Cross-Border Debit - Issue 3 - June 15, 2004

Frontier Times, Issue 3, June 15, 2004

Note from the Editor:

The crash of the Royal Bank of Canada’s ACH system in early June is perhaps the best recent example of how Canada has a long way to go towards diversifying the supply of financial services. Entry of US-style Independent Sales Organizations (ISOs) for the sale of merchant services is the first step towards that diversification. As ISOs go out into the Canadian marketplace, merchants will be re-educated to think of banks as having to compete for the privilege of their business rather than the less competitive contemporary perspective. I am excited about this movement. These pages are available to all participants in the payments business in Canada as a forum to exchange related information and ideas.

We wish to give special thanks to our outgoing Managing Editor, Stacy Denton, who has left the FT to pursue a PhD in English Literature. Stacy brought the FT from its infancy to where it is now, firmly established as a cornerstone for news in the Canadian payments business. Thank you Stacy, and we wish you the very best in your studies.

We would also like to introduce our readers to the new Managing Editor, Anny Vexler. Anny has just obtained a B.A. in English Literature from Yale University, and has joined the FT as of February of this year. Anny will be the principal interlocutor of the FT with its readership. We offer Anny a warm welcome to the FT team, and thank Anny for joining us.

Finally, special thanks to Visa Canada for being the principal sponsor of this issue.

Adam N. Atlas

Editor in Chief

atlas@frontiertimes.ca

The Frontier Times Team

Editor in Chief

Adam N. Atlas: atlas@frontiertimes.ca

Managing Editor

Stacy Denton: denton@frontiertimes.ca

Senior Associate Editor

Valerie L. Fox: fox@frontiertimes.ca

Associate Editors

Lena E. Atlas: lena@frontiertimes.ca

Lionel Perez: perez@frontiertimes.ca

Anny Vexler: vexler@frontiertimes.ca

Layout*Graphics*Illustration

centre TYPO: edaley@centretypo.com

Artistic Conceptualization

Michal Katz: pichkom@yahoo.com

Production

centre TYPO: edaley@centretypo.com

Contact us:

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© The Frontier Times: Canada’s Electronic Transactions Journal, 2004.

ISSN: 1710-4505 The Frontier Times: Canada’s Electronic Transactions Journal (Print)

ISSN: 1710-4513 The Frontier Times: Canada’s Electronic Transactions Journal (Online)

Cross-Border Debit

If you were one of the millions of Canadians that visited the United States in the last year or so, you may have experienced some hassle in respect to payment methods: currency exchange, having to carry large amounts of cash, or credit card use exchange fees. At any rate, the convenience which many Canadians can find in their day to day transactions is sorely missed in their U.S. travels, if for no other reason than their inability to use Canadian debit accounts.

This is about to change. In early April, Toronto based Acxsys Corporation (Acxsys) and Montvale, New Jersey based NYCE Corporation announced an agreement that will open the U.S. point of sale (POS) for Canadian debit users. Under this agreement, Canadians will have the opportunity to pay for their travels much like they make their purchases in Canada: using their debit card and PIN network. Once a financial institution (FI) signs on to this cross-border opportunity its clientele may use the POS at participating retailers relying on the NYCE U.S. debit network. At the POS the electronic transaction handles quite similar to intra-Canadian transactions, remaining virtually unnoticeable to the consumer (barring the FI-set surcharge, according to ITBusiness.ca.) However, as the transaction needs to cross borders and networks, the technical side of the service gains an extra step; for Acxsys to complete the cycle, a gateway will be developed by Montreal’s CGI Group, Inc.

Although the service is expected to launch this upcoming fall according to a NYCE press release, an exact date cannot be set, as “each [FI] will set their own schedule” to enter into this network, according to George Gorsline, Director of New Opportunities for Acxsys. The predilection of the Canadian consumer towards debit payment options, a preference that one in two Canadians hold as Gorsline points out, makes the cross-border service a logical step “from a market point of view”. When asked if he could venture a guess on what kind of impact the implementation of this service could have on the U.S. debit market, Gorsline noted that it would “seem unlikely that it would have a major impact” and that it is not Acxsys’s goal to break the U.S. market in this area: “Acxsys is adding an additional payment option for the Canadian consumer.” It should be noted that this is a one-way service: a U.S. consumer could not use debit in Canada through this system.

