debit usage is legendary around the world.”
In 2008, Canadians carried out 3.7 billion
domestic Interac debit transactions, worth C$168 billion ($160
billion), up 7.7 percent from 3.45 billion transactions worth C$156
billion in 2007.
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By GlobalDataBank of Montreal (BMO), one of
Canada’s biggest banks, already has over 2 million Maestro-branded
debit cards in issue.
“CUETS [a processor which provides
card-issuing services for credit unions] also has Canadian
cardholders with Maestro active on their cards,” MasterCard Canada
spokeswoman Julie Wilson told EPI. “Since 2008, MasterCard has been
working with Canadian acquirers to facilitate Maestro acceptance
for merchants who choose to accept it, and many Canadian merchants
already take Maestro.”
As at December 2009, no Canadian banks had
introduced Visa debit cards. But Canadian newspaper The Globe &
Mail reports that Visa Canada will launch its first debit cards in
early 2010, possibly with Canadian Imperial Bank of Commerce (CIBC)
as the issuer.
Because of the dominance of Interac at the
POS, Canadian banks will likely issue Visa- and Maestro-branded
debit cards in the form of cards bearing both an Interac logo and a
card scheme branding.
The advent of scheme-branded debit cards has
coincided with the Canadian government’s lifting of a ban on
duality, which had previously forced credit card issuers to choose
between Visa and MasterCard. Issuers can now offer MasterCard
credit cards and Visa Debit, Visa credit cards and Maestro, or both
Visa- and MasterCard-branded credit cards.
Interac moots IPO
Interac has applied for permission
from the Competition Bureau, Canada’s competition regulator, to
change its status from a non-profit body owned by its member
financial institutions (FIs) to a for-profit company.
This change, which could see Interac carrying
out an initial public offer IPO, is needed to enable Interac to
raise capital for investing in infrastructure, technology and new
services. US bank JPMorgan Chase has been hired to advise on
Interac’s IPO.
Retailers like Interac, because it doesn’t
charge interchange fees and merchants pay their acquirers a flat
fee for accepting Interac cards. According to a Bank of Canada
study, the median Interac debit card acceptance fee paid by
merchants in 2008 was C$0.12.
During 2008 and 2009, retailer associations
such as the Canadian Federation of Independent Business lobbied the
Canadian Department of Finance about the high ad valorem merchant
fees imposed for accepting credit cards.
Retailers were also unhappy about Visa Debit
and Maestro cards coming to Canada, due to the likelihood that Visa
and MasterCard would impose interchange on their respective debit
cards, leading to higher POS acceptance costs than those incurred
with Interac. Visa has already said that the interchange on its
Canadian debit cards will combine a flat fee and an ad valorem
fee.
As a result of the lobbying, Canadian members
of Parliament and senators held hearings with payments industry
stakeholders in spring 2009. This culminated in November 2009 with
the minister of finance Jim Flaherty publishing a draft voluntary
code of conduct for payment cards.
This code gives merchants the right to refuse
to accept higher-cost payment methods such as premium-rate credit
cards, or to offer consumers discounts for lower-cost payment
methods, effectively introducing a surcharge for credit cards or
Visa/Maestro-branded debit. Also, if a merchant is presented with a
co-branded Interac and Visa or Maestro debit card, the retailer has
the right to opt for the least-cost payment method, likely to be
Interac. Prior to the code, merchants were not allowed to surcharge
for Visa and MasterCard.
Going against traditional ‘honour all cards’
rules, retailers who take credit cards are no longer forced to
accept debit cards from the same scheme. Similarly, they can opt to
take debit cards from one scheme but not that scheme’s credit
cards.
“Flaherty is setting a voluntary code of
conduct, but, if card companies don’t comply, the code will become
mandatory,” Rob Burbach, a Toronto-based senior analyst at IDC’s
Financial Insights consultancy, told EPI.
In an IDC research note, Burbach wrote that
the code of conduct could cause uncertainty for Canadian banks
about investments in payments systems until they understand how
merchants will use their new ability to offer discounts based on
payment methods used at the POS.
Burbach wrote: “According to the Bank of
Canada, the credit card share of Canadian gross transaction revenue
is currently 31 percent, followed by cash at 29 percent and debit
cards with 26 percent. The higher-profit credit card transactions
may be under considerable threat. It will be a challenge for card
companies and issuers to convince Canadians to continue to use
their credit cards at the same rate [of usage].”
PayPal
Long, harsh winter months and a high
penetration of broadband have undoubtedly helped to make Canadians
avid internet users. The World Bank reported that almost 73 percent
of Canadian’s were internet users as of November 2009, while
statistical agency Statistics Canada (StatsCan) data indicates that
some 90 percent of these users have broadband access.
Not surprisingly, Canadian’s are also
enthusiastic online shoppers – making online payments a major
opportunity. However, at present PayPal the dominant alternative
e-payment service in Canada.
PayPal Canada says that it has 8 million
registered accounts in Canada, and that Canadians purchase over C$2
billion online annually through PayPal.
