Submission on Consultation Paper on a Digital Economy Strategy for Canada

Summary

One of the key roles that Governments can play in promoting the digital economy and the online marketplace is to review and modernize our regulatory frameworks to help regulations become technologically neutral and not solely based on traditional face–to–face business models. We submit that looking to solutions developed in comparable jurisdictions would foster an even more robust online marketplace.

Both MBNA and Capital One are virtual banks, without the face–to–face customer service environment of the traditional bricks and mortar branch infrastructure.

The Internet is the primary channel for our customer acquisitions, and the Internet is now the main means of banking for 35% of Canadians across all age groups. Recognizing that the needs and preferences of Canadians are changing, a challenge for Government must be to adapt the regulatory framework so that it does not inadvertently restrict the evolution of online and other innovative technologies.

Governments are requiring private sector entities to collect information from their customers in order to further Government policy goals. A longstanding example of this is requirements for financial service providers to collect certain identity information from clients who receive interest income of capital gains for taxation purposes. More recently, the Government of Canada created the Passenger Protect Program that requires airlines in Canada to collect and compare passengers names against a list controlled and managed by Transport Canada before a boarding pass is issued.

A key area for both MBNA and Capital One in this area is the increasing requirements to combat money laundering and terrorist financing. Identification requirements can be challenging and in our three years of experience with these "know your client" regulations, we have discovered that the solutions implemented to make online opening of accounts more feasible still pose some unintended but still significant barriers. There are some solutions to this barrier that have been implemented in other comparable jurisdictions. If these solutions were made available in Canada, they would allow for more Canadians to obtain new credit card accounts in an online environment.

Solution #1: To promote more e–commerce in the financial sector, we recommend adopting a similar approach to the United States whereby obtaining a valid SIN is sufficient for financial institutions to "know their client" and open an account.

Solution #2: Allow financial institutions to confirm the name, address and birth date of a new customer against the Elections Canada database as a method of "know your client" diligence. This option is available in Australia and the United Kingdom, and it has been proposed in New Zealand. Financial institutions could compare data that they have been provided by consumers against a Government database as a means of confirming that it is accurate.

Submission

July 9, 2010

Introduction

MBNA Canada Bank and Capital One Bank (Canada Branch) welcome the opportunity to provide comment on the Government of Canada's consultation paper on a Digital Economy Strategy for Canada.

About Capital One Bank (Canada Branch) and MBNA Canada Bank

Capital One Bank (Canada Branch) ("Capital One") was established in 1996 and has quickly grown to become the ninth largest credit card issuer in Canada (Nilson Report, March 2010) with 3.7 billion in managed loans outstanding for our Canadian portfolio as of December 31, 2009. Capital One is an affiliate of Capital One Financial Corporation, a leading diversified financial services company, offering a broad spectrum of financial products and services to consumers, small businesses and commercial clients. Headquartered in McLean, Virginia, Capital One has major operations in the United States, Canada and the United Kingdom with $130.3 billion in total managed assets, $117.8 billion (U.S.) in deposits (as of December 31, 2009) and approximately 44 million customer accounts worldwide.

MBNA Canada Bank ("MBNA") opened its doors for business in Canada in 1997 and quickly became the largest issuer of MasterCard credit cards in Canada and the country's fourth largest credit card issuing bank. With over 4 million accounts and almost $10 million in outstanding loans in Canada, MBNA is the leading provider of co–branded and affinity credit card programs in Canada. Its credit card products are endorsed by nearly 900 Canadian membership organizations, credit union and financial institutions, sports associations, educational institutions and charities. MBNA is an affiliate of Bank of America, one of the world's largest financial institutions, serving clients in more than 150 countries.

Success Stories in the Digital Economy

MBNA and Capital One have had tremendous success in Canada as a direct result of leveraging the online marketplace to drive customer acquisition and to service customers in the manner that those customers choose. Both MBNA and Capital One are virtual banks, without the face–to–face customer service environment of the traditional bricks and mortar branch infrastructure. Through unique strategies, separately pursued by MBNA and Capital One, we opened–up innovative distribution channels including direct mail, telephone and now heavily the Internet to respond to customer preferences for getting a credit card and enhancing their customer service experience. Canadian consumers find this convenient and efficient for them, with 79% of Canadians who say that technology has made banking more convenient, enabling them to bank whenever and wherever it suits them. Canadians have embraced these options and choices in the credit card market, and for the first time, the majority of Canadians (53%) are now banking online. The Internet is the primary channel for our customer acquisitions, and the Internet is now the main means of banking for 35% of Canadians. The use of the Internet as the primary banking choice is increasing among all age groups. Compare this to 2000 when 8% of new credit card accounts were acquired over the Internet. The online world has clearly expanded significantly.¹

By leveraging the online marketplace both MBNA and Capital One have brought choice, convenience and competition to Canadian consumers, who have embraced these service models.

Enhancing an Already Strong Regulatory Framework

The preferred model for servicing consumers in Canada has changed radically over the past decade throughout the entire service industry, including the financial service sector. The volume of Internet banking transactions completed with the six largest banks in Canada has more than doubled in the last five years, increasing from 238.1 million transactions in 2004 to 489.4 million transactions in 2009. Today, Canadians have less desire or need to go into a bank branch to conduct their banking affairs.

