Interac E-Mail Money Transfer Service Down January 18-19, 2006 - Issue 11 - April 2006

Interac E-Mail Money Transfer Service Down January 18-19, 2006

The Frontier Times asked Interac for a comment on the crash on January 19 and was provided with the following reply from Tina Romano, Interac Public Relations Manager:

“Hi, I understand you were interested in more information regarding the INTERAC Email Money Transfer disruption.

We have been experiencing technical problems on INTERAC Email Money Transfer. This has resulted in a service disruption for the past 24 hours. Our operations team has been working on it and are making good progress.

Customers have not been able to send or receive transactions during this disruption. Any transactions sent and not completed before that time are being retained on our databases and will be available for completion as soon as possible.”

Interac, Canada’s only debit network, operates monopolies on direct e-mail money transfers between Canadian banks as well as the new Interac Online service.

Note from the Editor

The Frontier Times was proud to sponsor the first Canadian Institute conference on Regulation of the Payment Card industry in Canada, February 16-17, 2006. The conference was well attended with well over 100 attendees. Most presenters reviewed the challenges to FI’s for compliance with evolving regulatory requirements, such as privacy legislation. I was pleased to present the perspective of unregulated entrepreneurs in the payments business in Canada. The bulk of my presentation is reproduced in the Features section of this issue. Please take note that the presentation was highly opinionated. If you are sensitive to procompetitive or anti-monopolistic opinions, then do not read this issue.

The FT has learned that there are a number of third party (i.e. non-bank) merchant account promoters coming online during the first half of 2006. We will be covering these new businesses for which this publication is, in part, intended. A reminder to readers that advertising in the FT is a lot easier than you might have thought, and also very effective in reaching the Canadian payments industry. For more information, call the Director of Marketing, Kimberley Craig at 514-667-7016.

The FT team would also like to welcome Kimberley Craig as our new Managing Editor. Kimberley has put in a lot of work during 2005 building up our subscriber base, and will now take on additional editorial responsibilities.

The whole FT team wishes readers a great Canadian spring

Adam N. Atlas

Editor in Chief

atlas@frontiertimes.ca

The Frontier Times Team

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Adam N. Atlas • atlas@frontiertimes.ca

Managing Editor, News Contact

Kimberley Craig • info@frontiertimes.ca

News and press Releases: 514-667-7016

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Kimberley Craig • craig@adamatlas.com

Marketing: 514-667-7016

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Valerie L. Fox • fox@frontiertimes.ca

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Canada's Electronic Transactions Journal, 2006

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

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

NEWS

Launch New M-Commerce Initiative

Nov 13 05, Toronto - Canada’s wireless service providers, Bell Mobility, Rogers Wireless and TELUS Mobility, have announced the launch of Wireless Payment Services, a jointly owned enterprise that will act as a mobile commerce, or m-commerce, gateway, facilitating secure wireless payment transactions.

With anytime, anywhere payments representing the next frontier of wireless service. Wireless Payment Services’ goals are to develop standard, secure and easy-to-use mobile payment means that work with debit and credit capacities already offered by Canada’s financial institutions.

Wireless Payment Services is working to commercialize a mobile commerce service in Canada within the next year. The first step of the project is to allow prepaid wireless users to buy additional minutes on their existing accounts with their debit or credit cards. Unlike mobile payment solutions already available on the market, which require new payment methods or additional hardware. This solution will extend access to payment methods already widely used by Canadian consumers and merchants over frequently used wireless devices. The next step is to look at additional opportunities for wireless users to make purchases using their mobile phones.

Debit card fraud on the rise at gas stations

November 23 05, Quebec - Police are warning consumers about a disturbing increase in credit card and debit fraud, especially at local gas stations.

People are being victimized by clerks who take the plastic cards back to the booth and double swipe them to obtain a copy of a PIN or credit card number, or by thieves who will place a special skimming device on gas pumps that will reveal the information secreted on the black stripe on the back of your card. Police say, there’s no real way for the motorist to tell.

Canada’s financial institutions (and ultimately their customers) were on the hook for $60 million in losses from credit card skimming in 2004. Retail gasoline outlets are being targeted by this type of criminal activity, so the campaign to educate merchants and create an awareness regarding payment card skimming will begin with gas stations and will be rolled out to other retail businesses as necessary.

Delta Hotels Canada launches gift card

October 5 05, Vancouver - Designed to encourage repeat business among valued customers and extend the brand to a broader audience, Delta Hotels’ electronic gift card program was developed

using technology from Emex (Head Office, Vancouver, BC), one of North America’s leading providers of real time loyalty and gift card programs and a division of Moneris Solutions Corporation. Delta Hotels’ clients can now purchase gift cards of several fixed values including $25, $50, $100 and $250.

First Data Grows: TeleCheck Services

November 22 2005, Canada - First Data’s TeleCheck Services has announced that it has considerably expanded its check services relationship. TeleCheck is now the main provider of check collection services for Wal-Mart and Sam’s Club stores. This increases TeleCheck’s position as a primary provider of paper check collection services.

