How the Coming of Duality Could Simplify Canadian Acquiring

The Canadian governmental body responsible for regulating competition told banks last week it now has no problem with financial institutions issuing both Visa- and MasterCard-branded cards or acquiring transactions on either bank card network, a radical change from present policy. The decision will likely spur not only fundamental changes on the highly visible issuing side of the payment card business, but it also could trigger behind-the-scenes operational changes by merchant acquirers that will eliminate extra processes that today provide merchants with de facto acceptance duality. Canada's decades-old non-duality policy required banks to choose one payment card network or the other. The thinking was that since both Visa and MasterCard were bank-owned associations, competition would be reduced if the governing members of one association could influence policy on the other. According to a letter to financial institutions from Competition Bureau Commissioner Sheridan Scott, the switch by both associations from bank ownership to publicly held stock companies (MasterCard in 2006, Visa this year) has eliminated that issue. “In light of the restructurings and subsequent information obtained from various industry participants, the Bureau is no longer concerned that there is a potential for a member, or group of members, of one credit card network to negatively influence the competitive operations of another card network through dual governance,” Scott said. Among Canada's dominant handful of national banks, Bank of Montreal aligned with MasterCard and the rest with Visa. In the early days, merchants that wanted to accept both brands had to get separate merchant accounts in order to have a Visa-aligned bank submit Visa card transactions into the Visa network and a MasterCard bank for access to the MasterCard network. The movement toward a more streamlined model began about a decade ago. Bank of Montreal and Visa member Royal Bank of Canada in 2000 formed a joint venture called Moneris Solutions Corp. to offer a full slate of services to merchants through one provider. And U.S.-based merchant processors such as Global Payments Inc., Chase Paymentech Solutions, and First Data Corp. began moving into Canada, all stressing seamless merchant service. Behind the scenes, however, non-duality still ruled. As exemplified by Moneris, acquiring banks had to find a partner on the other side to offer both Visa and MasterCard acceptance. Third-party acquirers such as Global Payments generate their transactions through merchant-referral agreements with sponsor banks CIBC (Canadian Imperial Bank of Commerce) for Visa transactions and National Bank of Canada for MasterCard purchases. “Every single bank has an alliance with another bank to grab the card [transaction] and re-route it,” says Adil Moussa, a researcher with Boston-based Aite Group LLC. A parallel situation exists on the merchant level, where what looks like duality is possible because processors set up separate Visa and MasterCard accounts in the background. Acquirers sweep funds from those enabling accounts into a merchant's primary account through the automated clearing house. These so-called synthetic-acquiring arrangements could be streamlined with the passing of non-duality, according to payments consultant Philip Andreae, who works in both Canada and the U.S. “I think what we're going to see is the key acquirers are going to concentrate their financial activity into one financial institution,” he tells Digital Transactions News. Although synthetic acquiring does create what many in the acquiring industry regard as extra overhead, its demise may not be a foregone conclusion, according to Andreae. That's because banks will have to do some operational re-jiggering to connect with the network with which they haven't had a direct relationship. Some may find the status quo less expensive than doing an upgrade. “Visa and MasterCard are not quite the same,” says Andreae. “If I've got systems work to do, I'm going to have to measure the cost of my investment.” MasterCard Inc.'s MasterCard Canada unit issued a statement saying the network welcomed duality, adding it would make its products such as the PayPass contactless card available to a wider audience and that MasterCard already is Canada's fastest-growing payment brand. “A dual market will allow MasterCard to build on this trend by providing greater opportunities through access to new issuers and cardholders,” the statement says. “Duality will also simplify the Canadian acquiring landscape and will make Canada a more attractive market for MasterCard to expand acceptance and introduce innovation at the point of sale.” Duality also removes one impediment to possible mergers of Canada's big banks, Andreae notes. The Competition Bureau's new stance is just the latest development in the Canadian payment card market's rapid evolution. Big banks reportedly are considering issuing Visa- or MasterCard-branded debit cards in a country currently dominated by the Interac debit card network (Digital Transactions News, Sept. 10). Merchants, meanwhile, are fighting the proliferation of rewards credit cards that cost them more to accept than conventional credit cards.