Canada Should Welcome Foreign Banks, says Ottawa - Issue 13 - September 2006

Canada Should Welcome Foreign Banks, says Ottawa

Meanwhile, the world’s fastest growing economy, China, imposes new restrictions on foreign banks

Ottawa, August 19 – Federal officials in Ottawa have told Industry Canada that Ottawa should encourage foreign investment in Canada, including in the banking sector. Internal government documents opine that takeovers and other foreign investment would be a net benefit to Canada. The documents were obtained by Ottawa researcher, Ken Rubin, who informed the FT in an interview that some of them predate the Harper government, while others do not.

Under the federal Bank Act no individual investor may hold more than 10% of the shares of a bank listed in Schedule 1 and the aggregate holdings of non-residents and their associates may not exceed 25% of all shares. A similar rule applies to federally incorporated trust companies and loan companies under the Trust and Loan Companies Act. These rules have been in effect in Canada since the 1960s when a wave of concern over American ownership of Canadian banks motivated Ottawa to enact them.

Canadian Schedule 1 banks employ approximately 200,000 people and account for more than 90% of the assets of the banking system and 65% of the assets of all deposit taking institutions. They also account for virtually all electronic payments in Canada, including credit and debit payments through the Visa, MasterCard and Interac associations. Schedule 1 banks control virtually all issuing and acquiring in Canada.

Electronic transactions businesses have long been complaining of a lack of competition in the Canadian banking market. As such, news of possible entry of foreign banks into the Canadian market may be positive. However, permitting foreign banks to enter Canada will not, of itself, address issues of competition in Canada. Acquisition by US payment processors, Chase-Paymentech and Global Payments, of the acquiring businesses of a couple Canadian banks had no obvious positive effect on competition. Instead, it continued the entrenched market shares of those businesses established prior to the acquisitions.

The rising value of the Canadian ‘petro-Dollar’ could make Canadian banks an attractive, if costly, target for foreign acquisition. After foreign acquisitions of Eaton’s, the Bay, Moslson and Fairmount Hotels, some might say that it is just a question of time before Canadian banks become open for US or other foreign purchase.

Chinese Take Opposite Stance

Before opening the floodgates to foreign banking investment in Canada, Ottawa should perhaps take note of the opposite trend in the world’s fastest growing and 4^th largest economy, China.

On August 23, 2006, it was announced that China’s State Counsel is expected to issue new rules in November or December that will require foreign banks to both incorporate local Chinese entities and capitalize the local entities with no less than the equivalent of $125.4 million U.S. Dollars if they wish to offer credit card, mortgage or other services to Chinese consumers. Foreign banks operating in China now own their Chinese branches through foreign corporations. Under current regulations, foreign banks carry out Yuan transactions in only 25 cities. Under the new regulations, without local incorporation and capitalization, foreign banks would not be permitted to carry out Yuan-based transactions with individual consumers and would be restricted to servicing only businesses.

Ottawa’s interest in opening to foreign direct investment coupled with Harper’s conservative government may be the combination necessary to actually invite foreign banks to enter the Canadian market. The effects on competition of these proposed changes are yet to be seen.

By Adam N. Atlas, Editor in Chief

NOTE FROM THE EDITOR

Every payment business in Canada perks up when there is talk of additional competition in the Canadian banking industry. More foreign participation in Canadian banking might bring that competition, it might not. Proponents of greater foreign participation in Canadian banking should remember that Canadian banks are still eager to merge with each other. Those mergers would quash the already sparse competition between them. Foreign participation in Canadian banks may simply be as shareholders of our small collection of large banks.

As any Canadian entrepreneur will tell you, Canadian banks appear to operate under the motto: “Please convince us why we should serve you today.” Having some additional foreign banks in Canada might persuade Canadian banks to rethink their customer service mottos. As a sign of what a future Canadian legislator might say on the subject of competition in Canadian banking, this issue includes the full text of a speech by US Senator Patrick Leahy, Ranking Member, And Committee On The Judiciary Hearing, on the subject of competition in the US credit card business.

Readership and advertising with the FT is steadily growing. We have made a corresponding enrichment of our content, and we hope you will enjoy it.

We wish all readers a great Canadian back to school season.

Adam N. Atlas

Editor in Chief

NEWS

HSBC Enhances North American Payments, and Cash Management Services

Toronto, June 26 06- HSBC's Global Transaction Banking Services has announced it will provide clients with a centralized-secure payment service across Canada, the United States and Mexico. The payment service is geared toward clients that need to make payments to trading partners within North American Free Trade Agreement (NAFTA) countries.

