Submission to Finance Canada: Oversight of national payment systems

June 19, 2015


  1. The Commissioner of Competition (the "Commissioner") is pleased to make this submission in response to the Department of Finance Canada's (the "Department of Finance") consultation paper "Balancing Oversight and Innovation in the Ways We Pay: A Consultation Paper" (the "Consultation Paper").
  2. The Commissioner supports the Department of Finance's initiative to consult Canadians on how to best oversee the Canadian retail payments system. This is a timely undertaking as change is underway within this landscape.
  3. As discussed in more detail below, it is important that any new oversight mechanisms put in place enable innovative and competitive forces to thrive to the greatest extent possible, while maintaining safe and reliable payments systems for Canadians. This will likely lead to greater consumer choice, lower prices and higher levels of innovation, while still providing secure payments systems.
  4. Section 125 of the Competition Act (the "Act") grants the Commissioner the authority to, among other things, make representations to persons carrying on regulatory activities, such as this matter the Department of Finance is now consulting upon.

Summary of recommendations

  1. This submission provides a number of recommendations to the Department of Finance regarding oversight measures for the retail payments system. The Bureau submits that, if implemented, any oversight measures that seek to mitigate efficiency risks should:
    • Be minimally disruptive to market forces;
    • Provide consumers with the flexibility to select and easily switch between different payment services and methods;
    • Allow merchants that choose to accept emerging payment methods to apply surcharges to those methods of payment;
    • Allow companies within payments systems to participate in pro‑competitive collaborations while recognizing the potential risks of such collaboration. Agreements or arrangements that have the potential to prevent or lessen competition should be approved only in exceptional circumstances and where necessary to meet policy objectives; and
    • Recognize circumstances where abuses of market power may occur, but not restrain the mere exercise of market power.
  2. In regard to addressing end user interests, the Bureau submits that oversight measures should ensure that any representation made to the public is not false or misleading in a material respect, and provides sufficient information to enable consumer choice.

Bureau experience in the Canadian payments sector

  1. The Competition Bureau (the "Bureau") has considerable experience and expertise analyzing issues in the Canadian payments sector. This is due in part to pursuing complex enforcement cases, including an application to the Competition Tribunal (the "Tribunal") for a Consent Order in respect of Interac and contested proceedings before the Tribunal against Visa Canada Corporation and MasterCard International Incorporated ("Visa" and "MasterCard", respectively).


  1. The Tribunal issued a Consent Order in 1996 following an investigation into an alleged abuse of dominance by the major financial institutions that controlled the Interac Association ("Interac").Footnote 1 In its application for the Consent Order, the Bureau alleged that the charter or founding members of Interac jointly controlled the supply of shared electronic network services. The Bureau also alleged that the members had abused their control of such services by imposing restrictive policies that governed competitors' access to the Interac network. In the Bureau's view, these restrictive policies resulted in a substantial prevention or lessening of competition in the market for the supply of shared electronic network services, including by preventing new competitors from entering the market.
  2. The Consent Order, which was subsequently converted into a Consent Agreement, promoted competition and, in particular, increased consumer choice by preventing Interac's members from engaging in certain anti‑competitive practices. The Consent Agreement did this by, among other things, opening participation in certain Interac services to other commercial entities and by requiring that certain entities be provided with all necessary technical specifications and information. The Consent Agreement also required that Interac continue to be managed on a not‑for‑profit basis.
  3. Interac approached the Bureau to vary the Consent Agreement in both 2010 and 2013. While the Bureau did not consent to the requested variation in 2010, it did consent to the requested variation in 2013. In this instance, the Bureau was of the view that, over the course of three years, the marketplace had undergone considerable changes, including developments in networking and payments technologies having opened the door to new shared payments types (e.g. contactless payments and mobile payments) and new ways of networking.
  4. On September 11, 2013, the Tribunal granted Interac's request to vary the Consent Agreement,Footnote 2 thereby allowing Interac to put in place an independent board and to operate under a for‑profit model.Footnote 3 In the Bureau's view, this Consent Agreement provides an appropriate balance between providing Interac with the flexibility required to compete in an increasingly competitive marketplace and ensuring continued open and non‑discriminatory access to the Interac network. The expectation is that Interac will be able to fund research and development in new and innovative payment services, thereby increasing the competitiveness of the network and improving the services provided to consumers while remaining a viable low‑cost payment option.


