After more than a decade of frustration and false starts, Canadian payments processor Interac has succeeded at overhauling its corporate structure in an effort to funnel more money toward developing new ways to pay.
The reorganization creates a single for-profit corporation called Interac Corp., which came to life on Feb. 1. And it does away with an unwieldy separation of powers that divided a non-profit association overseeing debits and cash withdrawals from a standalone business building more modern payment methods such as e-mail money transfers.
For Interac, the revamp promises more agile governance under a single board of directors, better funding for innovation, and a chance to compete with its main rivals – credit-card issuers Visa Inc. and MasterCard Inc. – on a more even playing field. In theory, millions of Canadians who use Interac as the backbone of their daily payments should benefit if the new company can bring better, more modern products to market.
But the new structure also relaxes the straightjacket that has kept Interac from charging higher fees than it needs to recover its costs. And it adds a small new fee to each debit payment, capped for the next decade, that could generate millions of dollars each year to spend on research and development.
For the past 11 years, the drive to restructure has tested chief executive officer Mark O'Connell's perseverance. When he arrived in 2007, he thought Interac was too reactive – an order-taking institution with little appetite for innovation. But earlier efforts to consolidate Interac into a single entity in 2008 and 2010 died at the hands of the Competition Bureau, Canada's competition watchdog. And a 2013 bureau directive clearing a path became bogged down amid debate among Interac's shareholders.
After pushing the restructuring plan across the finish line last week, he thinks Interac is finally equipped to compete in a rapidly evolving digital payments market.
"A strong and nimble Interac is so important to the health of the Canadian payments system," Mr. O'Connell said in an interview. "We need it to be on a level playing field with its competitors and have an innovation pipeline."
Founded in the 1980s by a group of banks to link their ABM networks, Interac's peculiar governance model was fixed in a 1996 consent order issued by the Competition Bureau. The order was intended to keep the banks and financial institutions backing Interac from abusing the payment processor's dominance in the market.
The core functions of debit and cash withdrawals were run by Interac Association, a non-profit entity limited to transactions using plastic cards, which Mr. O'Connell likens to a "walled garden." Across the wall was Acxsys Corp., the product development and research arm responsible for introducing Interac-branded e-transfers and secure online payments.
Until now, they were "two islands" with separate boards and fiscal years, unable to share capital. "We were completely siloed," he said.
Merging the two entities was no small task. Interac needed approval from its 46 shareholder institutions, including banks, credit unions, payment processors and merchants. And it needed further sign-off from the Competition Bureau, Canada Revenue Agency, Department of Finance and Canada's banking regulator, the Office of the Superintendent of Financial Institutions.
In the end, the restructuring won "a strong chorus of support for Interac's future," Mr. O'Connell said. Now, combined under Interac Corp., "it's one brand, one product set, facing off against the market."
To boost its competitiveness, Interac will charge a new fee – a maximum of half a cent a transaction – and earmark the proceeds for research and development. That will be added to the existing cost-recovery fee Interac already charges, which its shareholders agreed to cap for another 10 years, even though the consent order that has kept them in check will expire in two and half years.
The new fee is charged to card issuers, payment processors and merchants, but Mr. O'Connell doesn't expect consumers will feel any impact from the extra half-penny. Canada has some of the lowest debit costs in the world, he said, "and this transaction doesn't change that."
But Interac processed 5.7 billion transactions in 2017, and that figure continues to grow, meaning the new fee could pour tens of millions of dollars more into Interac's coffers as it gears up to fend off – and partner with – emerging financial technology startups, known as "fintechs."
A spokesperson for Payments Canada, which is responsible for Canada's clearing and settlement systems, confirmed it has also struck an agreement with Interac to design a new real-time settlement system for payments as part of a broader modernization plan.
Overseeing Interac Corp. is a new board made up of eight nominees from shareholder institutions – including one from each of Canada's six largest banks – as well as four independent directors and Mr. O'Connell as CEO.
The independent members are Angela Strange, an investment partner at venture-capital firm Andreessen Horowitz; David Clanachan, the former Tim Horton's chief operating officer who now chairs parent company Restaurant Brands International Canada; Michael Roach, former CEO of information-technology firm CGI Group Inc.; and experienced banking executive Paul Vessey, the ex-COO of Visa USA Inc.
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