Here's an excerpt from that letter...

On the debit card side of the market, Canada has long operated with Interac, a cooperative venture among banks, credit unions, payment related companies and others, as the principal clearing house for debit transactions at comparatively reasonable cost to consumers and merchants. The growth in debit has been astronomical since its introduction in 1984.

VISA and MasterCard now want in on the action in Canada and are trying to convince the banks to support them with the promise of greater fee income. In the U.S., both VISA and MasterCard allow their credit cards to double as debit cards; in most cases, debit transactions also attract the “interchange rate” (a percentage of the transaction amount), not the flat fee charged by Interac. We believe that if VISA and MasterCard were to bring the same service to Canada, debit rates would go up dramatically. Therefore, VISA and MasterCard will make a great deal more money than has been charged in the past by Interac’s “flat fee” approach, with no extra value accruing to the merchant.

Currently, debit attracts a “cents per transaction” fee. If the credit card companies succeed, the market will move to a fee which is a percentage of the transaction size. For example, for a transaction of $1,000, a current common rate would be $0.065 (6.5 cents). In future, if the charge was to become 0.65 per cent (the current U.S. average), the fee would be $6.50—an increase of almost 10,000 per cent!

The non-profit association that runs Canada's main payments network for automated banking machine and debit transactions is in talks with the Competition Bureau about a restructuring that would likely allow it to make a profit.

The Interac Association, created in the mid-1980s by a number of big banks and Desjardins Group, is about to embark on a major revamp to battle credit card companies, such as Visa Inc., that aim to invade Canada's debit market.

"We're quite aware that U.S.-based credit card companies are aggressively entering the debit marketplace in Canada, like they have done in most other countries around the world," Interac chief executive officer Mark O'Connell said. They are pushing into the sector "as we speak" and are "newly empowered as public companies," he said.

San Francisco-based Visa went public in the spring, two years after the successful initial public offering of Purchase, N.Y.-based MasterCard Inc.

Mr. O'Connell fears Interac risks falling behind as the industry rapidly innovates. There are already products, such as MasterCard's "tap & go" PayPass, that he would like Interac to be keeping up with. "The payments market is evolving every day," he said. "It's not just the U.S.-based credit card companies. You have PayPal, you have a number of unique payment companies in the marketplace, a number of new technologies. Look at mobile payments and its evolution in other countries around the world.

"Canada needs to ensure we can keep up and innovate in those areas," he added.

Interac direct payment, which allows consumers to pay for purchases with their debit cards, was made available to retailers across Canada in 1994. Canadians are now some of the world's most active debit card users.

But in the 1990s, the Competition Bureau went after Interac and nine of its members, accusing them of abusing their power in the payments sector. Interac signed an agreement in 1996 that it must be managed on a not-for-profit basis, and it can only charge fees that cover its costs. The agreement with the regulator, among other things, also placed rules on the makeup of Interac's board and its membership.

The agreement has constrained Interac's services over the past 12 years, Mr. O'Connell said. "We're in discussions with [the Competition Bureau] to amend the consent order to allow us to be more fast and nimble and efficient, to respond to the realities of the changing competitive marketplace," he said., adding that it is early days in the talks and no time frame has been established.

The discussions are one of a number of steps that Interac, which has already completed an internal reorganization, is taking as it seeks to keep up with the pace of change in the payments sector.

"There are many options with respect to governance and ownership, and there have been no decisions made on which path to go down and what model to employ, and that's the work that's beginning through the transition board," Mr. O'Connell said.

Asked whether Interac is considering an IPO, he said, "I think all options are being considered."

The battleground has changed now that Visa is public, with new funds and flexibility.

In most other countries, the major credit card companies also have debit products.

Visa long ago established the pricing, or fees, it would use for debit transactions in Canada. Any bank or financial institution that issues its credit cards has had the opportunity to offer its debit cards, but none bit.

Visa is hoping that will soon change, thanks to a number of industry developments, including the country's migration to the use of "chip" cards over the next couple of years. Chip cards use a microchip and a personal identification number (PIN), rather than a magnetic strip, and are expected to lead to a host of innovations in the card industry, possibly including combined debit-credit cards.

Some of these changes in the payments sector are concerning retailers, who fear the fees they pay to accept cards are going to rise.

The Retail Council is already up in arms over changes made to the fees that merchants must pay to accept credit card transactions, and it is actively pushing Ottawa to establish more oversight of the charges.

The only fees that Interac collects come from its members, largely banks and other financial institutions. The members can charge customers to use Interac services, and retailers and merchants pay a small fee - such as a nickel - to processing firms every time a customer pays with debit.

Mr. O'Connell said Interac recently established an independent board, which has "significant merchant representation," and will look at the issue of potential fee changes.

He noted that "being the low-cost provider has been a strategic advantage for this organization, and the merchant community is tremendously important to Interac."

The newly formed board is also examining five services that Interac currently offers: the ABM payments network, direct payment, e-mail money transfers, online payments, and its cross-border service, as the organization embarks on its overhaul.

It is still early days in its transformation and various possibilities are under consideration, Mr. O'Connell stressed. "We want to make sure that we do this right."