Top Ten Developments in the Canadian Payments Industry in 2012

The most important developments in Canadian payments industry in 2012 have been on three fronts, viz. regulatory oversight, product innovation and product commercialization. Mobile payments have been top of mind, and while they are still in their infancy in Canada, the year saw some important developments in setting the stage for successful mobile payments rollout. On the regulatory side there have been a number of initiatives, including readying the environment for mobile payments, taking on the big payment card networks and setting the stage for new markets (for example, prepaid). Contactless payments have gained traction as have ‘competing’ debit offerings. Here is our assessment of the top ten developments in the Canadian Payments Industry in 2012 (roughly in chronological order).

1. In March 2012 the Canadian Payments System Review Task Force released its final recommendations to the Department of Finance. The Department’s response was somewhat muted, and by all account fairly disappointing to those who were hoping for a major overhaul of the Canadian payments System.

2. The Department of Finance releases a Consultation Paper titled, ‘Addendum to the Code of Conduct for the Credit and Debit Card Industry in Canada’, to address how the code of conduct released in 2010 could be made more appropriate for a mobile payments world. The Department is still examining input from industry stakeholders and has yet to issue the final code.

3. The Canadian Bankers Association released their proposed Mobile Payments Reference Model, which provide guidelines for any players wishing to participate in the Canadian mobile payments market. Although the document was crafted under the auspices of the CBA, it is now being managed (as a living document) by a more diverse stakeholder group.

4. In 2012 Interac Flash started building traction amongst merchants in their key target categories. The number of Interac Flash cards in circulation is still low, but is expected to increase dramatically as new issuers come on board. While Interac Flash was slated for rollout in 2011, it has reportedly been plagued by a number of technical problems and instability around the final specification.

5. The Commissioner of Competition held hearings in the case against Visa Canada Corporation and MasterCard International Incorporated, et al, in mid-2012. The Commission still has to issue its final ruling. A ruling either in favour or against is likely to have a major impact on the payments industry in Canada.

6. Scheme debit gains some traction with TD’s introduction of an innovative debit card product that houses the Visa debit application, regular Interac debit and Interac Flash all on the same card. The card is compliant with the Code of Conduct in that the Visa debit functionality is only enabled for domestic transaction types where Interac cannot be used.

7. Rogers and CIBC issue the first mobile wallet in Canada, allowing NFC payment with a smartphone. RBC was slated to launch its own mobile wallet based on Visa’s platform in late November, but this has yet to materialize.

8. Square enters the Canadian market, distributing readers through retailers such as Future Shop, Best Buy and Apple Stores. Although Vancouver-based Payfirma – which has a similar offering – has been around for a while, Square’s entry into the Canadian market garnered substantial interest, among other things, because of the alliance with Starbucks.

9. The Minister of Finance released new proposed regulations for prepaid credit products. The proposed Federal regulation (see an analysis here, and here) will eliminate expiry dates on non-promotional prepaid credit products (while allowing for alternative funds access mechanisms for phased out products), and prevent the levy of certain fees without express consent of the user. Initial fees on the product are allowed, but subject to strict disclosure requirements.

10. Presto increases its penetration of the transit market. GO Transit passengers have been migrated, throughout the year, to the Presto card, and the TTC has signed up for the Presto card. In addition, Presto is testing the functionality of an open payment system (traditional debit or credit) on its network and is also expected to test mobile payments in the near future.

M-Commerce in Canada: Mobile Monday Toronto Panel Discussion

On November 7, Mobile Monday Toronto hosted a panel discussion in m-commerce in Canada. The panelists were:

  • Simon Law – CTO, Admeris
  • Derek Colfer – Business Leader, Visa
  • Sanjay Dhawan – Independent Consultant and head of Corporate Development, Mobiroo
  • Gary Schwartz – CEO, Impact Mobile 

The panel was moderated by Christie Christelis, President of Technology Strategies International (and author of this blog).

Key questions addressed by panelists included:

  1. What excites you about this space now and in the future?
  2. There is a lot of hype about NFC in the marketplace. How important is NFC in developing to m-commerce business in Canada, and what is the role of cloud-based wallets?
  3. To what extent will the consumer experience determine how the market will develop (for example, converging online and offline purchasing behaviour, and how to leverage rich and engaging interactions with consumers across global markets)?
  4.  What are the barriers to adoption of mobile commerce in Canada? What is the value proposition for merchants? And for consumers?
  5. How do we address the issue of security?
  6. Globally, there are numerous emergent m-commerce ecosystems, e.g. the environments in Canada, the US, Europe, and the Far East are all different. How are these divergent developments likely to influence the direction that Canada takes?
  7. What can be done to accelerate adoption in Canada, and how can players in the market work together to achieve this?