“PayPal payment volume in Canada is growing
more than three times the overall rate of e-commerce growth in
Canada,” Darrell MacMullin, PayPal Canada’s general manager, told
EPI.
According to StatsCan, Canadians purchased
C$12.8 billion worth of goods and services on the Internet in 2007,
up 61 percent from 2005.
“PayPal is making a significant contribution
to the growth of e-commerce in Canada,” MacMullin said. “PayPal is
proving very popular with consumers, as it allows them to accept
card payments online, for example via eBay Canada, or through a
person-to-person (P2P) payment. Someone who owes you C$50 from the
pub last night can use their card on PayPal to transfer the money
to your PayPal account.”
Consultation
In response to the changes occurring
in the payments industry, in May 2009 the Canadian Payments
Association (CPA) announced a consultation with its members and
with stakeholders such as retailers, PayPal and consumer groups.
The purpose of the exercise was to develop a vision of how
electronic payments will evolve in Canada through 2020.
“The CPA’s decision to conduct the
consultation was driven by all the development going on in Canadian
payments,” Raza said.
The increasing globalisation of payments also
paid a part in convincing the CPA to conduct the consultation.
In October 2009, the CPA issued a consultative
document, Draft Long-term Payments Strategy, Vision 2020, and in
parallel with this document published the results of an
international benchmarking study. In the study, the CPA compared
its own response to strategic issues such as interoperability with
eight comparative foreign payments organisations. Copies of these
documents can be found on the CPA website, www.cdnpay.ca.
In the preface to the Vision 2020 draft
strategy document the CPA’s President and CEO, Guy Legault wrote:
“Payment system users are demanding more in terms of payment
services in Canada and also around the world. Retailers want faster
and more cost-effective payments. Consumers will continue to demand
more convenience and more payment options. Billers want an easier
and faster way of compiling the information required with payments
to enable straight-through processing. As more and more companies
do business overseas, we also need to ensure regional
interoperability and that integration of payments systems becomes
the standard.”
Currently, the CPA is asking its members and
stakeholders to submit comments on Vision 2020. The CPA noted that
its “proposed strategy aims to provide a common foundation to
enable its members to competitively deliver modern payments
services to Canadians.”
The strategy is supported by four pillars:
• Facilitating electronic payments;
• Promoting domestic and international
interoperability standards to make payments more efficient;
• Modernising the CPA’s regulatory framework
to reflect new market and business realities; and
• Offering new value-added services to CPA
members and all users of Canada’s payment system.
Act of Parliament
Created by Act of Parliament in
1980, the CPA operates Canada’s two national clearing and
settlement systems, the Automated Clearing Settlement System (ACSS)
and the Large Value Transfer System (LVTS).
On average, 22 million payment items, worth
C$203 billion, were cleared and settled through the CPA’s systems
each business day in 2008.
LVTS is a real-time gross settlement system
processing large-value, time-critical payments such as securities
and foreign exchange throughout the day. Visa and MasterCard’s
Canadian members use LVTS for end-of-day clearing and
settlement.
ACSS is a deferred net settlement system
handling all payments not processed by LVTS, including cheques,
small-value electronic payment items such as ATM withdrawals and
debit card transactions, and pre-authorised debits and credits. It
is effectively a bilateral system as financial institutions are
free to send each other payments without an intermediary.
The third platform within the CPA’s domain is
the US Bulk Exchange (USBE) system. USBE is a parallel system to
the ACSS used for payment items in US dollars, drawn on and payable
to accounts at Canadian banks.
The CPA sets rules, standards and operational
procedures governing members’ participation in these systems. Its
charter includes a remit to “facilitate the interaction of the
CPA’s systems with other systems involved in the exchange,
clearing, or settlement of payments; and to facilitate the
development of new payment methods and technologies.”
“Some schemes operating in Canada only fall
partially inside the scope of the CPA’s rules,” the Vision 2020
document states. “In the case of Interac and third-party payment
processors such as PayPal, these [companies’] systems operate
separately but rely on the CPA’s systems for clearing and
settlement. As such, payments flowing through these systems are
subject to specific provisions of the CPA’s rules and standards. In
other cases, such as for credit cards and for foreign exchange
through the Continuous Link Settlement (CLS), the CPA is only used
for LVTS settlement. For on-us transactions, the CPA is not
involved.”
Missing items
Industry experts stressed that the
significance of Vision 2020 lies in what it doesn’t say, as much as
what it does.
“There’s no mention of Visa or MasterCard in
the report, or of bringing them into the purlieu of the CPA,”
Burbach said.
“The report doesn’t mention m-payments,”
MacMullin said. “PayPal Canada is very focused on getting into
m-payments, although it’s early days. Increasingly, you will see
our online payment and m-payment services merging, for example on
the Blackberry.”
Burbach added: “In Vision 2020, there’s a big
emphasis on the enablement of present and future payment systems. I
think the CPA has a good understanding of the issues in this space.
