Payments technologies

Canadian Card Code of Conduct Conundrum

Implications for mobile payments

The Code of Conduct for the Credit and Debit Card Industry in Canada came into effect in mid-August, 2010. One of the key provisions of the Code, articulated in Policy Element 6, is that “Competing domestic applications from different networks shall not be offered on the same debit card”. Given that Canadian bank cards that currently have Interac’s ubiquitous Interac Direct Payment functionality predominate, it in effect prevents scheme debit applications (MasterCard and Visa debit) from “riding on the Interac rails”. While it would be easy to assume that the term ‘card’, which is not defined in the Code, would refer only to the traditional plastic card (magstripe or chip) that allows debit payments to be effected at a point-of-sale (physical or virtual), there is some confusion as to whether this could also apply to debit applications on mobile phones. In essence, it raises the question as to whether the mobile phone is a card or a wallet. Deeming a mobile phone to be a card would imply that the Code of Conduct also applies to debit payment applications on mobile devices. This would, in turn, prevent any competing debit payment applications from residing on the same phone, similar, for example, to preventing a consumer from having multiple debit cards in their wallet.

At first blush, it would seem absurd to deem that a mobile phone is a card, much as it would be absurd to deem a computer to be a word processor. Mobile phones, especially in the smartphone era, are multi-functional devices capable of executing many different types of applications and functions, from voice communications, to e-mail, to web access, to games, to music, and more recently, to payments. Payment cards, by contrast, are far simpler, and while they may support a number of applications, these are usually focused on payments and cash withdrawal, or some combination of payments/cash withdrawal and loyalty/rewards.

So, where the does the confusion originate? Clearly, there are strong divisions in the Canadian payments industry, and vested interests on different sides of the payments ecosystem could be either advantaged or disadvantaged depending on whether the mobile phone is, for regulatory or legislative purposes, deemed to be a wallet or a card. Lobbying has been aggressive and stentorian. The ‘phone is a card’ lobby appear to have the upper hand. The Payment Card Networks Act makes provision for the phone to be deemed a card, although it does not go so far as to actually specify it as such. It defines a payment card as follows:

“payment card” means a credit or debit card — or any other prescribed device — used to access a credit or debit account on terms specified by the issuer. It does not include a credit card issued for use only with the merchants identified on the card.

The addition of the qualifier “or any other prescribed device” opens the door for regulators to deem any device used for debit or credit payments, including mobile phones, to be a card.

The implications of this for mobile debit payments are significant. Consumers would be unwilling to have multiple phones simply to be able to use different domestic debit payment applications on their phones. It would force selection of one scheme over another, and hence limit consumer choice at a transactional level. The first debit payment application on the mobile phone would have an advantage over others because it would have to be deleted in order to install a competing application. It would reduce competition in the domestic debit payments space, and it would almost certainly lead to a lower adoption rate. Enforcement would be impossible. Furthermore, it would by no means represent technologically neutral regulation. It would be difficult to uncover a grain of sanity in such a decision, should it ever be made.


Top Ten Developments in the Canadian Payments Industry in 2010

Over the past year the Canadian payments environment has undergone a period of dramatic change. Competition has intensified across most major segments of the industry, EMV migration has gained traction, technological innovation has resulted in new payment mechanisms being developed and rolled out, and regulatory scrutiny of the industry has increased. Here is our assessment of the top ten developments in the Canadian Payments Industry in 2010.

