Green Sheet - In the fall of 2008, Visa Inc. and MasterCard Worldwide revealed plans to introduce their branded PIN-debit cards into Canada. MasterCard launched several pilot programs for its Maestro Debit Card in early 2009. As a condition to entering the market, the company agreed to set transaction fees to mirror those of Interac, Canada's not-for-profit debit network collectively owned by Canadian banks.



However, a year later Visa has yet to enter the Canadian debit market: Company officials said they have no intention of setting a flat debit transaction fee or introducing any debit programs without interchange.



MasterCard said Canadian merchants are not charged interchange for Maestro debit card transactions; instead, a flat fee of 5 cents in Canada (about 4 cents in the United States) is charged per transaction. In contrast, Interac's median fees reportedly average 12 cents, with most small ticket items costing approximately 7 cents per transaction.



Points of contention



"The banks are somewhat ambiguous because ironically they stand to gain the most, but I think the main reason that Visa and MasterCard want to implement the discount rate for debit cards is to be able to offer the points or rewards programs that tie the consumer to their card brand," said Joseph Iuso, Chief Executive Officer of UseMyBank Services Inc., a Toronto-based firm that facilitates real-time debit transactions through online bank accounts.



Iuso noted that both Visa and MasterCard are trying to develop a system in which, regardless of whether consumers make credit or debit card transactions, the brands can leverage air miles and loyalty programs to attract consumers.



"For MasterCard to get its Maestro debit card here, they actually had to agree to the same rates as Interac," Iuso said. "However, you would think they'd want to keep the discount rate or at least get it implemented eventually. Otherwise, how are they going to come up with the money to sponsor those things? The long-term play is to come in cheap – though they might be accused of undercutting Interac. Ultimately, to offer those programs, they have to be costed somewhere."



Iuso added that Interac's concern with regard to the introduction of Visa and MasterCard in the Canadian debit market is that banks will be unable to resist the new revenue streams interchange and rewards programs would generate. He estimates that Canadian companies could increase business 30 to 40 percent with the ability to accept Visa and MasterCard debit cards.



Door number one, two or three



No regulatory issues prevent Visa or MasterCard from entering and competing in the Canadian debit market. It simply comes down to whether banks and merchants choose to accept the cards.



"The crux of the problem with the federations and the associations is their contention that if you introduce interchange, the merchants are going to end up eating the costs," Iuso noted. "But on the other side, you're going to increase your ability to take money from consumers. The banks merely have to say they want to partner with the card provider. They're already in bed with the card brands, so why wouldn't they want to do it?"



Reshaping the business model



Iuso said that once Visa and MasterCard debit cards become entrenched in Canada – which he believes is only a matter of time – Interac will suffer because transactions will be settled through banks' networks and not Interac's.



He sees two possible means of resolution: Visa will either acquiesce and match Interac's and MasterCard's transaction rates, or Interac will be forced to join other debit networks around the globe (like NYCE, Star, and Pulse) to generate additional revenue streams. To do this, Interac would have to become a for-profit company.



"Operating as a for-profit organization would probably be their smartest move," Iuso said. "They need to be able to innovate to compete with the other brands, but it's hard to do when you have board members looking at the business model from a cost basis instead of a profit center. "Interac doesn't have to like Visa and MasterCard coming in because they know that once you start to add points to a debit card, why would someone want to use an Interac card? But ironically, this situation gives them the forum to say to the competition committee that we're no longer the only people in Canada doing debit, so let's open up the market to give us a chance to compete."