  1. On December 15, 2010, the Bureau filed an application with the Tribunal under the price maintenance provision of the Act alleging that Visa and MasterCard were imposing restrictive rules on merchants who accept their credit cards ("Visa/MasterCard")Footnote 4. In the Bureau's view, these rules impeded or constrained competition for credit card network services, including competition with respect to credit card acceptance fees — fees that merchants typically pass on to their customers in the form of higher retail prices for goods and services. In particular, these rules impeded or constrained merchants from
    1. discouraging the use of more expensive credit cards by customers in favour of lower‑cost methods of payment;
    2. declining to accept certain credit cards, such as those with higher card acceptance fees; and/or
    3. applying a surcharge to transactions where the customer uses more expensive credit cards (the "No‑Surcharge Rule").
  2. The No‑Surcharge Rule effectively operates as a price parity requirement, ensuring that no purchase made by way of credit card will be more expensive than an equivalent purchase made by way of cash or a debit card. In the Bureau's view, in order to achieve economic efficiency, merchants should have an unfettered ability to differentially price transactions based on payment method, allowing price signals to be properly transmitted to consumers. This is consistent with the consensus view of competition authorities across the OECD,Footnote 5 as well as the recent ruling by the U.S. District Court for the Eastern District of New York in United States and Plaintiff States v. American Express Co., which dealt with American Express' anti‑steering rules.Footnote 6
  3. In its application in Visa/MasterCard, the Bureau requested that the Tribunal issue an order prohibiting Visa and MasterCard from entering into, imposing or enforcing the alleged anti‑competitive rules, or any other agreements, arrangements, policies, rules or regulations that influence upward or discourage the reduction of the card acceptance fees paid by merchants.
  4. On July 23, 2013, the Tribunal dismissed the Commissioner's application, finding that the requirements under the price maintenance provision of the Act had not been met.Footnote 7 Despite this finding, the Tribunal carried out an alternative analysis in the event that it was wrong in its legal interpretation. Under this analysis, the Tribunal found that there had in fact been an upward influence on prices and an adverse effect on competition in the market for credit card network services as a result of the No‑Surcharge Rule.
  5. In its decision, the Tribunal also suggested that the matters raised in the Commissioner's application would be better addressed by regulation:
    • Given the evidence adduced, it is clear that the proper solution to the legitimate concerns raised by the Commissioner of Competition is going to require a regulatory framework. We are typically reluctant to decline to exercise our discretion in favour of regulation as we agree that generally speaking even very imperfect competition is preferable to regulation.
    • However, this is an exceptional case and we are convinced that it makes more sense to begin with a regulatory approach rather than to back into it. A section 76 Order would be a blunt instrument and there will be technical hitches, unforeseen consequences, a need for ongoing adjustment and stakeholder consultation.Footnote 8
  6. On November 4, 2014, Visa and MasterCard submitted separate and individual voluntary proposals to the Minister of Finance agreeing to reduce their credit card acceptance fees to an average effective rate of 1.50% for a period of five years.Footnote 9 The purpose of these commitments is to reduce the cost of credit card acceptance for merchants in order to keep prices low for consumers. As a result of these voluntary proposals, the Minister of Finance indicated that there is no need for the Government to regulate the interchange rates set by Visa or MasterCard, but he has reserved the right to rescind acceptance of the commitments if fee reductions are not passed along to merchants or the overall cost of accepting credit card increases at any time during the period covered by the commitments.

The Department of Finance’s Consultation Paper

  1. In the Consultation Paper, the Department of Finance notes that government oversight is not fully extended to retail payments systems, but that effective oversight can help mitigate risks to its policy objectives. The Department of Finance identifies lack of competition, barriers to entry and market concentration caused by network effects as creating potential risks to efficiency in this sector. The Consultation Paper asks "How should the Government balance the need to mitigate risks with the objectives to promote innovation and competition in the payments sector?"
  2. This submission discusses efficiency risks by identifying areas where these risks may be realized in the retail payments landscape and outlining considerations for those risks. In general, the Bureau supports measures that:
    • Provide the maximum possible scope for market forces to determine outcomes, while still achieving legitimate policy objectives;
    • Ensure flexibility for competitive switching among products;
    • Allow pro‑competitive collaborations between competitors; and
    • Discourage abuses of market power.
  3. In regard to considerations surrounding end user interests, the Bureau supports measures that improve transparency and disclosure in retail payments systems.
  4. The Bureau anticipates that by identifying specific competition issues in this sector, the Department of Finance's chosen measures will be targeted to its policy objectives and will be as minimally intrusive to market forces as possible.