HSBC's payment process is flexible and allows clients to send check, wire money transfers and Automated Clearing House (ACH) payments in one file-format, whether those payables are in a single currency or in multiple currencies within North America. Through its presence across NAFTA countries, HSBC is able to facilitate all payment types into one consolidated file via HSBC Connect, a secure host-to-host file-based delivery channel.

INETCO Systems Partners with TII Smart Solutions

Vancouver, June 13 06 - INETCO Systems announces that it has entered into a partnership with TII Smart Solutions, a leading software solutions provider to the financial industry in Central America. Under their agreement, TII Smart Solutions will supply INETCO's suite of payments communications products to the Central American and Caribbean market.

INETCO solutions are used in over 40 countries for connecting all types of ATMs and POS terminals to TCP, SNA, X.25, and legacy transaction hosts and networks. As well as protocol conversion, they serve as transaction aggregators, transaction routers, and transaction firewalls. Web based management capabilities provide online control and viewing of the transaction network.

Identity Theft Moves from Phishing to Pharming

Ottawa, July 10 06- In our fast paced world millions of online transactions are conducted every day, it didn't take long for most users to become aware of phishing scams and avoid the fraudulent e-mails. But even the smartest surfer might be fooled by the next generation of fraudsters that have developed a more deceitful way of tricking consumers known as pharming.

This new form of fraud is above all damaging because it doesn't require any clicking of external links. Instead, it re-directs the browser to a fake site even when the proper URL is entered. With phishing, criminals send out mass e-mails made to look as if they are from legitimate companies. These e-mails are usually easy to spot because they tend to have spelling mistakes, not have the customer's name attached, and ask for information a bank wouldn't ask for online.

On the other hand, pharming is much harder to notice. Hackers set up fraudulent web sites to look exactly like the real site; they redirect the users' browser to their site and steal any personal information that is provided.

Although there have been no large-scale cases of pharming yet, the fact that users could enter what they think is a genuine URL and unwittingly submit personal information makes for a scary scenario.

Pharming has been around for some time. Also known as framing or domain name spoofing, the latest technique is known as domain name system (DNS) poisoning. The URL for a website is linked to a numeric IP address and that address is what brings users to the proper web site. Hackers can crack the DNS and change the address linked to the URL.

In the future new firewalls and security certificate software will become increasingly important in keeping predators out. Some companies are also looking into creating holograms or other optical cues for their websites that cannot be duplicated, similar to security features found on bank notes.

20,000 Canadian Merchants in MasterCard QSR Program

Toronto, June 5 06- MasterCard International announced that more than 20,000 merchant locations across Canada are enrolled in the MasterCard Quick Payment Service (QPS) program, which facilitates credit card payment at quick service retailers. MasterCard QPS offers consumers and merchants quick, secure and easy transactions by eliminating the need for a signature or receipt for purchases made with a MasterCard card.

MasterCard QPS was developed for use in retail and service environments where speed of payment is critical to the transaction, such as movie theatres, parking garages and quick service restaurants.

MasterCard PayPass®, the contactless payment service, and MasterCard QPS work well together for merchants in quick service environments. MasterCard PayPass allows cardholders to simply tap their PayPass-enabled MasterCard card or on a specially-equipped terminal that utilizes a radio frequency chip.

Netifice Closes Precidia for Shell Program

Ottawa, June 6 06 – Precidia Technologies Inc., a global leader in the design and manufacture of Internet Protocol (IP) access devices, announced that it has been chosen by Netifice Communications Inc. to provide network connectivity to serial equipment as part of Shell Oil Products U.S. ‘CoolBand’ initiative. This innovative program consolidates a wide range of convenience store/petroleum equipment, from payment processing such as Ruby™ terminals, to tank monitors and video surveillance, onto a single broadband network infrastructure, replacing a VSAT connection.

Precidia’s compact, plug and play iPocket232 connects existing serial devices to the Netifice broadband IP network via Ethernet. This customized iPocket232 works seamlessly on any broadband network. By connecting POS equipment to a broadband WAN, rather than VSAT, transaction authorization speeds are improved. Moreover, for many site operators the overall cost of networking can be reduced by implementing a single multi-application solution.

Canadian Chip Card: Update

Vancouver, June 20 06- Next year Visa, MasterCard, and Interac plan to introduce "smart card" technology in Canada as part of an effort to reduce credit-card fraud by 80 percent. Smart cards contain an encrypted chip that makes counterfeiting all but impossible. Like debit cards, smart cards work with a PIN rather than a signature.