Within the last year Acxsys and Certapay, a person-to-person (P2P) vendor owned by five Canadian banks and now an operating division of Acxsys, teamed up to extend Interac services for online payments. This service, called Interac Email Money Transfer, is similar to the online service, Paypal. Customers of the banks that own Certapay (CIBC, Scotiabank, BMO Bank of Montreal, TD Canada Trust, and RBC Royal Bank) can make real time payments to other customers, and delayed payments (three to five days) to customers of other Canadian banks.

Stacy Denton, Managing Editor, denton@frontiertimes.ca

NEWS

EFT Processing

April 5- Metro Credit Union (MCU), a full service financial institution serving the Greater Toronto Area, has begun to offer electronic transfer processing by EFT Canada Inc. As detailed on the MCU website, the main components of this processing software are: “Virtual terminal (data entry of transaction details),” “Recurring Module (recurring transaction payment processing authorization),” “Reporting Module (report generation and export function),” and “Customer Service Module (customer profile, transaction, and comment management).”

Toronto based EFT Canada has developed software solutions that have the capability to service customers in both Canada and the United States.

Nexxlink Acquisition

April 14- Nexxlink Technology Inc. and CGI Group Inc. announce the conclusion of Nexxlink’s acquisition of Meta-4 Technical Support Services. With offices in Vancouver, Calgary, Toronto, Montréal and Québec City, Meta-4 offers technical services for computer systems, ATMs, and video lottery terminals across Canada.

In a press release, Karol Brassard, Nexxlink’s Executive Chairman of the Board, notes that the acquisition “strengthens (Nexxlink’s) technical team considerably.” Services that Nexxlink offers for its customers include hosting, ASP and outsourcing, Business Solutions, infrastructure solutions and technical services, and consulting.

CGI is considered to be the largest independent firm in Canada that deals with IT services and the fifth largest in North America. As a result of this transaction, Nexxlink has paid CGI $8.75 million. The signing of the irrevocable memorandum of understanding was announced by the two parties on March 22, 2004.

Canadian ISO Partnership

April 23- Ezee ATM Inc., a Canadian ISO, and Newport Partners, an investment firm, have announced their new partnership, Ezee ATM LP. This partnership was created in an effort to consolidate the white label ATM industry in Canada. Some plans of the partnership include pursuing acquisitions and entering into management agreements with Canadian ATM portfolio owners who are interested in more efficient operating models.

Ezee ATM LP is now the second largest white label independent service organization in Canada, holding more than 1,550 ATM management contracts and dispensing more than $500 million annually.

More on Truncation…

We were very pleased to receive a response from the Canadian Payments Association (CPA) in regards to the article entitled “Truncating Fraud: Canadian Credit Card Security.” After a discussion with Roger Dowdall from the CPA, some clarification needs to be made in relation to our article.

As Dowdall has pointed out, the CPA itself deals with the “clearing and settlements” of payments and not directly with the issue of credit card fraud. While this issue may not fall under CPA’s mandate it is dealt with in various ways by members of the CPA such as VISA and MasterCard, Dowdall notes. Dowdall also stated that while the CPA is not directly involved with credit card fraud per se this does not mean that it adopts a stance of laxity to consumer fraud; one example of this is the CPA’s steps toward greater “online authentication” in which “adequate provisions” can be made for customers’ security in online payments. This matter “touches on fraud prevention,” Dowdall said.

In a final note, readers will likely be interested in the following passage from the Fair Credit Reporting Act (FCRA), 15 U.S.C. § 1681 H.R. 2622 recently enacted in the U.S.: “In general. Except as otherwise provided in this subsection, no person that accepts credit cards or debit cards for the transaction of business shall print more than the last 5 digits of the card number or the expiration date upon any receipt provided to the cardholder at the point of the sale or transaction.” In other words, it is now a federal law in the U.S. that all credit card numbers must be truncated at the POS.

FEATURES

Canadian vs. US Debit: The Differences

Question: Why does my U.S. debit card have a credit card logo and my Canadian debit card does not? For those who are not familiar with some of the differences between Canadian and U.S. payment systems, here are some points to consider:

There are basically 6 card issuing institutions (banks) in Canada vs. approximately 1,600 in the United States. This difference is one reason why widespread PIN debit networks have not taken off in the U.S. as they have in Canada: one consolidated network in Canada vs. more fragmented U.S. systems and a more competitive U.S. banking market (for example: fewer and lower fees for basic services like paper based transactions.)