  1. Establishment of a ‘Voluntary’ Code of Conduct for the Credit and Debit Card Industry in Canada
    The final form of the voluntary Code of Conduct was tabled by the Minister of Finance, Jim Flaherty, on May 18, 2010, after more than a year of intense lobbying by the retail sector and other key players in the Canadian payments ecosystem. The major financial institutions involved in the Canadian payments industry were quick to publicly adopt the voluntary code for fear of it becoming compulsory, and to head off the possibility of more stringent direct regulation. Provision 6 of the Code prevents co-resident competing applications on the same debit card. One of the most important impacts of the Code has been to delay the entry and rollout of scheme debit (Visa and MasterCard) into the Canadian market, thereby giving Interac an extended period of monopoly protection.  The Code of Conduct came into effect in mid-August, 2010. It applies to payment card networks (i.e. credit and debit card networks), card issuers and acquirers.  The Financial Consumer Agency of Canada (FCAC) has responsibility for overseeing compliance with the Code.
  2. Payments System Review Task Force Established
    In June 2010, Finance Minister, Jim Flaherty, announced the formation of a Payments System Review Task Force “to help guide the evolution of the payments system in Canada”. While the Task Force’s mandate is fairly broad in that it addresses policy, innovation, regulatory structures, the competitive environment and security of the payments system, it marks the start of an era of increased regulatory oversight in the Canadian payments industry. The Task Force is scheduled to present recommendations to the Minister of Finance by the end of 2011.
  3. Interac’s Application to Convert to ‘For-Profit’ Status Declined
    Interac has been engaged in discussions with the Competition Bureau since 2007 in an effort to be allowed to operate as a for-profit organization. This was largely a response to the threat of increasing competition from Visa and MasterCard in the Canadian debit market. With Visa and MasterCard now publicly traded companies, they are no longer subject to similar levels of scrutiny by the Competition Bureau and are free to structure their businesses and pricing in any way that they choose, provided they do not breach the provisions of the Competition Act.  In February 2010, the Canadian Competition Commissioner declined to grant permission to convert to ‘for-profit’ status, but left the door open for further discussions should the situation change. This development was not surprising, given Interac’s near monopoly in the debit transaction market. A change in situation that would warrant a review of Interac’s status would imply that other debit card networks had gained a reasonable share of the market, and that Interac was no longer in a position to exercise market power or abuse its dominant position. Other aspects that Interac will have to address prior to gaining ‘for-profit’ status are changes to its governance, structure and funding.
  4. Contactless Rollout Gains Momentum
    The contactless market in Canada reached a critical mass of contactless cards and merchant acceptance terminals in 2010. More than 30 million contactless payment cards have been issued and there are in excess of 70,000 merchant acceptance terminals in place. Acceptance infrastructure rollout has been atypical in that it has been implemented in a ‘top-down’ manner, focusing on large merchants that have multiple checkout lanes and points-of-sale. MasterCard has the clear lead, having started its Canadian PayPass contactless initiative in 2007 (it originally showcased the technology in Canada in 2004). Most MasterCard issuers in Canada have started to issue PayPass cards.  Over the past year Visa’s payWave initiative also started to gain momentum and Visa issuers and acquirers have focused on playing catch-up. Interac conducted contactless trials in 2010 and has announced that it will be offering a contactless debit product – under the name Interac Flash – in 2011. While the number of acceptance terminals and cards is substantial and still growing rapidly, usage of contactless technology is still lagging. Most consumers are unaware of the fact that the cards issued to them have a contactless capability.
  5. Interac’s EMV Migration Deadlines Come into Effect
    The first slew of Interac’s EMV migration deadlines come into effect at midnight tonight. According to the Interac schedule, 90% of deposit-taking ABMs, 50% of white-label ABMs and 35% of POS terminals must be EMV compliant by December 31, 2010. Most of the bank-owned ABM’s have already been converted, whereas white-label ABMs are way behind schedule. In September, Interac offered the white-label ABM industry a compromise to either have 50% of their ABM’s converted by the deadline, or have 80% of ABM’s in high-risk locations converted. It is estimated that less than 20% of white-label ABM’s have been converted thus far. Organizations that are not compliant with Interac’s EMV migration schedule face sanctions and the risk of transactions being blocked. In September, Visa and MasterCard both postponed their EMV liability-shift dates from October 31, 2010 to 31 March, 2011.
  6. The First Competing Debit Application is Launched in Canada
    The Code of Conduct for the Credit and Debit Card Industry prevents competing debit applications appearing on the same card. In October 2010, CIBC launched a debit card that allows Interac debit transactions for domestic payments at points-of-sale, and Visa debit payments for international or online transactions. While some have suggested that the card is in contravention of the Code, the fact that the debit applications on the card do not compete, means that the card is compliant with the Code. In 2009, some debit transactions on Bank of Montreal transactions were routed through Maestro, which created a furor amongst merchants, and led to intense government lobbying to prevent preferential routing that did not default to Interac debit.
  7. First ‘Dual’ Card Issuers Appear in Canada
    The Competition Bureau of Canada has, historically, not allowed the same financial institution to issue both Visa and MasterCard credit cards, and the market developed as a ‘non-dual’ environment. In November 2008 the Canadian Competition Commissioner issued a ruling permitting duality in the Canadian market. Duality gained traction in 2010 with the Royal Bank of Canada, traditionally a Visa issuer, issuing a MasterCard WestJet World credit card. In June 2010, CIBC, also a Visa credit card issuer, announced that it would acquire CitiCards $2.1 billion MasterCard card portfolio, opening up a new mass market segment to CIBC and allowing the successful Petro-Canada loyalty program to be brought on board.  The deal closed on September 1, 2010. The CIBC Citibank deal is unlikely to have a major impact on Visa since an existing base of CitiCards is being brought into the CIBC fold. The RBC WestJet card, however, erodes Visa’s share directly since it cannibalizes the Visa base in a traditional Visa stronghold.
  8. Canadian Banks Launch Mobile Banking Applications for Smartphones
    The increasing usage of smartphones in Canada has stimulated the development of mobile banking applications by most of the large Canadian banks. CIBC was first to launch a mobile banking app for the popular iPhone, but others followed rapidly and most large banks now have mobile banking applications for the iPhone, Blackberry and Android platforms, with launch usually occurring in that order. While mobile banking applications provide an extension to the online banking services that are so popular with Canadians, most banks see it is a precursor to mobile payments. Once consumers are familiar with conducting financial transactions on a mobile device – and have developed a level of trust in mobile transactions – it will be easier to gain acceptance of payment applications.
  9. Tim Horton’s Decides to Accept Debit Cards
    The iconic Tim Horton’s chain of coffee shops finally succumbed to the onslaught of debit in November by agreeing to accept Interac debit payments at all of its outlets across Canada. The company first started accepting debit payments in western Canada in 2003, but was reluctant to roll this out to other stores for fear of increasing transaction times. Interestingly, Tim Horton’s was one of the first to accept MasterCard PayPass payments. While both Interac and Tim Horton’s have denied that the move has anything to do with Interac’s plans to rollout contactless payments in 2011, it is unlikely that the move to debit acceptance would have taken place without the prospect of contactless debit payments on the horizon.
  10. Competition Bureau Takes on Visa and MasterCard
    On December 15 the Canadian Competition Bureau announced that it will be challenging Visa and MasterCard’s ‘honour all cards’ rule and ‘no-surcharge’ rules, since it regards these as a demonstration of anticompetitive behaviour. The Bureau has submitted an application to the Competition Tribunal to have these, and other allegedly anti-competitive rules, struck down. The action is being brought under the price maintenance provisions of the Competition Act. According to independent legal commentary on the matter, it is believed that the action under the price maintenance provisions of the Act will be more effective than under abuse of dominance provisions since it does not require the Competition Bureau to prove that the two players are dominant and have abused their dominance by reducing competition.