But there’s not much about the role of the CPA in regulating the
system and in providing consumer confidence and protection within
the system. Given that we are seeing a plethora of nontraditional
entrants into payments, the push to have everyone play by the same
set of rules and subject to the same regulations needs to come from
somewhere – why not from the CPA?”
He continued that the CPA sees itself as the
payments enabler in Canada, but he posed the question: “Who should
take on the role of regulator of payments if it is not the
organisation which actually enables payments?”
For the CPA, the critical issue is to widen
its purlieu to cover the 65 percent of Canadian-initiated payment
transactions that do not pass through its systems.
“The CPA wants to grow beyond the 35 percent
of Canadian-initiated payments transactions that it actively
participates in as a clearing institution,” Burbach said. “It wants
to become a clearing house for all payments in Canada – if it’s the
clearing house, then it should set the rules and standards for
these payments. If Starbucks set up an m-payment system for its
customers, currently this would fall outside the remit of the CPA,
and would be unregulated.”
Lott added: “The CPA wants to remain a
meaningful force in payments. The challenge for the CPA is to
closely monitor the developments in emerging payments technologies
and ensure there is a place for financial institutions to provide
financial control, service quality and revenue opportunities.”
From cheques to
e-payments
Vision 2020 cites a 2008 TowerGroup
consultancy report predicting that between 1999 and 2010, Canadian
payment card activity would have doubled to about 67 percent of all
non-cash payments. TowerGroup said that electronic payments would
grow to 90 percent of all non-cash payments between 1999 and 2010
and that cheque volumes were projected to be down 37 percent during
the same period.
“In Canada, the number of paper cheques
written has dropped dramatically over the last decade, to be
replaced with [card-based and online payments] electronic
transactions,” Lott said. “The real fear not mentioned in the CPA
report is the emergence of P2P transactions that bypass the normal
payments systems infrastructure. This is basically the electronic
equivalent of cash being passed from one person to another – P2P is
next to impossible to track in order to understand its overall
influence on the payments environment, and it could be used for
money-laundering and other criminal activities.”
Lott continued that there have been a number
of efforts to try to develop P2P payment programmes primarily
intended to handle small value transactions at a reasonable
cost.
These programmes, said Lott, have been beset
by two major hurdles: regulatory oversight to prevent the use of
the system for illegal uses and safety and security of the system
so that users will feel comfortable that their transactions will be
secure, legitimate and handled accurately.
“It is for these reasons start-up efforts have
struggled,” said Lott. “Even the existing payment systems players
who have attempted cash-card programmes have generally found that
the expense of the infrastructure to handle the transaction,
piggybacking on debit/credit infrastructure, is too much for common
mass acceptance.”
For example, he continued, closed system
proprietary gift cards that can be used only at that retailer
represent more than 90 percent of the gift card market. Open system
cards offered by Visa and MasterCard have such high fees that
acceptance of them has been low.
Value-added services
One interesting aspect of Vision
2020 is the CPA’s offer of providing value-added services such as
education and fraud monitoring.
CPA education initiatives could include
Canadian payments education and training for members and
stakeholders on CPA rules, systems, payments, and services. Some
efforts could also be directed specifically to end users to inform
them about payment instruments available to them. The CPA argues
that fostering informed users will help promote electronic
payments.
Also, the CPA stated that it could potentially
offer its members fraud monitoring to fill current gaps in the
payments market place.
In the CPA’s review of comparable foreign
payment organisations, fraud monitoring was identified as an
initiative undertaken by the Australian Payments Clearing
Association, the Irish Payment Services Organisation and the UK’s
Payments Council.
“The education component has been successfully
implemented by banking associations in the US and other countries,
so no problems there,” Lott said. “I’m sure the CPA has already or
will evaluate the current bank educational information market to
determine where it can fill any gaps.”
But fraud monitoring poses some hurdles, with
Lott adding: “There are some well-proven third-party risk
management solutions out there, so I suspect the CPA would be
likely to buy one of those systems and then customise it. For risk
management of card payments, most larger financial institutions
already have some sort of fraud risk processes in place, the
development of which is an expensive process.
“They may feel they have a competitive
advantage due to that investment and not want smaller financial
institutions to be able to replicate that functionality at a much
lower cost. While there is value in a shared system or service, in
many cases individual banks have unique requirements and will be
concerned that any shared system will be a compilation at the
lowest common denominator.”
Response to CPA vision
There has been a widespread reaction
to the CPA’s Vision 2020 with the most significant responses from
CPA members being:
• Strong support for the continued growth of
electronic payments;
• Concern about keeping the needs of
individuals and small and medium enterprises in mind;
• The need to reduce clearing time and costs
for electronic payments and transfers;
• A preference for a “technologically neutral”
CPA framework;
• Requests for a national “credit push” system
for credit transfers, notably bill payments; and
• Strong support for remittance data to
accompany payments to allow for more automated processing.
In addition, and underscoring the CPA’s
failure to emphasise the significance of emerging payments
alternatives, there was a strong call for the CPA to focus on
emerging payments posing significant or systemic risks when
modernising its rules and standards.