Different types of debit: PIN based vs. signature based. A consolidated network makes security an easier issue to deal with. With PIN based debit, it seems that the most logical route between the point of sale (POS) and the issuing banks would be the one with the least curves. Signature based debit, on the other hand, works on a credit line where fragmentation, while not desirable, may be less of an issue.

Popularity: As can be inferred from the first two statements, PIN based debit is almost exclusively used in Canada while signature based debit tends to be the more popular method in the U.S. Taking into consideration the different lines that these two debit types follow, the following can be concluded: PIN based debit (i.e. Canadian) while issued on a bank card does not need to follow the same or similar line as a credit card, thus becoming affiliated strictly with the issuing bank; the signature based debit card (i.e. U.S.) becomes branded with a credit card logo as well as the issuing bank, as it follows a credit line.

Stacy Denton, Managing Editor, denton@frontiertimes.ca

Loyalty Credit: Credit isn’t just credit anymore

Long gone are the days when choosing a credit card was as simple as choosing VISA, MasterCard or American Express- even using interest rates as a tie-breaker isn’t so cut and dry anymore. Looking over the April 24 and May 1 issues of the Financial Post, we quickly notice how things have changed. In both the expert (April 24) and consumer (May 1) analyses of credit cards, the rewards systems that are tied to specific credit cards were get the closest scrutiny. With these new features, matters of card acceptability, reliability and interest rates enter into play, but the issue is not as simple as 1,2,3: we must take into account how these qualities complement and compete with perks that a consumer can obtain simultaneously when using credit for purchases. In the time of loyalty, credit isn’t just credit anymore.

Reward based credit cards are not a new thing for the Canadian consumer. Scotiabank, for example, has offered its ScotiaGold Preferred VISA card since 1990, and according to David Stafford, V.P. Credit Cards, this card has had a “strong and ongoing portfolio” ever since. But leafing through the many different credit card options offered by Canadian banks, it is apparent that the loyalty credit card industry is a “very crowded field”, as Andrew Mitchell, Senior Manager for Royal Bank of Canada (RBC) Rewards and Partnerships points out. RBC alone has 15 different personal credit cards, all of which carry reward schemes. According to Mitchell, RBC offers cards to consumers with redeemable points to be used towards funding for education and retirement. The most recent addition is the RBC Mike Weir VISA card, slated for release in June.

CIBC also offers a wide range of VISA cards, including travel-based rewards credit cards. There are six travel cards alone, including a card for U.S. travel, billed in U.S. funds. Although CIBC does offer cards with rewards (travel, cash back, and points based,) their “everyday cards” are not affiliated with a rewards or loyalty program. This is the first difference between CIBC’s card offerings and RBC’s: not every card has a reward/loyalty scheme through CIBC. Also, there does not appear to be redeemable points for Registered Retirement Savings Plans (RRSP) or Registered Education Savings Plan (RESP) with CIBC.

Like CIBC, Citibank does not offer reward schemes with all of their cards; however, a new card called the KidsFutures MasterCard will be offered by the summer. The cash rewards can be used towards a customer’s RESP, as well as opening up the opportunity to receive money from the Canada Education Savings Grant. Citibank feels they can comment more on this card in the upcoming months.

Another addition to Canadian loyalty schemes is to the BMO Bank of Montreal (BMO) Mosaik MasterCard. In early March, it was announced that WestJet will add its name to the Mosaik card created in September 2002. The Mosaik card, lauded as the first Canadian credit card that allows consumers to design their own credit options, will now be offering redeemable rewards for WestJet services in addition to the Air Miles reward program already in place.

Quick Comparison- Selected Cards

Cards	Purchases Interest Rate Per Annum	Rewards Offered	Yearly Fee
BMO Mosaik MasterCard	Varies with plans chosen	Varies with plans chosen	Varies with plans chosen
No-Fee ScotiaGold VISA	18.50%	No rewards; AVIS rental discounts	None
RBC Rewards VISA Classic	18.50%	RBC Rewards	None
CIBC Aero Classic VISA	19.50%	Aeroplan Miles	$29 (after first year)
Citi MasterCard	19.90%	No	None
Standard HSBC MasterCard	18.40%; 12.9% with $15 annual fee	Air Miles with $35 annual fee	None
TD Gold Travel VISA	18.50%	Travel points; no blackout periods	$99

Note: The above chart is only a sample of Canadian credit cards, and does not represent a comprehensive list of such cards.

