The interac associa-tion has been denied the opportunity to become a for-profit company to compete with debit giants Visa Inc. and MasterCard Inc. in Canada. But the federal Competition Bureau has left the door open for other proposals from Interac, the debit system operator.

In a Feb. 12 decision, the competition agency said it “is prepared to re-examine Interac’s request in the future if there is new information or material changes in the marketplace, or if Interac advances an alternative proposal.”

In that case, changes to Interac’s structure may be permitted, provided the bureau concludes that such changes do not lessen competition.

In the bureau’s decision, it said it is unconvinced there is a need for Interac to convert to for-profit status because of its current dominance of the debit card market: “In particular, the bureau does not agree that the removal of the restriction against for-profit activities by Interac would be pro-competitive, or is necessary to allow Interac to remain competitive.”

Interac’s public response says it is “disappointed” with the decision, “but remains optimistic that further discussions can result in other variations to the Consent Order that will enable Interac Association to respond more effectively to the realities of the changing competitive debit landscape.”

Interac had sought the change in status a year ago because of concerns about the pending entry into the debit market by U.S.-based credit giants Visa and MasterCard.

Interac was founded in 1984 by the big banks to allow customers to use the ATM machines of different banks interchangeably; a decade later, Interac’s membership had grown considerably and it had become a major player in the payments industry with a system that allows retailers to accept debit payments.

At that time, the bureau accused Interac and some of its members of abusing their dominance in the payments sector. Interac agreed that it would only charge fees sufficient to cover the costs of the system. Interac now argues that it needs for-profit status to invest in research and to develop new products in a more competitive market.

“Really, the ball is in our court right now to come up with a proposal and bring that to the bureau for its consideration,” says Interac spokeswoman Caroline Hubberstey, adding that the bureau had said it would consider “other changes to the governance structure and corporate status of Interac.”

About 60% of all card-payment transactions in Canada are done by debit. Last year, according to Interac, consumers performed almost four billion debit transactions.

In Interac’s push for greater operating flexibility, the association has been backed by industry groups such as the Canadian Federation of Independent Business and the Retail Council of Canada.

“People realize that status quo Interac is not an option,” says Hubberstey. “ And I think even the bureau’s comments about its willingness to enter into additional discussions with us in these key areas reinforces that.”

Interac has garnered some sympathy, if not outright support, in its pending debit showdown with Visa and MasterCard, in part because of the dominance those companies have gained in the U.S. and elsewhere, says CFIB president Catherine Swift: “We have followed what has happened in other countries, and [Visa and MasterCard] have put the incumbent — whatever the Interac equivalent was — out of business.”

In the U.S., Visa has a 73% share of the larger “signed receipt” debit card business and 42% of the personal identification number-based debit market.

The CFIB, which supports Interac’s conversion to a for-profit model, had argued that Interac will be outgunned by the significant marketing muscle of Visa and MasterCard and that Interac is in an “untenable” position because the big Canadian banks, which look to profit from the U.S. credit firms’ entry, sit on the Interac board.

“Interac’s current governance structure,” says Swift, “is akin to having Col. Sanders looking after your pet chicken.”

For the bureau’s part, it has said that it is open to changing Interac’s governance to give it more independence.

Interac membership includes banks, trust companies, credit unions, caisses populaires, merchants, and technology- and payment-related companies.

Swift says that in the U.S., debit rates charged to merchants are “eight to 10 times what they are here,” and that has strengthened the case of the CFIB and others.

“We think we are making headway,” she says, noting that Finance Canada has drawn up a draft document known as the Code of Conduct for the credit and debit card industry.

@page_break@The proposed code is a recognition, says Hubberstey, “that some of the current practices are really putting in question the health of our debit system in Canada.”

The draft code would, among other things, ensure that merchants are made aware of the costs of accepting credit and debit payments; that they have more flexibility to encourage customers to choose the lowest-cost payment option; and that they are free to choose which payment options they will accept.

“We certainly want to retain Interac,” says Swift, whose lobbying efforts on behalf of Interac went as far as federal Finance Minister Jim Flaherty. “Virtually all merchants like Interac; it is a reasonably priced, good service.”

Although Visa and MasterCard have been portrayed as debit behemoths patiently waiting to enter the market in Canada, Hubberstey says, Visa and MasterCard are already ready to accept debit payments in some Canadian retail outlets.

“There are three million BMO MasterCard-enabled debit cards in the market now; if the merchant is accepting MasterCard debit, those [transactions] are being priority routed over Interac,” says Hubberstey. “The merchant likely doesn’t know [the details of the processing channel], and the consumer certainly doesn’t have any choice in the matter.” IE