Recognizing that the needs and preferences of Canadians are changing, a challenge for Government must be to adapt the regulatory framework so that it does not inadvertently restrict the evolution of online and other innovative technologies. We share the challenge of adapting to a quickly changing environment and recognize it's not an easy one. In the financial services field a few examples would help to make the point.

Increasingly, as customers are conducting their financial services transactions online they are finding it more convenient to obtain documentation online (e.g. a credit card monthly statement), as opposed to a paper–based format (e.g. in the mail). Recently the Government of Canada proposed amendments to the Bank Act that would allow consumers to provide their consent to the provision of documents online in an electronic format as opposed to via paper. Until this change was proposed, banks were required to provide consumers with a single (and out–dated) option of indicating their consent in writing either by sending in a signed consent via mail or delivering it in a face–to–face manner. For virtual banks and their customers, who prefer the convenience of online banking, requiring paper–based consent to send documents thereafter electronically was neither feasible nor innovative. We commend the Department of Finance for proposing these amendments, promoting the development of the financial sector in the online marketplace, fostering innovation and addressing consumers' needs and preferences.

Another area where Government can modernize its regulatory framework is in the area of Identification Management.

Increasingly, Governments are requiring private sector entities to collect information from their customers in order to further Government policy goals. A longstanding example of this is requirements for financial service providers to collect certain identity information from clients who receive interest income of capital gains for taxation purposes. More recently, the Government of Canada created the Passenger Protect Program that requires airlines in Canada to collect and compare passengers names against a list controlled and managed by Transport Canada before a boarding pass is issued.

A key area for both MBNA and Capital One in this area is the increasing requirements to combat money laundering and terrorist financing. For example financial institutions who receive over $10,000 in cash as a payment (or any suspicious payment for that matter) are required to identify the person making the payment and report the transaction to FINTRAC, which is absolutely the right thing to do. Identification requirements, though, can be challenging.

Another key area in the money laundering and terrorist financing regulations is the requirements that financial institutions take appropriate steps to 'know their client' when opening accounts. Capital One and MBNA strongly support 'know your client' requirements, as they help minimize the threat of money laundering and terrorist financing in Canada. However, originally 'know your client' regulations were grounded in the traditional business model of face–to–face interaction between customer and financial institution, whereby businesses identified their clients by reviewing physical identification (e.g. a birth certificate, driver's licence etc.), recorded details from these documents and obtained a signature card for comparison in the future.

In 2007, the Government, in recognition that the traditional regulatory requirements to review documentation in a face–to–face environment was impossible to comply with in an e–commerce framework, passed new regulations for credit card accounts that incorporated identification initiatives that were better suited to an online marketplace. We commend the Department of Finance for developing a regulatory framework that accommodated an online marketplace business model. This is an example of how the Government can promote the digital economy by analyzing and amending regulations to ensure that they are technologically neutral while still achieving the objectives of the regulations.

Unfortunately in our three years of experience with these 'know your client' regulations, we have discovered that the solutions implemented to make online opening of accounts more feasible still pose some unintended but still significant barriers. Both Capital One and MBNA have been unable to open accounts for some consumers because they cannot obtain the necessary information or documentation required by the 'know your client' regulations even though all other indications are that these consumers should have access to the credit for which they apply and do not pose a money laundering or terrorist financing threat.

There are some solutions to this barrier that have been implemented in other comparable jurisdictions. If these solutions were made available in Canada, they would allow for more Canadians to obtain new credit card accounts in an online environment.

Recommendations

Using a Social Insurance Number ("SIN") as a means of identifying a client.

In the United States, financial institutions that open a credit card account for a client are allowed to request their Social Security Number and use that as a unique identifier for the purposes of meeting the 'know your client' regulations. In Canada, providing a SIN is optional for consumers when dealing with non–deposit taking financial institutions, but it is not sufficient for financial institutions to simply obtain the social insurance number, they are required to see and inspect the actual SIN card. This does not lend itself to online commerce or the business models of virtual banks. To promote more e–commerce in the financial sector, we recommend adopting a similar approach to the United States whereby obtaining a valid SIN is sufficient for financial institutions to "know their client" and open an account.

Another option we suggest is to allow financial institutions to confirm the name, address and birth date of a new customer against the Elections Canada database as a method of 'know your client' diligence. This option is available in Australia and the United Kingdom, and it has been proposed in New Zealand. It is our opinion that this access would promote online commerce. Financial institutions could compare data that they have been provided by consumers against a Government database as a means of confirming that it is accurate.

As a side benefit, this reform could also be tied to initiatives to allow consumers to update their information for elections purposes online instead of in person. This is another example of policy and regulatory modernization that contemplates technological advances and promotes the digital economy.

Conclusion

One of the key roles that Governments can play in promoting the digital economy and the online marketplace is to review and modernize our regulatory frameworks to help regulations become technologically neutral and not solely based on traditional face–to–face business models. The above submission highlights two areas where the Government of Canada (in particular the Department of Finance) has undertaken this review and updated our frameworks. We also submit that looking to solutions developed in comparable jurisdictions would foster an even more robust online marketplace.

Cathy Velazquez
Senior Vice President
MBNA Canada Bank
1600 James Naismith Drive
Ottawa, Ontario K1B 5N8
(613) 907–4911

Ted Wilby
Associate General Counsel
Capital One Canada
5140 Yonge Street, 19^th Floor
Toronto, Ontario M2N 6L7
(416) 549–2726

¹ The Strategic Counsel for the Canadian Bankers Association — Technology and Canada's Banking Industry (2008)