Stacy Denton, Managing Editor, denton@frontiertimes.ca

U.S. Cross-Border Payments

The convenience that a cross-border electronic transactions system like Acxsys and NYCE will be giving to their Canadian customers begs the question: how could the U.S. consumer manage their electronic transactions in Canada? If we recall, the Acxsys/NYCE PIN network only accommodates the one-way flow from Canada to the U.S.

Since 2001, the Federal Reserve Financial Services (FRFS) has helped provide a infrastructure for U.S. consumers to use both credit and debit networks to Canada, in an effort to “promote electronic transactions as an alternative to paper-based products like checks,” according to the FRFS website. This service allows for participating banks to offer both credit and debit payment methods to the U.S. customer in Canada. More recently, the FRFS has implemented service to Mexico (February 2004) and bi-directional flows to five countries in the European Union (EU) (Austria, Germany, the Netherlands, Switzerland and the UK.) As it stands now, however, all three regions are restricted to one-way, outward bound transactions, due to the expressed concern that U.S. receiving depository financial institutions may not be properly aware or prepared to screen these types of foreign transactions. The bi-directional flow between Mexico and the U.S. is expected to be implemented by the end of this year.

The services to these three geographic regions include fixed-to-variable (FV) transactions, meaning that a given U.S. amount will be converted into a foreign currency; in Mexico and the EU, the conversions are to local currencies only. In Canada, however, the added bonus of fixed-to-fixed (FF) transactions, or a given U.S. dollar amount remaining in the same amount and currency across the border, gives an extra advantage for those banks dealing in the FRFS’s service. The reason why somebody can open both Canadian and U.S. dollar accounts within a Canadian bank is the same reason why FF transactions are allowed in Canada and not in Mexico and the EU: Canada’s capabilities as a dual currency country. According to the FRFS website, there are no variable-to-fixed (VF) transactions (adjusted U.S. currencies converted into a given foreign currency) allowed anywhere within the system, although talks have been made with Toronto-Dominion (TD) Bank on this issue.

The mere fact that every merchant and every consumer is affiliated with a financial institution of some kind or another theoretically makes these cross-border transactions of interest to those of us outside of the banks. The differences between electronic payment systems of different countries, coupled with uneven currencies, could be seen to impact those who are directly affected by this system (i.e. banks, processors that are hooked into these services) as well as those seemingly indirectly affected, like the consumer. Besides the obvious trickle-down charges (“the domestic origination fee and a cross-border conversion fee”- FRFS website), the hidden risks of currency dealings could perhaps have a further impact. The FRFS makes it clear that any delay in transactions due to different payment systems may carry the risk of “foreign exchange currency exposure,” and this includes returns as well. The “currency spread” is applied to both outgoing funds, as well as any funds that may be returned back to the U.S.; this risk is for the originating institution to absorb. While this may seem to negatively affect only the U.S. side of the FRFS flow, it should be kept in mind that where there is a risk, there can be an equal reward, meaning that any reward experienced by a U.S. institution could amount to a loss and therefore risk for a foreign, receiving institution. If viewed in this light, the risk of the receiving Canadian institution can be as great as the originating U.S. institution. In both cases, any major hits a financial institution may take could be passed down the line to processors, ISOs, merchants, and the consumer.

Some of the differences listed by the FRFS as impacting U.S. to Canadian transactions include: longer consumer and business return times, no dishonored returns through the Automated Clearing House (ACH), and no reversals allowed across borders. Both sides of the border have a vested interest in these differences, if only in light of currency fluctuations. All three of these factors contribute to the possibility of longer cross-border clearances; other than the obvious longer consumer/business returns, the latter two traits could lead to longer float times as well. In the ACH instance, the originating and receiving institutions must settle their disputes without the third party intermediary of the ACH, possibly leading to a longer settlement. When looking at the “no reversals” rule, we can see the safeguard against back to back currency conversions as potentially harmful in the face of fluctuating currencies.

The Service’s line to Mexico also operates under the same agreement as with Canada in regards to currency spread. Also similar to Canada is the mandate that no file reversals are allowed, meaning that the Originating Gateway Operator (OGO) and the Receiving Gateway Operator (RGO) need to settle any reversed transactions after the fact. On both the Canadian and Mexican cross-border networks, the OGO is the Federal Reserve Bank of Minneapolis; the RGOs, respectively, are TD Bank and Banco de México.