Providing scope for market forces

  1. The Canadian payments landscape is vast and impacts the lives of Canadians on a day‑to‑day basis. Given its size and reach, ensuring that market forces thrive within this system will likely lead to substantial benefits for consumers, businesses and the economy at large. For instance, it has been estimated by the Task Force for the Payments System Review that with a fully modernized payments system (which would require measures not discussed in this submission), the Canadian economy could save as much as two percent in productivity gains, which equates to $32 billion.Footnote 10
  2. Productivity gains are realized when firms actively compete against each other for customers, and when they are forced to innovate to compete with emerging competitors. In this environment, firms will lower prices, invest in new technologies and provide customers with more choice.
  3. Therefore, regulations that restrict market forces should only be implemented when necessary to achieve legitimate policy objectives, and should be designed to be minimally disruptive to market forces. 

Ensuring flexibility for competitive switching

  1. While new services presently represent a small percentage of total payment transactions in Canada, research shows they are growing quickly: the Canadian Payments Association has found that the compound annual growth rate from 2008 to 2011 for the value of mobile wallet and peer‑to‑peer transactions was 43.5% and for prepaid cards it was 46.9%.Footnote 11
  2. The Department of Finance has taken steps to account for some of these emerging technologies in the payments landscape. On April 13, 2015, enhancements were made to the Code of Conduct for the Credit and Debit Card Industry in Canada (the "Code") to account for mobile payments. The Code includes policy elements that support competition in the areas of mobile payments by:
    • Ensuring that merchants who accept credit card payments from mobile wallets or mobile devices will not be obliged to accept debit card payments from that same payment card network, and vice versa;
    • Ensuring that consumers can select default settings on mobile devices and mobile wallets and that they can select between credit card or debit card applets;Footnote 12 and
    • Not requiring merchants to accept contactless payments (including those through mobile wallets or devices) at the point of sale, or to upgrade point‑of‑sale terminals to enable contactless payments, and allowing merchants to opt out of accepting contactless payments made from a mobile wallet or mobile device, while maintaining all other aspects of their existing contract without penalty.
  3. In the Bureau's view, these enhancements to the Code are an important step forward.
  4.  In general, when consumers can easily switch between products, firms will likely have an incentive to compete on price and quality dimensions. As such, the Bureau is of the view that measures allowing consumers to switch not only between applets within their mobile wallets but also between competing mobile wallets would be beneficial to consumers. Ease of access to competing mobile wallets is important to their development in the payments landscape, and will ensure consumers have competitive choices.
  5. Additionally, the Bureau views measures that allow merchants to opt out of emerging payment methods that have additional or increased merchant fees as important and further submits that merchants who decide to accept emerging payment methods should be free to apply surcharges. These measures may provide steps towards avoiding competitive effects analogous to those in Visa/MasterCard, and will likely reduce the risk of merchants passing some or all of the costs of these payment methods on to all consumers in the form of higher retail prices for goods and services, regardless of whether consumers choose to pay with lower cost forms of payments. In the Bureau’s view, without the ability of merchants to surcharge credit card transactions through mobile wallets or payments, refuse to accept certain credit cards through mobile wallets or payments, or otherwise effectively encourage their customers to use lower cost methods of payment (including credit cards with lower card acceptance fees), neither Visa nor MasterCard, nor any mobile wallet providers using their respective networks, have any meaningful incentive to compete with respect to the level of card acceptance fees.Footnote 13
  6. While recognizing the two‑sided nature of credit card networks, which face interdependent demand from merchants and cardholders, these complications are not sufficient to nullify the likely pro‑competitive effect of such measures. As noted by Dr. Ralph Winter in his reply expert report in Visa/MasterCard:
    • the 'balancing' problem that a credit card company faces between low prices for merchants and increased expenditures on issuing activities is the same problem that any firm faces in balancing between low prices and non‑price promotions or strategies….[I]n competition policy generally, a practice that raises prices as a result of a suppression of competition — whether it is a vertical restraint, a facilitating practice leading to less competition, or explicit collusion — cannot be defended on the basis that the excess revenues are being spent productively on non‑price dimensions such as promotion, quality‑enhancement or innovation… Competition policy is based on the principle that markets without anticompetitive activity should be relied upon to yield the appropriate mix of price and non‑price competition. [emphasis in original]Footnote 14
  7. As described above, in Visa/MasterCard the Tribunal found that there was an adverse effect on competition in the market for credit card network services where merchants had no ability to surcharge credit card payments. 
  8. In the end, consumer switching can work in tandem with measures providing merchants with options to manage fees. Together, these can protect consumers against anti‑competitive effects in emerging payment services. If consumers are able to switch between mobile wallets and merchants can opt out of accepting certain wallets or apply surcharges when accepting such wallets, merchants can encourage consumers to use lower‑cost options and discipline merchant fees without sacrificing their participation in emerging payments. As such, ensuring mobile wallets compete with one another, regardless of a mobile device's operating system, is another important aspect for encouraging competition.

