Submission from MasterCard Canada on Building Canada's Digital Economy

Summary

Electronic payments are critical to the continued growth and expansion of the digital economy and online marketplace. Canadians have traditionally embraced technological advances in the payments industry that helped fuel that growth. However, recent policy decisions have placed severe constraints on future payment innovations, particularly for debit transactions. Equally troubling, Canadians were already lacking many of the innovations for debit payments enjoyed elsewhere in the world for things like online or phone purchases, contactless debit applications, and enhanced security.

Attempts by MasterCard to introduce these innovations to the Canadian market through a new debit product — one that was not only more technologically advanced and more secure but also cheaper for merchants to accept — were met with fierce resistance from the merchant lobby, which resulted in policy changes that ultimately made this product unviable in Canada and forced MasterCard to withdraw it from the market. As a result, the innovation and enhanced security for debit payments that are widely available elsewhere in the world will now be denied to Canadian consumers for the foreseeable future.

MasterCard's primary concern from this experience is a lack of any clearly defined policy rationale for these changes. The policy and regulatory environment is not currently evolving in a way that promotes the development and adoption of new payments innovations — ones that would be essential to expanding the digital economy and online marketplace.

Therefore, given the goals expressed in the consultation paper, MasterCard makes five recommendations in this submission:

• The Government should ensure that one of the overriding principles of payments policy and regulation is the promotion of innovation within the payments sector.
• A digital strategy should have clearly defined policy goals. If one such goal is increasing electronic commerce and growing the online marketplace, other policies should match it.
• A digital strategy should ensure that Government policies encourage, not discourage, the introduction of more secure and reliable payments technology.
• If Canada wants next generation networks for payments, policies and regulations should be developed with a goal of encouraging, not stifling, innovation.
• A clear policy for payments needs to be enunciated so providers have a clear understanding of the Government's priorities.

Promoting a secure and innovative payments system in Canada is absolutely fundamental to the development of an online marketplace and the further growth of electronic commerce. The Government must ensure that its policies are coordinated to promote these goals, not inhibit them.

Submission

Introduction

MasterCard Canada welcomes the opportunity to respond to Improving Canada's Digital Advantage: Strategies for Sustainable Prosperity. This is a worthwhile initiative and we look forward to the policy outcomes. It is also a timely initiative. Canadians have traditionally embraced technological innovation in payments, evidenced by their early adoption of point–ofsale debit as a payment method and heavy usage of online banking.

However, MasterCard is concerned that Canada risks being left behind in terms of the development and use of new payment innovations. Our concern is that the policy and regulatory environment is not currently being developed in a way that promotes the development and adoption of payments technology in Canada. Furthermore, recent developments have created significant obstacles to payments technology innovation, without any clearly defined policy rationale for these impediments. Left unchecked these impediments will leave Canada and Canadian consumers behind in terms of innovation in the payments sector.

To put these issues into perspective, consider the following evolutions that are widespread in much of the developed world:

• Using a "tap–and–go" debit card when boarding public transit.
• Using your debit card to make purchases over the phone or online.
• Bringing the security of debit card transactions up to the same level as credit cards.

MasterCard is concerned that without a proper policy and regulatory environment the above opportunities will continue to be denied to Canadian consumers. We will explain why after first providing some background about MasterCard. Our submission will then address some of the questions raised in the consultation document.

About MasterCard

MasterCard advances global commerce by providing a critical economic link among financial institutions, businesses, cardholders and merchants worldwide. As a franchisor, processor and advisor, MasterCard develops and markets payment solutions, processes over 22 billion transactions each year, and provides industry–leading analysis and consulting services to financial institution customers and merchants. Powered by the MasterCard Worldwide Network and through its family of brands, including MasterCard®, Maestro® and Cirrus®, MasterCard serves consumers and businesses in more than 210 countries and territories.

It is important to note that MasterCard itself does not issue credit cards, grant credit to consumers, set interest rates or terms of credit, or sign contracts directly with consumers. Generally speaking, any issues surrounding the granting of credit and the collection of debt are the purview of the individual financial institutions that issue MasterCard–branded credit cards. In short, MasterCard provides the processing network, technology and brand marketing, while the financial institutions issue the credit cards and deal directly with the cardholders.

Recent Developments in the Canadian Payments Industry

Before addressing the issues raised in the consultation paper, it is worth reviewing some recent developments affecting the Canadian payments industry. On May 18, 2010, the Minister of Finance announced the final version of a new Code of Conduct for the Credit and Debit Card Industry in Canada. The Code followed 18 months of lobbying by merchants to draw political attention to their concerns about the cost of accepting credit and debit cards.