However, unlike a magnetic stripe debit card, criminals cannot use a smart card unless they know the PIN and have the actual card. "This new chip has been out about five years and it has not been compromised anywhere in the world," said Frank Van Nie, Visa's vice-president of relationship management. "Each of these chips has its own ID. If you took the data off this and put it onto a different chip it wouldn't work." Next year's smart card rollout will also involve the replacement of 25 million Canadian-issued Visa cards and terminals at more than 600,000 merchants. Van Nie could not estimate the cost of the changeover.

Hypercom & Verifone Pitch Their Handheld Payment Terminals

Ontario, June 24 06- Two point of sale terminal companies Hypercom Corp., and Verifone Holdings Inc. are rolling out portable, wireless payment systems for use in the restaurant, hospitality and service industries. Hypercom's M4100 Blade, which was unveiled at the Electronic Transactions Association's Annual Meeting and Expo in Las Vegas, accepts credit and PIN debit cards and has an optional contactless reader.

The 7.1 ounce device also accepts smart cards that use the Europay, MasterCard, Visa format. The M4100 Blade offers all of the same features as Hypercom's countertop counterparts, and though it is aimed mainly at the North American restaurant industry, there are other markets where it could be used.

Verifone is also introducing its Vx 670, which accepts credit and PIN debit cards and prints out an itemized receipt for people to sign. The company announced the device's development in November and said this week that it will begin shipping it to North American restaurants next month.

Verifone is confident that the Vx 670 can reduce the number of trips a waiter must make to a table, which in turn will help restaurants increase their sales. In addition, wireless payment systems such as the Vx 670 will help ease consumers' fears about skimming, since cards will be processed at the table rather than in an unseen part of the restaurant.

Wi-Lan Acquires Assets of Ensemble Communications and Reaches Settlement with Ottawa

Calgary June 24 06- Wi-Lan Inc. has struck a deal to acquire Ensemble Communications Inc. and settled a royalty dispute with Ottawa in a move to restructure the company to focus on its wireless technology patents.

The telecom technology company said that its newly created patent licensing subsidiary, Wi-Lan Technologies Corp., has bought substantially all the assets of Ensemble Communications, based in La Jolla, Calif. The move allows Wi-Lan to buy back its patent portfolio and relieves the company of a large royalty commitment.

Under terms of the deal, Wi-Lan will buy back the patent purchase and royalty commitment deal between the two companies negotiated in 2004, which provided the Canadian company with its current WiMax MAC wireless patents.

As part of the prior deal, Ensemble acquired licensing rights to the Wi-Lan patent portfolio as well as significant revenue sharing on any licenses Wi-Lan sold in the future.

The announcement relieves Wi-Lan of these commitments. Wi-Lan also gets inventors' files, drawings and notes for other technology Ensemble was working on prior to its windup in 2004, as well as a license to a number of additional patents that are complementary to Wi-Lan's current portfolio.

In return, Ensemble will receive two million Wi-Lan common shares, worth about $1.1 million at the Calgary Company’s current stock price of 56 cents.

National Bank of Canada and UniCredit Group sign cooperation agreement to offer services in Central and Eastern Europe

Montreal, May 30 06- National Bank of Canada announced that it has signed a cooperation agreement with UniCredit Group. As a result of the agreement, National Bank business clients will now have access to the services UniCredit Group provides in the countries of Central and Eastern Europe, Russia, Turkey and Ukraine.

This agreement with one of Europe’s premier financial institutions will enable National Bank to better assist commercial clients in their dealings with their counterparts in 16 countries, among them Poland, the Czech Republic, Hungry, Croatia, Romania, Bulgaria, Russia, Ukraine, Turkey and the Baltic States.

Listed on the Milan Stock Exchange, UniCredit Group is one of Europe’s largest banks in terms of market capitalization. It operates 7,000 branches, employs 140,000 people and has EUR 787 billion (CDN $1,133 billion) in total assets. The group is a banking services leader in the countries covered by this agreement.

Canadian Mortgage Fraud Booming

Montreal, August 21 06- Mortgage fraud is becoming over a billion dollar a year industry in Canada.

Mortgage fraud occurs in two ways.

• The first, involves individuals fabricating their qualifications for a mortgage when buying a house.

• The second involves fraud for profit where someone intentionally defrauds a lender or a homeowner of their interest in a property.

The latter is often accomplished by identity theft. Ownership of a property is transferred fraudulently from the rightful owner to the criminal who then sells or mortgages that interest and makes off with the funds. The problem is becoming more prevalent as technology makes it easier to falsify documents and create identities, say experts in the field.

US Version of Interact iDebit Proposed by NACHA

Virginia, June 16 06- NACHA’s proposed new product for Internet transactions, could unleash powerful competitive forces among banks if it becomes a commercial payment application. Banks that choose to allow their customers to pay online merchants through the new automated clearing house application will jockey among themselves for transactions, while those that choose not to participate could lose market share to those that do.