Allowing pro‑competitive collaborations between competitors

  1. Collaboration among competitors in the payment sector has gained attention in the media recently, as emerging technologies enter the Canadian marketplace. For example, in April 2015, The Wall Street Journal reported that several of Canada's largest banks formed a consortium to negotiate with Apple Inc. ("Apple") for the launch of Apple Pay. The article indicated that the consortium would deal with security issues related to the new service as well as provide leverage to the banks in their negotiations with Apple.Footnote 15
  2. Additionally, it has been suggested that collaboration may be important for advancing the industry and creating new competition. In its review of other jurisdictions, the Mobile Working Group of the Task Force for the Payments System Review found that mobile payments are more likely to find a foothold where there is collaboration between market participants, namely wireless carriers, financial institutions and retailers.Footnote 16 However, the Bureau recognizes that some of these participants may be competitors in certain markets.
  3. Collaborations between competitors are not without their risks. These types of collaborations may lead to competitors communicating business practices and strategies to each other, resulting in less innovation, reduced quality and higher prices.
  4. In general, to ensure that collaborative arrangements do not inhibit the beneficial forces of competition, the Bureau assesses collaborations between competitors using the approaches set out in its Competitor Collaboration Guidelines.Footnote 17 In circumstances where competitors form agreements to fix prices, allocate markets or restrict output, this can constitute an indictable offence under the Act, and those found responsible can be subject to imprisonment and fines. Other forms of competitor collaborations, such as joint ventures and strategic alliances, may be subject to review under section 90.1 of the Act.
  5. With respect to agreements or arrangements between federal financial institutions, section 49, a criminal provision of the Act, may apply. Where the activity is within the scope of subsection 49(1) but is exempted by subsection 49(2), agreements or arrangements may be reviewable under the civil provisions (e.g., section 90.1) where the agreements are likely to substantially lessen or prevent competition. However, there may certain exceptions to the application of the civil provisions. For example, subsection 90.1(9) creates an exception for agreements or arrangements in respect of which the Minister of Finance has issued a certification for reasons of financial policy. As another example, subsection 90.1(4) provides for a trade‑off analysis in which the efficiency gains that are likely to be brought about by an agreement or arrangement are evaluated against the anti‑competitive effects that are likely to result. 
  6. Applying its competitor collaboration framework, the Bureau recognizes that, within the retail payments landscape, some competitor collaborations may be pro‑competitive, enhancing innovation and spurring dynamic competition. For example, collaborative arrangements can allow firms to agree on common standards that support interoperability between payment systems or methods. In general, allowing for beneficial collaboration results in the realization of efficiencies and could drive down prices to merchants and consumers.
  7. Hence, the Bureau is of the view that if the Department of Finance develops an oversight mechanism, it should allow companies to collaborate in respect of activities that do not fall within the scope of sections 45, 49 and 90.1 of the Act. In the Bureau's view, agreements or arrangements in respect of activities described in section 49 or 90.1 should be approved only in exceptional circumstances and where necessary to meet policy objectives.
  8. As an aside, the Bureau encourages businesses in this sector to refer to the Bureau's Corporate Compliance Programs Bulletin,Footnote 18 for guidance on how to design a credible and effective corporate compliance program to prevent or minimize their risk of contravening the Act, and to detect contraventions should they occur.

