The Canadian payments industry never rested in the shadows of the US-based payment companies American Express, Discover, MasterCard and Visa (Big Four Issuers). While it accepted the infrastructure of the branded payments networks, the country protected its pillar banks, Bank of Montreal (BMO), Bank of Nova Scotia (Scotiabank), Canadian Imperial Bank of Commerce (CIBC), Royal Bank of Canada (RBC), and Toronto-Dominion Bank (TD), from acquisition by large US banks. For 40 years, it constrained card growth by permitting banks to issue only one payment card brand, rather than the global practice of permitting banks to issue dual products, such as MasterCard and Visa. One of the country’s most significant innovations was the 1984 launch of Interac, by a consortium of Canadian banks to provide free debit card processing to merchants, in contrast to interchange assessed by US card products. Innovations continued, as the country outpaced the US with 2010 adoption of EMV.
The Canadian Mint announced its entry into the payments business with a stored value product aimed at small purchases and Person-to-Person (P2P) payments. The country specifically targets these electronic niches and allows value to be stored on phones, USB devices, computers or cloud accounts. This disruptive play compares, on a much smaller basis, to indigenous card networks that will compete with the Big Four Issuers in Brazil (ELO Card), Russia (RusCard), India (IndiaPay) and China (Union Pay), though it specifically addresses small payments and P2P. Once the market matures, we expect to see a shift of $30 billion in small value/high volume payments, and the ability to shift similar volume in P2P payments as MintChip becomes socialized into the Canadian Economy.
MintChip is very different from other virtual currencies, such as Bitcoin, because of its sovereign backing. We have consistently challenged the Bitcoin model because it contends with the laws of many lands (including the US) which prohibit alternative currencies. We particularly like the MintChip model because it attacks the most expensive segment of payments, which ironically carries the least risk.
The wake-up call to American card brands is that their current business model is at risk. While indigenous networks in developing countries such as the BRIC nations will probably not cannibalize much of the $10 trillion passing through MasterCard and Visa’s global switches, Canada’s model is easily transportable into every country aimed directly at Canada’s branded card volume, which surpassed $350 billion in 2011. In addition, after a few years of burning in the model, Canadians could just as easily raise thresholds into higher transaction value segments. The ability to ensure taxation on cross-province (or in the US case, cross-state) sales tax would be an additional incentive.
The US market and other mature card markets from Australia to the United Kingdom will certainly have to consider our northern neighbors on this one, because MintChip looks like a winner. It solves the virtual currency issue with sovereign backing as solid as the Canadian Dollar, enhances taxation and provides a low cost option.
And, at the point of sale, it eliminates the need for all that change rattling in your pocket.
To learn more, CEB TowerGroup Retail Banking members can access EMV in the United States: Essential Perspectives for Issuers and Acquirers