The potential competitive environment bears some resemblance to the early days of the credit card business, when banks raced to sign up cardholders and win market share. In NACHA’s proposed new application for online payments, consumers would use their banks’ online-banking platforms to issue instructions to pay Web merchants. Payments would be electronically “pushed” from consumers’ checking accounts to merchants’ accounts via the ACH. The online banking programs would be responsible for authenticating consumers, obtaining authorization, and guaranteeing funds to merchants.

The NACHA system would enable greater competition than the monopolistic Canadian Interac e-mail money transfer system. While NACHA has said the pilot for the new payment type will include interchange-like pricing, with merchants’ banks paying fees to consumers’ banks, pricing is likely to vary widely depending on negotiation between merchants and processors.

The Canadian iDebit product launched by the big five Canadian banks in 2005 has been controversial for, once again, raising the question of whether a monopoly in the Canadian debit payment market should continue to be protected.

Giesecke & Devrient Launch Paypass Antennae

Ontario, June 17 06- Giesecke & Devrient (G&D) recently began offering MasterCard issuers conveniently-sized contactless payment cards and devices in smaller formats to be attached to key rings. G&D has developed an innovative Contactless Product Suite, which makes small-scale antennas available for Radio Frequency (RF) transmission on the basis of new antenna technology. The smaller MasterCard PayPass will be issued first to customers in North America.

G&D's new antennas allow contactless payment devices to be manufactured in all sorts of new shapes and sizes, as demonstrated by the key fob now available for MasterCard issuers. Despite their reduced size, the devices meet the PayPass-ISO/IEC 14443 specifications and achieve excellent radio frequency performance.

Precidia Introduces IP Card Acceptance Alternative for Cash Registers

Ottawa, July 20 06– Precidia Technologies Inc., introduced a unique new card acceptance solution for electronic cash registers (ECRs). Appearing at next week’s RSPA EXPOtech, the POSLynx220™ with NetVu™ puts control of the end device in the hands of resellers and merchants, while speeding up the transaction time and eliminating telephone and vendor service fees.

Designed for small and medium retail businesses that depend on ECRs, the POSLynx220 with NetVu is a multi-port payment router which can connect an ECR of almost any manufacture, along with auxiliaries such as printers, barcode scanners, contactless smart cards and biometrics, to a broadband IP network for faster and more cost effective transactions.

Easily installed and managed, this solution is different from existing options by several key features. Primarily, the device can forward to numerous hosts based on card type, via Ethernet or dial up. This allows for greater competition between processors, and better pricing for merchants. Furthermore, the device is managed and configured by the reseller. This frees the merchant from unnecessary and excessive maintenance costs, facilitates fast and cost effective upgrades, and gives resellers tools to better support merchants. Finally, the POSLynx220 is designed to accommodate hardware of any type, including biometrics.

Edmonton Hit by Debit Scam

Edmonton, July 20 06- Edmonton city police officers are warning businesses about a fraud scheme aimed at hitting debit card machines. The fraud has occurred at least a dozen times throughout Edmonton, said Const. Olena Fedorovich of the Edmonton Police Service. "Each incident is a minimum of $1,000 to $2, 000," said Fedorovich. And that number is growing when each complainant is hit. “It sounds like a big ring of individuals that are all helping each other out and teaching others how to do this," she said.

The police have yet to identify the suspects in the scheme, first uncovered when Fedorovich responded to a complaint from a west-end hotel. Bandits either break into businesses or pose as servicemen trying to do some work on debit machines, she said.

When a business receives a point of sale machine or a debit card machine, many often don't change the built-in pin code. Merchants are urged to change debit machine pass codes frequently, monitor all refunds, limit staff members who have access to the machines and call police if anyone tries to access the debit machines without proper authorization.

Statement Of Senator Patrick Leahy, Ranking Member, And Committee On The Judiciary Hearing On “Credit Card Interchange Fees: Antitrust Concerns?"

Vermont, July 19 06- “First, I must thank Vermont State Representative, Warren Miller, and his wife, Kathy, for making the trek down from Elmore, Vermont, in order to be here today. I am always glad to see Vermonters here, and especially so when they are able to help us on the Committee as we struggle with the problems confronting businesses and individuals across the country. Kathy, I look forward to hearing from you, and know that you are speaking for many of the small businesses that make Vermont prosper.

