Visa and MasterCard Hoping to Cash in on Debit
By JoAnne Sommers

Canada’s two largest credit card companies are planning to enter the domestic debit card market later this year, despite concerns that their involvement will result in soaring transaction fees that will hurt both merchants and consumers.

MasterCard Canada and Visa Canada are proceeding with plans to expand their global debit processing systems into this country, which is one of the few where they are currently excluded from the system.

t’s not surprising that they want a piece of the action: Canada’s per-person debit card use is the second highest in the world, after Sweden.

The credit card companies say their presence will bring more innovation and choice to the marketplace. “The benefits of switching to a global debit infrastructure are many,” says Jennifer Reed, MasterCard’s vice-president, communications and government relations. “For Canadian consumers, it means that they can finally shop with debit in countries all over the world and with the same confidence they have using MasterCard’s global credit payment system. “ 

For merchants, Reed continues, the company’s Maestro debit system means they can accept international travelers’ debit cards and MasterCard will provide technological advancements, including greater security protections, payment innovations like PayPass™ contactless payment, e-commerce payment capacity, and eventually mobile payments.

The Interac debit system, which is controlled by the banks, credit unions and other companies that issue debit cards to consumers, was created in 1996 through a “consent order” issued by the federal Competition Tribunal. The order required it to be non-profit.

Interac has asked for an amendment so that it can operate independently of its stakeholders. The change would allow Interac to introduce technological changes, which, it says, are necessary to compete against credit card companies. The Competition Bureau is expected to announce its decision this fall.

Organizations such as the Canadian Federation of Independent Business (CFIB) and the Retail Council of Canada (RCC) are worried that transaction costs will increase dramatically if the two credit card giants enter the debit card market. At present, debit transactions are fixed at about 12 cents apiece, regardless of the amount of the purchase.

Visa Canada has said the fee for Visa debit will be set as a percentage of the sale, as is the case with credit card transactions. MasterCard has committed to a flat rate pricing for its Maestro debit product. “It’s also worth noting that the Maestro fee is lower than Interac,” says Reed.

Canada’s credit and debit card systems have attracted considerable attention this year. The Competition Bureau is investigating whether the credit card companies have violated Section 79 of the Competition Act, which deals with the abuse of a dominant position, after receiving thousands of complaints about high fees from across the country.

On June 30, the Standing Senate Committee on Banking, Trade and Commerce released a report that unanimously called on the federal government to act immediately to prevent the debit card system from collapsing. The Committee had heard from representatives of merchant groups, the credit card companies and others as it studied Canada’s credit and debit markets and their fees.

One of its recommendations called for debit card fees to be charged on a flat fee basis, not a percentage basis. Another called on Ottawa to create a watchdog with teeth to oversee the credit and debit card industries because the federal government has failed to rein in rising interest rates and fees. Finance Minister Jim Flaherty has yet to respond to the recommendations, which are non-binding.

Peter Woolford, Retail Council’s vice-president of policy development and research, says that debit card fees are not the only issue of concern to his members.

“The Canadian Payments Association has evolved a set of standards for the debit card system, which governs matters such as who bears liability when there’s a dispute and what protections exist for participants. Much of its work is done by consensus and the participating organizations comply voluntarily.

“Visa and MasterCard wouldn’t be bound by that. They have their own proprietary system and apply international rules to any disputes that arise. Canada has designed a very good debit system and it would be unfortunate if we lost it because the large multinationals took things over.”

CFIB President Catherine Swift says that proper oversight of the system is essential, especially with the prospect of Visa and MasterCard issuing debit cards on the horizon.

CFIB is challenging the credit card companies, chartered banks and card processing companies to adopt a Code of Conduct on behalf of the small business sector, she notes.

“For the past month we’ve been meeting with the various parties and I’m pleased that the reaction has been so positive,” she says. “We think that if there was a voluntary code of conduct and a means of oversight we wouldn’t need to take the direct regulatory route.”