MasterCard welcomed the Minister's attempt to address merchant concerns via a voluntary code, which will formally take effect on August 16. However, we fear that specific elements of the Code will severely restrict innovation and choice in the Canadian payments sector.

Our main concern with the Code is Element #6, which states the following:

Competing domestic applications from different networks shall not be offered on the same debit card. However, non–competing complementary domestic applications from different networks may exist on the same debit card.

A debit card may contain multiple applications, such as PIN–based and contactless. A card may not have applications from more than one network to process each type of domestic transaction, such as point–of–sale, Internet, telephone, etc. This limitation does not apply to ABM or international transactions.

This Code element is the primary reason why all the innovations listed in the previous section will be delayed for an indefinite period in this country. Longer term, this element could also result in Canada's debit card network lagging behind international peers in terms of security and fraud detection.

To understand why, a brief primer on debit cards is needed. Bank–issued debit cards in Canada and virtually every other country typically contain functionality for a number of different payment networks, such as Plus, Cirrus, Maestro and, here in Canada, Interac. These networks are noted with their logo on the back of a debit card possessing that functionality.

Having multi–network functionality allows a consumer to carry one debit card but still access a number of distinct services. For example, the Interac logo means your debit card has functionality for point of sale (POS) transactions in Canada and withdrawals from domestic ATMs. The Cirrus or Plus logos mean your debit card can be used at an ATM outside Canada. The Maestro logo, which is a MasterCard brand, allows you to use your debit card at the point of sale internationally wherever Maestro is accepted.

This notion of "co–badging" debit cards has been in place in Canada since such cards were launched in the 1990s. It is essential to their functionality. If, for example, only Interac functionality was on your debit card, you would be unable to use it outside Canada and you would need to carry a separate debit card to access ATMs abroad.

While Canadians have embraced the use of debit cards as a payments vehicle, Interac has some significant limitations:

• It cannot be used at the point of sale outside Canada.
• It cannot be used for most ATM withdrawals outside Canada.
• It cannot be used for the vast majority of online purchases.
• It cannot be used for phone purchases.
• It does not have a contactless application in market (akin to MasterCard's PayPass).
• As a peer–to–peer network, Interac does not have the same level of security as credit cards or other debit offerings.
• Interac's system is prone to occasional breakdowns that interrupt service.

Recognizing these limitations, MasterCard identified an opportunity to bring innovation and enhanced functionality to the debit marketplace in Canada. MasterCard has two debit products — MasterCard Debit and Maestro — that are in wide use around the globe and offer the following benefits:

• They can be used anywhere in the world where MasterCard debit brands are accepted.
• They can be used for online or phone purchases.
• They can take advantage of contactless PayPass technology so consumers have a "tap and go" debit option. As an example, MasterCard recently announced a pilot project that allows users of the New Jersey and New York transit systems to simply tap their debit cards as mode of payment. This pilot will dramatically reduce wait times for passengers.
• MasterCard debit products are vastly superior in terms of safety and security with ongoing fraud detection features.
• Both MasterCard debit products run on fully backed up networks.

Based on the above, there is no doubt that MasterCard would have offered a superior debit product for Canadian consumers. MasterCard planned to co–badge its debit functionality on the cards of banks that wanted to offer these additional functionalities to their debit products. Such cards would have had traditional Interac functionality as well as the features above. As mentioned previously, co–badged functionality is standard in most of the world.

Unfortunately, Element #6 of the Code of Conduct effectively eliminates co–badging for domestic applications on debit cards. Consequently, innovations that are available widely in the credit card market and around the world for debit cards cannot be offered to Canadian consumers.

In our view the rules of the game were changed for reasons that can only be seen as a merchant desire to protect Interac from competition in the debit marketplace. As a result, all the innovations and cost advantages for merchants that MasterCard would have brought to the Canadian marketplace through its Maestro product are now stymied.

Response to Discussion Questions

Please find below responses to applicable questions from the discussion paper.

Capacity to Innovate Using Digital Technologies

How can Canada use its regulatory and policy regime to promote Canada as a favourable environment for e–commerce?

This question is the most relevant to MasterCard's business in Canada. This country has the building blocks necessary to be at the forefront of e–commerce development. Consider the following:

• World class privacy legislation that provides a legal framework for the collection, use and storage of information and promotes confidence amongst Canadians in the security of their personal information.
• A strong and stable financial sector that is committed to investing in innovation.
• A history of early adoption of payments technologies, including point–of–sale debit transactions, acquisition of credit cards via the Internet, and contactless technology in the credit card market. Canadian consumers have shown an eagerness to embrace technological advances in payments.
• A geographical makeup that often necessitates the development of non face–to–face commercial dealings.