The complete video of the panel discussion can be found here: (video - 1 hour 25 mins).

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.

New Canadian Wireless Entrants lash out at Incumbents

At the Mobile Monday Toronto meeting held on December 6, senior executives of Wind Mobile and Public Mobile sketched the emerging Canadian wireless environment and lashed out at incumbents for their anticompetitive behaviour. The new entrants to the Canadian wireless market were represented by Anthony Lacavera, Chairman of Wind Mobile, and Alex Krstajic, CEO of Public Mobile. In a panel session chaired by Jeff Mucci, Publisher of RCR Wireless, Lacavera and Krstajic highlighted the impact that new wireless entrants have had on the mobile market in Canada.

 Prior to entry, they said, unlimited plans were “unheard of” in Canada, but are now offered by most operators. Service pricing has decreased as a result of competition, and the large wireless carriers have launched competitive offerings. Incumbents have also tried to bolster their position in the marketplace by having subscribers sign lengthy wireless contracts – in most cases up to three years – in an effort to prevent erosion of their subscriber base. Lacavera commented that the contract cancellation penalties are particularly harsh in Canada, and that mobile service agreements are more onerous than most car lease agreements. The key reasons why subscribers are prepared to sign these contracts are that incumbents subsidize phones, and they also offer some of the most sought after handsets, including the iPhone.

Krstajic noted that Rogers’ launch of of the low-end brand, chart, was a blunder of note on a number of levels. Firstly, it cannibalizes Rogers’ own profits. Secondly, the brand chose to differentiate itself on a false claim of having the fewest dropped calls – a move that has recently seen Rogers fined $10 million by the Competition Bureau for false advertising. Krstajic’s prediction is that “a senior executive from Rogers will lose their job over this within the next year”.

Anticompetitive antics

Both executives were most vocal on the anticompetitive behaviour that they claimed was being practised by incumbents. Kristajic noted that, while tower sharing was mandated by government almost three years ago, not a single tower has been shared by incumbents. One of the strategies followed by incumbents has been to populate their towers with inactive antennas in anticipation of applications by new entrants, on the basis that they are building out their capacity in preparation for future demand. This allows them to assert that their towers are not able to take any additional antennas at any reasonable height on the tower (increased height equates to increased coverage). Furthermore, they then maintain that that some of the towers have reached the maximum stress limits and that placement of new antennas on the towers will require the applicant to pay for rebuilding the tower to handle the increased load. Lacavera and Kristajic called on the CRTC and policy-makers to prevent this kind of anticompetitive behaviour and enforce tower sharing on reasonable and competitive terms.

Lacavera and Krstajic admitted, in response to a question from the floor, that their organizations didn’t share any towers with each other. Lacavera commented, somewhat sheepishly, that this is an area “where we should definitely do more”.

The issue of future 700 MHhz spectrum auctions also drew fire. Krstajic said that the questions of “set asides” for new entrants was being determined by Industry Canada, and commented that the full allocation should be set aside so that incumbents were not allowed to bid. He refuted claims by incumbents that they urgently needed spectrum for future network development and suggested that incumbents are hoarding it. He accused Bell and Rogers of being “spectrum squatters”. He quipped, rather humorously, that “Bell, Rogers and Telus have all been breast-fed until the age of twelve on spectrum! They're obese on it!”

However, both incumbents and new entrants believe that it is unlikely that the full allocation of 700 MHz would be set aside for new entrants. The executives representing the new entrants suggested, in recognition of this, that incumbents wanted to accelerate the 700 MHz spectrum auction process since they realized that new entrants were still busy investing in and building out their networks – leaving little financial capacity for engaging in a further round of expensive spectrum auctions.

The mobile industry has been participating in discussions with, among other entities, the Payment System Review Task Force, in order to advance the mobile payments and mobile commerce agenda. Krstajic commented that this was not an immediate area of concern for Public Mobile since it was not, at this stage, of great importance to their blue-collar target market. Lacavera stated that this was yet another area where incumbents, in consort with the large banks, were trying to dominate and limit the role that new entrants could play.

When asked when Wind Mobile would be offering the iPhone, Lacavera pointed out that the Advanced Wireless Spectrum (AWS) that Wind offers services on differs from the bands used by incumbent mobile operators, and that Wind did not yet have the volume that would make it attractive for handset manufacturers, including Apple, to supply them. However, he said T-Mobile’s use of the same AWS spectrum in the USA, and their plans to offer the iPhone, would result in Apple supplying to this market, and hence Wind was likely to offer these devices at some stage in the future.

While all Canadian carriers were invited to participate in the panel discussion, only Wind and Public Mobile accepted.