Canada's payments industry is at a critical crossroads.

Despite making significant strides in modernizing certain aspects of payment technology, from migrating to a chip-and-PIN environment to building a respectable base of contactless cards and merchant acceptance, crucial regulatory issues are mired in fog, experts say.

A key unresolved question is whether Visa Inc. and MasterCard Worldwide will break through a rule preventing them from issuing branded debit cards in Canada, which some observers contend would upset a landscape dominated by the Interac Association, which operates Canada’s sole PIN-debit network.

"One of the things nobody knows is where the whole story about Visa and MasterCard debit is going in Canada," Christie Christelis, president of the Canadian payments industry consulting firm Technology Strategies International, tells PaymentsSource. "That, and a lot of other issues, are on hold because regulators have so far not addressed things head-on."

Canada's government is making progress, but very slowly, in tackling the forces of new technology and competitive threats to existing programs.

The government in early 2010 put the brakes on major card networks' attempts to introduce debit cards when it issued a Code of Conduct for the Credit and Debit Card Industry, a voluntary agreement preventing further development of debit schemes (see story).

The Code of Conduct was a "hastily crafted document" meant to be temporary, Christelis wrote in his recently released Canadian Payments Forecast 2012 report (see story).

Late in 2010, Canada's Minister of Finance formed a Payments System Review Task Force to develop a guide to future payments industry development, Christelis notes in his report.

The agency released the results of its two-year review on March 23 (see report).  Dubbed "Moving Canada into the Digital Age," the report calls for overhauling Canada's payment system, noting most nations are outpacing Canada in its transition to digital payments.

The country is "controlled by Canada's major banks and other key institutions," and "their interests are best served by keeping at bay new entrants to the system," the task force determined in its report.

Small businesses lack many digital alternatives to paper checks, consumer funds-transfer services are costly, and there is an "absence of a healthy competitive environment," the report stated.

Canada must pass legislation to create a body to oversee the payments industry and help transform its infrastructure, the report contends. It also recommends drafting legislation to amend the Canadian Payments Act "by overhauling the governance, business model and powers of the Canadian Payments Association."

But the long-awaited report was "underwhelming" and failed to provide specific guidance on competitive issues, Christelis contends.

"Interac's future is under threat, and it is unclear what will happen next," he says.

While payments industry players digest the task force's report, Canada's Competition Bureau, an independent law-enforcement agency set up to ensure the country’s businesses and consumers are treated fairly, is seeking to remove some Visa and MasterCard credit card industry rules (see story).

The bureau's moves are separate from the task force and debit-regulation issues, but the outcome could be significant, Christelis suggests.

"It is unclear how that will be resolved, but it may have more impact than efforts of the task force, which fell far short of expectations,” he says. “There is much left to be decided, and a lot up in the air in Canada."

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