In the early days of e–commerce, payment was done almost exclusively through major credit card networks such as MasterCard. MasterCard enabled e–commerce by offering worldwide acceptance, zero liability for fraudulent use of a MasterCard credit card, state of the art fraud monitoring systems, and chargeback rights for consumers (the latter provides consumers with the right to have their purchase refunded directly on their credit card if the goods or services they ordered were not delivered or were defective).

Promoting payments innovation is critical in order to facilitate e–commerce innovation. Without the ability to make a secure and reliable payment, consumers and merchants will not be able to increase their participation in the online marketplace. That innovation has been taking place with credit cards. In Canada, close to $13 billion was spent online in 2007, according to the most recent numbers from Statistics Canada. Online debit purchases are miniscule by comparison.

As previously stated, current payments policy is placing significant obstacles in the way of online debit transactions becoming a common feature in Canada. That in turn imposes a massive constraint on the future growth of online spending and the digital economy.

Recommendation:

Given Canada's natural advantages and traditional embracing of electronic commerce innovations, and the importance of a payments system that facilitates electronic commerce, the Government should ensure that one of the overriding principles of payments policy and regulation is the promotion of innovation within the payments sector and the economy.

What would a successful digital strategy look like for your firm or sector? What are the barriers to implementation?

The immediate barrier to implementation of new payments technologies in Canada are policies that unduly constrain competition in the debit marketplace. As discussed previously, this has stifled innovation and prevents Canadian consumers — and merchants — from enjoying the benefits of debit products that are used in the rest of the world.

Recommendation:

A digital strategy should have clearly defined policy goals. If one such goal is increasing electronic commerce and growing the online marketplace, other policies should match that goal.

Once anti–spam legislation, and privacy and copyright amendments are in place, are there new legislative or policy changes needed to deal with emerging technologies and new threats to the online marketplace?

MasterCard commends these initiatives, in addition to earlier steps to strengthen Canada's identity theft protection. MasterCard would also point to its own systems for things such as fraud protection as being highly beneficial to ensuring confidence in the online marketplace. Furthermore, as stated previously MasterCard's debit products offer far greater security than the current debit platform in Canada.

Recommendation:

A digital strategy should ensure that Government policies encourage, not discourage, the introduction of more secure and reliable payments technology.

Building a World–Class Digital Infrastructure

What speeds and other service characteristics are needed by users (e.g., consumers, businesses, public sector bodies and communities) and how should Canada set goals for next generation networks?

In terms of payments, Canada is well–served on the credit card side. However, as discussed at length in previous sections, Canada's debit system is quickly becoming vastly inferior to those of most advanced economies; e.g. use of debit cards online or on the phone, contactless debit technology, sophisticated fraud monitoring and protection, etc. These are simple innovations enjoyed in much of the rest of the world but not currently available in Canada.

Recommendation:

If Canada wants next generation networks for payments, policies and regulations should be developed with a goal of encouraging, not stifling, innovation.

What steps must be taken to meet these goals? Are the current regulatory and legislative frameworks conducive to incenting investment and competition? What are the appropriate roles of stakeholders in the public and private sectors?

MasterCard invested millions of dollars in our plan to offer our Maestro debit product in Canada. Ultimately, the rules of the game were changed in a way that made the launch of this product impossible, which is particularly frustrating given we planned to introduce a vastly superior — and cheaper — debit product in this market. We know why this happened; a loud and well organized merchant lobby purposely spread misinformation about our product. However, the policy rationale for blocking a cheaper and technologically superior product has not been offered.

Recommendation:

A clear policy for payments needs to be enunciated by the Government. For example, if cost to merchants is the primary concern, then that should be spelled out so all stakeholders know the rules of the game. Future investment in this market requires some degree of policy certainty. We believe the Minister of Finance has taken a positive step in this direction with the appointment of the Task Force for the Payments System Review.

Other Sections

MasterCard has no comments on the three remaining sections of the consultation paper.

Conclusion

MasterCard recognizes that its comments are relevant to only a small part of this consultation. However, payments are a critical aspect of the digital economy and we hope the information provided here is useful.

Canada is a world leader in many aspects of the payments industry, particularly with credit cards. However, with respect to debit payments, the innovation and enhanced security that is widely available elsewhere in the world is not being introduced in Canada.

Promoting a secure and innovative payments system in Canada is absolutely fundamental to the development of an online marketplace and the further growth of electronic commerce. The Government must ensure that its policies are coordinated to promote these goals, not inhibit them.