The Interac Association has hired a top Wall Street investment bank to help it prepare for life as a for-profit company as the twin goliaths of plastic money - Visa and MasterCard - begin to invade its turf.
Interac, which runs the system on which the majority of Canadian debit and ABM transactions take place, has given JPMorgan Chase & Co. a mandate to figure out how many shares each of its dozens of members, including the big banks, should receive if the company gets regulatory approval to restructure and turn itself into a money-making business, sources say.
The association, which is run on a break-even basis, can't make the transition to for-profit status until the Competition Bureau gives its blessing.
Executives at the company want to make the move because, for the first time, Interac has real competition for a piece of Canadians' wallets. MasterCard Inc. has begun launching debit cards into the Canadian market and Visa Inc. is fast on its heels.
The stakes are high.
Canadians are infatuated with their debit cards, using them more than any other country except Sweden. Last year, Interac processed nearly four billion direct payment transactions in Canada, amounting to $168-billion in sales. Small fees are levied on each transaction; the money goes to the banks, which in turn pay Interac for the use of its network.
Visa and MasterCard already offer debit services in most other major countries around the world, and now they want in on Canada, too.
The outcome of the battle will have implications not only for the card companies, but for consumers and retailers nationwide. Consumers stand to benefit from a wider choice of payment cards - some of which may come with loyalty programs or other perks, as many credit cards do.
But many retailers fear that the entry of the credit behemoths into the debit market will result in higher costs for accepting the cards, and warn that those costs will ultimately be passed on to their customers.
Merchants are very concerned, says Diane Brisebois, chief executive officer of the Retail Council of Canada, which has argued that the launch of Visa debit alone could raise the retail sector's costs by hundreds of millions of dollars each year.
The federal government has indicated it will introduce a code of conduct governing the payments industry, and "we're obviously hoping that the [finance]minister is going to take actions very quickly," Ms. Brisebois said.
The fact that Interac, which celebrated its 25th anniversary this week, has hired investment bankers does not necessarily mean that an initial public offering will occur. (Both Visa and MasterCard made the transformation from co-operatives into publicly-traded companies in recent years.) Asked about the hiring of JPMorgan, Interac CEO Mark O'Connell said the organization is still in talks with the Competition Bureau.
"In the event that our restructuring goes forward, our 62 members would become shareholders in the new organization. We have to be prepared for that possibility, which requires an independent valuation to ensure that shares are allocated fairly to all members," he said.
However, Interac's executives also argue that it needs more capital to compete with MasterCard and Visa
MasterCard is already in the business: Bank of Montreal has already issued debit cards that can be used on the MasterCard's debit system, called Maestro. Visa is expected to follow within months, possibly with Canadian Imperial Bank of Commerce as its partner.
Depending on the rules that Finance Minister Jim Flaherty sets out, it's likely that each of the payment networks will soon be pitching their respective benefits to consumers. Visa, for instance, promotes the "zero liability" guarantee that goes with any payments made on its network, and the ability of consumers to make debit transactions over the phone. Interac highlights its roots as a low-cost, made-in-Canada network.
But many consumers don't realize that stores, restaurants, and other retail outlets pay a fee each time they pay with plastic. On credit cards, it amounts to a small percentage of the total they've spent. With Interac, it's a flat fee per transaction.
In Fredericton, Paul Simmonds, the president of Robert Simmonds Fashions, says the issue has got him worried. The amount he pays each month to accept credit transactions has already gone up, and, so far, he's resisted passing the costs on to his customers. But he fears the changes in the debit system will further erode his bottom line.
"As an independent, you're constantly worried about costs going up," said Mr. Simmonds, who says he pays about 7 cents per transaction done by debit. "You don't have as much leverage as larger retailers do."
Despite his fear that costs will rise, Mr. Simmonds, like a number of retailers, says that he plans to accept Visa and MasterCard debit cards because he can't risk turning away customers who want to pay with them. "Our goal is to make it easy for consumers to shop," he said.
Fred Pritchard, co-founder of Golda's Kitchen, a family-owned business on the outskirts of Toronto, said he doesn't plan to accept the cards. His costs are already going up, he said. "It's frustrating."
A number of big banks and Desjardins Group gave birth to Interac in the mid-1980s so that their customers could withdraw cash at one another's bank machines. It expanded, and in 1994 began offering a system that enabled retailers to accept debit cards. The Competition Bureau, meanwhile, accused Interac and nine of its members of abusing their power in the payments sector. To assuage that concern, Interac signed a deal in 1996 that says it can only charge fees that cover its costs.
Interac approached the Competition Bureau more than a year ago with a request that it be freed from some of the provisions in the 1996 deal, which also places restrictions on the makeup of its board and membership. The Bureau has not made a decision yet.
It's not clear yet whether all the major banks will decide to roll out millions of debit cards that could be used on Visa and MasterCard's systems. While some are embracing the idea, at least one is speaking out publicly in favour of Interac, illustrating the rifts that these issues are causing. Barb Mason, head of wealth management at Bank of Nova Scotia, says that Interac's "ongoing viability as the low cost provider to merchants and consumers across Canada is critical."