Current debit monopoly `unsustainable,' says Visa

October 30, 2009

Rita Trichur

Visa Canada says there is a big misperception that its new debit product is designed to rid Canada of its existing low-cost service run by Interac Association.

While critics contend that Visa debit is putting non-profit Interac "under siege," the U.S.-based card giant argues that Canadians will only benefit from competition in the $168 billion debit market.

Mike Bradley, Visa Canada's head of products, says the current "monopoly" is not sustainable because consumers are demanding more innovation from debit.

Canada is the second-largest debit market in the world after Sweden. It represents a lucrative expansion opportunity for Visa Inc., which has penetrated other markets.

In the United States, for instance, Visa's debit payments volume now surpasses that of credit. In fact, the majority of Visa's global payments and transactions are on debit.

The introduction of Visa debit in Canada will give consumers more utility, Bradley said. For instance, Visa debit offers international acceptance and a wider reach with online merchants.

Like Interac, it promises improved security through chip-enabled cards and zero-liability on fraudulent purchases, while dangling contact-less payments as an option.

"I am extraordinarily proud of our national payments system but I find it embarrassing that you can get in France, in Australia, in Nigeria, a debit card that allows you to buy stuff online, pay for your bills, order a pizza on the phone and do all of the things that you can't do today with your debit card," Bradley said.

While logic suggests a healthy market promotes competition, critics warn the result for Canada could be far from that, and that once Visa and smaller rival MasterCard gain enough market share, Interac will cease to exist and fees will soar.

Catherine Swift, president and chief executive officer of the Canadian Federation of Independent Business, said Visa has already proven adept at dominating market share south of the border.

"In the U.S. debit is roughly 10 times what it is here, on average. It costs them 60 to 70 cents a transaction and we think that's rip-off territory," Swift said earlier this week.

Sources say Finance Minister Jim Flaherty is hearing complaints that Visa and MasterCard are taking advantage of a little-known "co-badging" rule to gain the upper hand on Interac.

Co-badging is mostly used to offer complementary services. For example, cards running on the domestic Interac network can also be used on Visa Plus or MasterCard Cirrus for international transactions. This allows Canadians to withdraw cash from bank machines elsewhere in the world.

But now co-badging is being used by Visa and MasterCard to compete in the market. While the new Visa and MasterCard debit cards are not allowed to bear each other's badges, each will sport the Interac logo. That allows the cards to use Interac as a backstop if merchants have not signed up for Visa debit or MasterCard's Maestro network.

Visa says it will allow consumers to choose at the point of sale whether their debit transaction runs over Visa's or Interac's network. But retailers worry the Interac option will be given less prominence. MasterCard, meanwhile, has said that if Maestro debit is on the merchant's terminal, the transaction will be priority routed over its network.

Critics worry that once Visa and MasterCard gain sufficient market share, they will no longer agree to share space with Interac on the same card. Flaherty is expected to address co-badging when he releases his voluntary code of conduct for credit and debit.