Stacy Denton, Managing Editor, denton@frontiertimes.ca

No ATMs in Winnipeg Casinos

Earlier this year, the Manitoba Lotteries Corp. (MLC) proposed the installation of ATMs in its two Winnipeg casinos, citing greater customer convenience and safety while accessing their money. However, amidst protest and feedback from the Addictions Foundation of Manitoba, the MLC decided to forego this proposal just a couple of weeks later. The original plan included regulations on how these machines can be used, including the actual placement of the ATMs and method of usage by casino patrons. In regards to the actual placement of the ATMs, the MLC seemed to adopt a stance similar to those taken by the lottery corporations of British Columbia, Saskatchewan, and Alberta: the machines must not be placed on the gaming floor itself. But it was the restrictions on how the ATMs can be used that was ultimately defined as providing insufficient deterrence to addictive gambling, and thus as unacceptable in Winnipeg. In the original proposal, ATMs were to provide patrons access to their accounts via ATM/debit cards but bar their access to credit card use. Speaking on behalf of the MLC, Scott Smith has said that the MLC was not capable of completely fulfilling this restriction due to Interac ATM regulations.

While Manitoba is not allowing ATMs in the two Winnipeg casinos, the Aseneskak Casino (First Nations Casino) located in Manitoba does host ATMs, subject to restrictions imposed by the issuing banks. According to Liz Stephenson of the Manitoba Gaming Control Commission, ATMs are allowed in this casino because of the sparseness of ATMs located outside the facility. In comparison to the Winnipeg casinos where a patron can have access to her or his money more readily at locations outside the casino, the Aseneskak Casino provides ATM services inside on account of a lack of nearby ATMs outside.

As each province is responsible for the regulation of casinos, the rules for matters like ATM placement/usage in gaming varies. While it appears that ATMs are required to be separate from gaming in all provinces, the restrictions placed on the ATMs themselves seem to vary. For example, in British Columbia, the Lottery Commission (BCLC) allows for casinos to install ATMs, but under the discretion of the provider. The responsibilities of the provider include “decisions on the number of machines permitted, contracts and administration of ATMs,” according to Consumer Services of the BCLC. While the machines are allowed to be implemented by individual providers, they cannot be in view of casino patrons while they are on the “gaming floor.” Similarly, Alberta wishes to create a “clear interruption of play” by placing ATMs “sufficiently apart or away from the playing area” for patron usage (Alberta Gaming Licensing Review, 2001.) Information addressing problem gambling is also to be displayed at the ATM.

Thanks to Rhys Stevens of the Alberta Gaming Research Institute.

Stacy Denton, Managing Editor, denton@frontiertimes.ca

FRONTIER DIRECTORY

Business Name	Type of Business	Telephone Number	URL
Beanstream Internet Commerce Inc.	payment and authentication services provider	250-472-2326	www.beanstream.com
Collective Point of Sale Solutions Ltd.	enabling ISOs to sell debit, credit, gift, loyalty and prepaid	800-219-7119	www.collectivepos.com
Datacap Systems, Inc.	integrated payment solutions for cash registers and POS devices	757-496-6478	www.dcap.com
Ecom Secure Inc.	credit card processing, pay at pump retail and Internet sales	877-937-3206	www.ecom-ca.com
EdgeWare Technologies Corporation	software development firm for card-based technology solutions	905-513-0530	www.edgeware.ca
ETAC	Electronic Transactions Association of Canada	514-282-8463	www.electran.ca
Global Payment Systems of Canada, Ltd.	bank card processor	416-445-7151	www.gps.ca
Ingenico Canada Ltd.	secure transaction terminal software, network and gateway services	416-245-6700	www.ingenico-ca.com
Merchant Card Acceptance	Canadian ISO selling card processing, gift, loyalty, ATM’s	1-888-MCA-4POS	www. merchantsales.com
Mercury Payment Systems	merchant service provider and front-end processor	800-846-4472	www.mercurypay.com
Moneris Solutions Corporation	Canada’s largest processor of debit and credit card transactions	1-866-MONERIS	www.moneris.com
PsiGate	Internet merchant account & payment services provider	877-374-9444	www.psigate.com
Soltrus Inc.	provides online payment processing solutions for Canadian merchants	877-291-3111	www.soltrus.com
Telpay Incorporated	Internet bill payment service for major utilities, governments, businesses, banks	800-665-0302	www.telpay.ca
Adam Atlas Attorney at Law	law firm specializing in electronic transactions law	514-842-0886	www.adamatlas.com