Canadian consumers use “plastic” every day to purchase millions of dollars worth of goods and services. Rarely do they think about the payment system behind the use of such cards – nor should they as long as the transactions are secure and seamless.
For merchants, it's another matter altogether. They pay the direct costs of these transactions, which not only serve consumer interests but also support so much of our country's commercial activities. Indeed, almost half of all retail transactions are made by debit or credit card.
In recent years merchants have raised concerns about rising transaction costs. This led Finance Minister Jim Flaherty to examine the electronic payment system, and, in turn, produce a draft “code of conduct,” which focuses on promoting fair business practices between all players in the payments industry. The government concluded its consultations last month, and we expect to see a final code in the coming weeks.
The payment system is a complex web of interaction between merchants, the payment processors that provide the payment terminal and services to store owners for access to the system, the financial institution that issues the debit or credit card to the customer, and finally the card-network company (Visa, MasterCard, Interac, American Express and others) that sends an electronic signal between all the players to complete the transaction.
Setting the rules in a way that properly balances the interests of consumers and merchants has not been easy but, in the Toronto-Dominion Bank's view, the Minister largely got it right.
Consider how the code would enable merchants to better manage their businesses. Currently, many store owners are not provided with basic information on their bills from their payment processors, such as the number of transactions processed or the cost of each transaction. Imagine the challenge of running a business if you were unable to determine the breakdown of costs on your bills. Only when merchants clearly understand the costs associated with their payment services can they make informed decisions about the form of debit- or credit-card payment they want to accept. Moreover, it's the only effective way to compare price offers from competing payment processors.
The code also provides merchants with an explicit choice about whether they want to accept new payment forms, such as Visa Debit and MasterCard Maestro. These networks will provide Canadian consumers with access to new channels, such as online purchasing and present new services for merchants. Merchants will choose to support these new payment types if and when it makes sense for them.
In some markets around the world, merchants have no choice in the matter and are faced with either accepting all debit and credit payment forms from any given card-network company (Visa, MasterCard, Amex, et al), or none. Rather than this all-or-nothing scenario, the proposed Canadian code would ensure that merchants can do what is best for their business and, in turn, their customers.
The code is not without controversy. Canada is already seeing the entry of debit cards – dubbed “co-badged” cards – that can be routed over more than one network, such as Interac or Visa Debit. There is a debate about who should choose the routing for transactions using these cards – merchant, customer or bank.
The proposed code opts for merchants. TD believes this is acceptable given the code's support for co-badged debit cards. This would give merchants additional control of their transaction costs. Moreover, it would cause the least amount of confusion at the point of sale and should not negatively impact consumers. That's because the payment would still be drawn from the customer's bank account, from whichever financial institution he or she uses. In addition, as a result of the code, stores would be explicitly allowed to offer discounts to their customers for using a particular type of payment, such as cash.
However, providing merchants with the choice of network for transactions using co-badged cards will require significant technological changes to payment systems, which will take at least a year to implement. In the interim, to protect the merchants' real choice, the government should place a moratorium on issuing co-badged debit cards until the code is in effect.
Alternatively, the government could consider eliminating co-badged cards altogether, which would be a more transparent way for networks to compete in the Canadian debit market. And it would demand that those networks make a compelling value proposition to consumers and merchants.
Successful introduction of this code is important on two levels. It will help foster a stable, competitive payments market that continues to provide consumers with secure and seamless service. And it will help many of Canada's merchants – from small businesses to big-box stores – better manage the costs of doing business.
Given the central role these storeowners play in our economy, it is not only a smart move but the right one to make.
Tim Hockey is president and CEO of TD Canada Trust.
