Canada's right next door and has lots of English speakers, so it might seem the ideal place for American independent sales organizations to expand.
But the two countries' business and cultural practices differ in ways that Americans may not expect, say Canadian ISO executives and industry experts.
Those differences do not, however, make Canada a prohibitively difficult place to do business.
"Americans either think this might as well be like Mars — somewhere totally foreign — or, 'I do it this way in Texas. It's going to work in Toronto,' " says Michael Back, president and CEO of Collective Point of Sale Solutions Ltd. of Toronto. "It's neither of those things. There are nuances in the Canadian marketplace that are very, very different than in the States."
Some of the most significant differences include the role of banks in the payments processing industry, the EMV chip-and-PIN card standard, demographics and regulations.
Unlike the U.S., which has several thousand banks, Canada has a handful of large banks and a few smaller ones, Back says, and those banks have historically played a major role in transaction processing.
"Merchants are heavily influenced by whom they do their business banking with because those relationships are very critical," says Marcus Dagenais, vice president, business development, at Caledon Card Services of Toronto.
A merchant is, in turn, likely to work with the acquirer its bank works with; Dagenais cites Canada's largest acquirer, Moneris, as an example.
"The bank sponsors for Moneris are Royal Bank of Canada and Bank of Montreal, two of the largest banks in Canada. So if you're a business and your business bank account is with Bank of Montreal, it's highly likely that you will end up with a Moneris merchant account," he says. "That's also why Moneris typically does not deal in the ISO world — because it doesn't have to. It's got two solid bank channels."
When Dagenais receives calls from American ISOs inquiring about the Canadian market, he finds they are often surprised to learn that their assumptions about margins and market size are wrong.
"It's no longer the case that an American ISO can come here and expect to get 100 basis points. The margins are very, very thin here," he says. "Maybe 5% to 6% of merchants in Canada right now are dealing with an ISO. The vast majority of credit card volume is going through the major acquirers directly."
For ISOs to compete in Canada, Dagenais says it's essential for them to differentiate themselves by targeting a specific market vertical and offering proprietary products or services. Otherwise, they'll end up fighting a price war.
Another aspect of the Canadian market that surprises Americans, says Dagenais, is related to the use of EMV.
"A lot of Americans know that we do have EMV," he says. "But that comes along with a whole host of other issues. In the U.S., if you're a merchant and you buy a terminal and then switch your acquiring relationship, you can use that same hardware. That doesn't work in Canada. Software on the hardware is actually locked to the acquiring network. So if you change your acquirer, you have to swap out that hardware."
Dagenais estimates that, as a result, 80% of the point-of-sale terminals in Canada are rented rather than owned. He also hasn't seen free terminals used as a sign-up incentive.
"With EMV, it's a whole new technology," Dagenais says. "There are a lot more moving parts in those terminals, so our average terminal price is probably double what it would be in the U.S. Canadian ISOs aren't able or willing to subsidize the cost of the hardware."
Besides the differences in the payments system, the country itself differs from the U.S. in ways that steepen the learning curve for American ISOs considering expansion.
"Not the least of which is that we're one of the largest countries on the planet with a population the size of California's," says Back. "We all live within about a hundred miles of the border east to west."
That geographic dispersion can make the Canadian market more challenging than the U.S. market.
Some of those agents would likely need to be multilingual. Residents of the province of Quebec predominantly speak French, and businesses operating in Quebec must give their customers the opportunity to conduct business in French, says Kashif Zaman, partner in the banking and financial services group at Toronto-based law firm Osler, Hoskin & Harcourt LLP. Many Canadian businesses operate in both languages, but private enterprises are only required to do so if they operate in Quebec.