Monday, November 17, 2008

Banks Get Go-ahead to Issue Both Visa, MasterCard

The Globe and Mail, Tara Perkins, 17 November 2008

The head of the Competition Bureau is ushering in a new era of credit card competition that she hopes will lead to increased choice and better service for consumers.

In a letter to the country's major financial institutions, commissioner Sheridan Scott says she believes banks should be allowed to issue both Visa and MasterCard branded credit cards.

Up until now, Canada's banks have had to choose one or the other. Most of the country's big six banks issue Visa cards, while Bank of Montreal and National Bank of Canada issue MasterCard.

That's because, until recently, Visa and MasterCard were associations owned by the banks that issued their cards. But Visa Inc., which is based in San Francisco, became a publicly traded company this spring, two years after Purchase, N.Y.-based MasterCard Inc. made the transition from an association to a public firm.

The bureau had previously been worried that banks that were in both the Visa and MasterCard associations would be able to influence decisions on each side and restrict competition in the marketplace.

“In light of the restructurings and subsequent information obtained from various industry participants, the Bureau is no longer concerned that there is a potential for a member, or group of members, of one credit card network to negatively influence the competitive operations of another card network through dual governance,” she said in her letter.

It will take some time for banks to begin issuing new brands of cards, but the decision will likely cause a wave of competition between Visa and MasterCard that will result in new and innovative products, said a banker who did not want to be identified.

Maurice Hudon, senior executive vice-president of Bank of Montreal, said the bank is in favour of competition that provides choice to consumers.

The decision is a boon for MasterCard, which can now seek to do business with more of the big banks. The company said this will make Canada a more attractive market.

“We're confident in Visa's ability to operate in a dual marketplace,” Visa Canada spokeswoman Amy Cole said.

“The experience in other countries is that duality results in a competitive marketplace that leads to an increase in the variety of products and services available to personal and business cardholders.”

This shift comes at a time of major upheaval for the country's payments systems. The Interac Association, the non-profit organization that runs Canada's main payments network for automated banking machine and debit transactions, has asked the Competition Bureau about a restructuring that would likely allow it to make a profit.

Interac wants the bureau to loosen its shackles so that it can compete more effectively with Visa and MasterCard, which are attempting to break into the debit card business in Canada.

In this landscape, the country is migrating to the use of “chip” cards, which use a microchip and a personal identification number (PIN), rather than a magnetic strip. Chip cards use technology that could allow a range of new products from combined debit-credit cards, to payment cards loaded with coupons.

To prepare for expensive new offerings, the so-called “interchange” fees that retailers must pay to accept credit card transactions have been rising, causing protests from merchants who say they are carrying the cost of new credit card perks for consumers.