Few of us outside the business and banking communities had probably heard much about interchange fees until recently. Those fees, which retailers pay to the banks that process credit card transactions, are ultimately paid by consumers. We are here today because questions are being raised over whether those fees are too high, and whether they are too high because the associations of banks that handle credit cards are behaving unfairly in the marketplace. Just this week, the European Union’s Competition Authority announced that unless Visa and MasterCard change those fees, they will face an antitrust action. This is not an issue that we can ignore.

Retailers tell me that interchange fees represent an increasingly large portion of their costs of doing business. They tell me that they are compelled to raise their prices, and shift some of that cost burden onto their customers. They tell me that all of their customers are harmed, whether they pay by cash or check or debit or credit card, because of the fees that force them to raise prices. They tell me that they have no choice but to accept credit cards – and the fees that go along with them – as more and more customers expect to be able to charge their purchases. And they tell me that the entire fee process is utterly opaque; they have not seen the rules for the interchange systems, and cannot decipher the complicated billing schemes of the credit card companies.

Credit cards do bring many benefits to both retailers and consumers – greater access to consumer purchasing power, more rapid payments, and increased payment options for consumers. And certainly, interchange services are necessary, valuable, and worth paying for. But we need to be sure that the cost of accepting credit and debit cards does not outweigh the many possible benefits businesses and consumers should be enjoying. We need to bring more transparency to the entire system. We need to take a closer look.

The livelihood of many Vermonters depends greatly on the success of our small businesses. I do not want interchange fees to force smaller businesses, like the village grocery store run by the Millers in Elmore, to take a net loss in order to both accept credits cards and sell the ice cream cones, and cups of Green Mountain Coffee that have helped make their store a Vermont treasure.”

FEATURE

Emergis Enforcing eInvoicing Patent in U.S.

Montreal, August 4, 2006 — Emergis Inc., announced on May 26, 2006 that its U.S.-based subsidiary Emergis Technologies, Inc. has settled its lawsuit against Avista Corporation of Spokane, WA, for infringement of Emergis’ electronic invoicing and payment technology patent.

“The out-of-court settlement is part of a series of five settlements and licenses that Emergis has signed since the beginning of the year, and it is in line with our sustained efforts to enforce our intellectual property,” said Marc Filion, Executive Vice-President at Emergis.

Emergis Technologies owns US Patent No. 6,044,362 that was granted in March of 2000 for a process for the electronic receipt and payment of invoices. Emergis no longer offers an electronic invoicing and payment service, but continues to own the patent.

Avista Corporation is an energy company involved in the production, transmission and distribution of energy as well as other energy-related businesses.

Ann-Marie Gagné, Director of Communications at Emergis, informed the FT in an interview that Emergis intends to continue enforcing its rights in the patent and that it has been doing so since 2003. Gagné said that Emergis did not own any similar patents in Canada.

US Utilities Shocked

In July, the American Public Power Association (APPA), a service organization for over 2,000 US community-owned electric utilities, informed its membership of the action taken by Emergis to enforce its patent rights versus various US utilities. While informing its membership of the nature of the Emergis claim, the APPA disclosed to its membership that the owner of the patent in question was Canadian. The APPA warned its members that if they are a public power utility system that allows payment of utility bills by retail customers over the Internet using bill-payment functionality provided by their own website or bill-payment services provided by a third-party service provider that brands its web pages with the utility’s system name and logo, then the utility may soon be an object of Emergis’s unwanted attentions.

US Payment Process Patents

Payment process patents are just one variety of the more general category of process patents which allow their holder to prevent any other person from engaging in a particular business process. The US Patent Office has been criticized lately for granting too many process patents, and thereby wrongly extinguishing competition in certain business markets. Payments are particularly vulnerable to control by a process patent because processes are usually the way by which one payment method is distinguished from another.

There are at least two good ways to defend oneself in a claim of infringement by the holder of a US payment process patent. One is to put the patent itself into question, by finding ‘prior art’, meaning an occurrence of or discussion of the process that was published sometime before the patent application was made. A second is to develop a ‘work around’, meaning a process that is somehow distinct from the patented process which would not attract an infringement claim.

Another example of a US payment process patent claiming license fees alleged infringers is the AdvanceMe, Inc. patent of the process of repaying merchant obligations by splitting merchant credit card receivables between the merchant and the entity to which the merchant is indebted. AdvanceMe has taken action against a handful of merchant advance providers in the US. Merchant advance is the business of providing merchants with working capital which is then repaid to the provider by deducting a portion of merchant account receivables from each settlement to the merchant from the acquiring institution. Merchant acquiring is the ‘flavor of the month’ in the US merchant account market. There is little activity in merchant advance in Canada at the moment.

By Adam N. Atlas, Editor in Chief