With the debate raging in Ottawa about credit card rates, you may have overlooked another issue in the mix: the uncertain future of your bank debit card.
Let's put it this way. Don't get too used to calling your debit transactions "Interac," because Visa Canada and MasterCard Canada may yet challenge the monopoly held by the national not-for-profit Interac Association, a co-operative payment system created in 1984 by the country's big banks and merchants.
Many Canadians don't realize that Interac is a low-cost anomaly.
In other countries, high-fee, for-profit systems from companies such as Visa, MasterCard and China UnionPay reign. Now the first two are considering a foray into Canada. Visa has held talks with Canadian banks and retailers, said Tim Wilson, head of Visa Canada. Visa debit is used by 844 million cardholders in 170 countries, according to company reports.
"The bank card in Canada has been tremendously successful, but it's relatively plain vanilla," Mr. Wilson said.
MasterCard said recently it will "create competition in the Canadian debit market where it has never existed" with its debit system, Maestro, used by 652 million people in more than 100 countries. Under the system, Canadian customers could use their debit cards abroad, and retailers here could accept foreign cards.
Interac is in a fight for its life, says Mark O'Connell, its president and CEO. He maintains it is a world-class, low-cost payment system that won't survive unless its regulatory structure is altered by the Competition Bureau.
Interac should be "a more independently run commercial organization that has the ability to innovate," he said. As it stands, the not-for-profit association can't raise funds for research and development of new products, such as high-tech terminals.
"We cannot let such a successful debit system continue in this shackled fashion, as the market changes around it," Mr. O'Connell said. "I think it would be a tragedy to have this made-in-Canada success story obviated by U.S. card companies."
Analysts say that Visa and MasterCard can enter Canada with new products and set up lucrative fee structures for all involved - themselves, the banks, and the middlemen.
For now, the big card companies have taken pause. Mr. Wilson at Visa Canada said in Toronto recently that additional regulation on debit providers may limit competition and inhibit innovation, yet he indicated he might introduce Visa's debit system to Canadians anyway this year.
Debit is not the preferred method of retail payment in Canada, though we are the second-highest-per-capita users, after Sweden. We still love our credit cards.
Conversely, debit is the preferred payment option for retailers, over the risk and slightly higher cost of handling cash, according to a 2006 Bank of Canada survey of merchants. The least-favoured method of payment was credit cards, in part because of the high processing fees - on average, retailers pay only 2 per cent to 4 per cent of a credit transaction, compared with 12 cents per debit transaction.
Those low debit fees could rise quickly if Visa and MasterCard enter the market, said Catherine Swift, president of the Canadian Federation of Independent Business.
"We've talked to business groups in the U.S., and their advice was, if you can possibly prevent it, don't let Visa and MasterCard in," she said. "In the U.S., you can understand why it took hold ... they have many regional and community banks. They never had the national banking network we've had from relatively early days in Canada."
She scoffs at Visa and MasterCard's suggestion that they want to enter the market to better serve consumers.
Accepting Visa and MasterCard debit may indeed create competition, but it would also raise consumer prices, said Peter Woolford, vice-president of policy and research for the Retail Council of Canada.
The lobby group has created a special campaign, at the website StopStickingItToUs.com, that takes issue with the card giants' "ad valorem" fees, in which retailers pay a percentage of the transaction value. Additionally, in the United States, the retailer pays an "interchange" fee to the bank.
There are no interchange fees in Canada, meaning the banks get no money from retailer. Therein lies the reason for Canadian banks to sell this new product, Mr. Woolford said.
"What the consumers will see is a message from their banks saying, 'We have this wonderful new debit card which doesn't cost you anything.' It might have points, insurance, extended warranties, it might have dancing girls on it, or whatever. It's all for free. You take the card and you're happy," he predicts.
"What you don't see is the merchant who used to pay five or six cents per transaction is paying 12 to 20 cents more. Sooner or later, that has to show up in the price of the merchandise you buy."
FOLLOW THE MONEY
With debit card transactions, the trail of fees is complex. Here is how debit works now in Canada, and how might it change under new systems.
DEBIT IN CANADA
Let's say you buy $100 worth of groceries at Loblaws and hand over your bank debit card at the register. The money goes to the store, and there is no "interchange" fee - no fee is paid by the store to your bank.
However, Loblaws does pay a fee to the middleman processing the payment, sometimes called the "merchant acquirer." This party handles data processing between Interac and your bank. In Canada, a major one is Moneris Solutions. Loblaws pays Moneris a flat fee for using its swipe terminal and processing the transaction.
This fee varies with a retailer's size and can be as high as 15 cents, but on average is eight to 10 cents, analysts say. Moneris gives part of this fee to the not-for-profit Interac - less than one cent, called a "switch fee" for enabling the transaction. Finally, your bank also has to pay Interac another fraction of a penny.
All told, the store keeps about $99.90. This is better than the $98 the store would net if the customer paid with a credit card, which typically costs 2 per cent of the transaction.
U.S.-STYLE DEBIT SYSTEM
One important difference in the United States is that the bank, too, gets money from the retailer. This is the "interchange" being discussed in Parliament. In a U.S.-style system, Loblaws would pay the bank an interchange, which is part fixed-fee, part percentage of the purchase. Interchange fees average about 25 cents per transaction in the United States, analysts say.
And instead of Loblaws paying 8 to 10 cents to Moneris to process the sale in Canada, it would be about 13 or 14 cents under the U.S. system. (In the United States, it's up to your bank whether you are charged an additional debit fee.) There are many types of fees. For example, the largest transactional fees are switch fees, generally 2.5 cents from your bank and Moneris, payable to Visa; and assessments, which can be anywhere from three to eight basis points (1/100th of a percentage point) from each side.
In this $100 transaction, Visa or MasterCard would typically get 5 cents in switch fees and six to 16 cents in assessments. Loblaws keeps about $99.50. The bank got 25 cents, but paid out 10.5 cents in the switch and assessment fees, plus fixed costs.
As you walk out of the store with your bag of groceries, under this system, you might collect reward points or other incentives not available in Canada through the basic Interac system. But the higher fees charged to the merchant might mean higher prices, so your $100 might buy less food.
Theresa Ebden is a producer for Business News Network.