Discouraging abuses of market power

  1. The Consultation Paper notes that certain market dynamics are at play in the retail payments sector that can create inefficient outcomes for consumers. The Consultation Paper suggests that network effects are an example of one of these dynamics and that they can lead to market concentration and anti‑competitive behaviour.
  2. The Bureau agrees that network effects are an important characteristic of payment systems. Network effects occur where the value of the products increase to existing users when new users are added to the network. This added value can present itself to both customers and merchants, but can amplify the effects of economies of scale or scope causing incumbents to have competitive advantages over new entrants. For this reason, some new entrants may decide to, or may be required to, partner with, or connect to the services of, an incumbent in order to enter the market.
  3. It may be that network effects and other similar market dynamics in payment systems cause a firm or firms to have, or gain, market power in the retail payment sector. Market power is the ability of a single firm, or a group of firms, to profitably maintain prices above the competitive level, or other elements of competition such as quality, choice, service or innovation below the competitive level, for a significant period of time.Footnote 19 However, the mere exercise of market power, whether on a unilateral or coordinated basis, does not by itself raise concerns under the Act. Rather, the Act will come into play only where a firm engages in conduct or practices that abuse its market power.
  4. As such, the Bureau draws a distinction between market dynamics that create market power and conduct or practices that constitute abuses of market power. The Bureau suggests that the former should not fall under policy oversight. Rather, given that some new entrants need to connect to an incumbent's services, the Department of Finance should consider the incumbents' incentives and opportunities for anti‑competitive conduct when developing policies in this area.
  5. The Bureau's view on potential abuses in this area is informed by enforcement experience. For example, as described above, the Bureau was concerned with how Interac's members were imposing policies that governed competitors' access to the Interac network. The Bureau alleged that the policies impeded the entry or expansion by competitors and that consumers were deprived of potential competitive benefits arising from additional services being offered over Interac.
  6. As such, it is the Bureau's position that where oversight measures address anti‑competitive conduct by incumbent firms but otherwise allow for usual market dynamics, competitors will likely have a greater ability to enter the marketplace with competitive offerings in the form of lower prices or better quality or innovative products.

Improved transparency and disclosure in retail payments systems

  1. Beyond the competition issues raised above, the Bureau recognizes the importance of providing clear, accurate and sufficient information to consumers and merchants regarding products and services. Providing transparent information ensures that consumers and merchants are informed about their purchasing decisions. As a result, service providers will have a greater incentive to reduce prices and offer higher quality and innovative products.
  2. To this end, the Bureau applauds the extension of the Code to include new mobile payment services. As a result, mobile payment services will be required to provide clear and accessible information on fees and rates. This is beneficial because when merchants are provided the same information and options regardless of the processing method, there is improved transparency regarding costs, and merchants can make more informed decisions regarding their use of payment services.
  3. The Consultation Paper identifies the issue of maintaining truthful advertising practices as an element of the "Market Conduct Risk". It is essential from the Bureau's perspective that businesses ensure that any representation made to the public to promote payments systems is not false or misleading in a material respect and that it provides sufficient information to enable informed choice.
  4. These principles should be applied to all actors within the payments landscape to ensure consumers and merchants receive clear and accurate information. This is paramount given the reach and importance of payment services.


  1. With the development of emerging retail payment technologies, there is an opportunity to usher in a new era of low‑cost, convenient payment systems. However, in order for Canadians to fully benefit from these advancements and for companies to take full advantage of the digital economy, competitive forces within the Canadian payments landscape must be nurtured to spark innovation and drive this sector forward.
  2. Should additional oversight measures be adopted in the retail payments sector to increase competition and reduce risks of inefficiency, those measures should restrict market forces only to the extent necessary to achieve legitimate policy objectives, such as enabling consumers to switch services and discouraging both anti‑competitive collaborations and the abuse of market power. In addition, it will be important for the industry to be transparent and provide full disclosure to merchants and consumers.
  3. By addressing the issues raised above, oversight by the Department of Finance has the potential to foster a competitive environment. Competition in retail payment systems will reduce prices, expand services and enhance innovation in this important sector — one that impacts the lives of Canadians on a daily basis.