The expanded relationship includes four check service areas. Wal-Mart is substantially increasing its use of the TeleCheck ECA service by launching it into additional markets. The increased use

of the ECA service expresses Wal-Mart’s continuing pledge to providing consumers with handy payment options.

TeleCheck is providing Wal-Mart stores with a new way to process paper checks. TeleCheck has the ability to make a distinction between high and low-risk check transactions and as a result, process them accordingly. TeleCheck is also providing Wal-Mart with adaptive decision-making tools, while low-risk transactions are approved through a real time negative database of returned check information.

Last but not least, TeleCheck will host all shared negative database files for Wal-Mart. TeleCheck will provide returned check data to Wal-Mart, and Wal-Mart’s returned check data will continue to support TeleCheck’s database.

First Data Study: PIN Debit Less Expensive than Signature Debit for Financial Institutions

November 20 2005, Toronto - First Data Corp. has announced the results of a new study that concludes that on average, PINbased point-of-sale (POS) transactions cost approximately 50 percent less than signature debit transactions for financial institutions.

Results of the “POS Debit Issuer Cost Study” indicate that issuing financial institutions should encourage activation and usage of both PIN and signature debit products to help support customer preferences and maximize revenue. The study also found the average fraud losses were more than four times higher for signature debit programs than for PIN debit programs. This study clearly shows the value that PIN debit transactions bring to financial institutions of all sizes.

Consumers prefer to use PIN debit and merchants like the added security and guaranteed funds of PIN debit. Financial institutions should take a close look at their investment in signature rewards and other programs, which are designed to drive transactions to signature debit over PIN. Consumers earlier this year reported a clear preference for PIN debit purchases. The STAR Consumer Payment Usage Study found consumers prefer PIN 47% to signature debit 30% Security is the primary reason consumers say for preferring PIN debit, but a majority uses both forms of payment.

Canada’s Interac Moves To Ecommerce

December 7 2005, Canada - Moneris Solutions has announced that it has processed the first Interac Online transaction in Canada. Interac Online is a new service that allows Canadians to pay for goods and services purchased on the Internet directly from their bank account. Interac Online, controlled indirectly by Canadian banks and other members of Interac, is Canada’s monopoly on direct online debit payment services. “Debit is the most popular way for Canadians to pay for their purchases - with Interac Online we’ve given Moneris’ online merchants access to the full potential of consumers’ spending power,” said Jim Baumgartner, president and CEO, Moneris. “Moneris merchants will be equipped to present the same payment options to their e-commerce customers as they do to their in-store customers, increasing the scope of their business.” The Interac Online service is virtually identical to services that UseMyBank has been offering for a couple years.

The Interac association has a trim website describing Interac Online for both consumers and merchants. When you select the Interac Online service as a payment method when making an online purchase, the merchant website will redirect your browser to an Interac web page where you will select your Financial Institution. Next, your browser will be redirected to your Financial Institution’s web banking website. After logging in and selecting the account you want to pay from, you will be prompted to confirm the payment. You will then be redirected back to the merchant’s website for the confirmation page, and the merchant will proceed to fulfill your order.

As a result, the consumer does not provide any financial details, card numbers or login information to the online merchant, as is sometimes the case in credit card transactions. Instead, the consumer uses their existing web banking service with their usual User ID and password to complete the payment.

Pre-paid credit cards hit Manitoba

December 23 05, Winnipeg - The MyCard branded MasterCard, a pre-paid credit card has arrived in Manitoba. The card is targeted to individuals with a bad credit history or those without a credit history at all. MyCard is a branded pre-paid program like those common in the US.

The cost is $39.95 to buy a card, which also includes $10 on the new account. There is a monthly maintenance fee of $5.95 and there are service fees every time the card is used. It can be used at ATMs, and a third party can put money into the card account, convenient for parents helping to finance a university student’s expenses or for someone who’s traveling. The card is being rolled out across the country and is now available in Manitoba.

Pay By Touch Completes Acquisition of CardSystems

December 22 05, Georgia - Pay By Touch has announced it has completed the acquisition of considerably all the assets of CardSystems Solutions, Inc. for $47 million in stock and cash. CardSystems Solutions, Inc. was in the news recently for the biggest breach of security in cardholder information in US history. Independent sales organizations of CardSystems are not in the process of adapting to their new partner in the form of Pay By Touch.

New Mint Prepaid Card

December 27 05, British Columbia - Mint Inc., a subdivision of Mint Technology Corp, and Now Prepay, a subsidiary of VendTek Systems Inc., announced the creation of a partnership that will be able to sell and reload cards from Mint’s portfolio of prepaid credit cards. Mint’s products will be distributed through Now Prepay’s national network in Canada.

Now Prepay will provide a secure point-of-sale system for activating and reloading Mint’s prepaid credit cards over Now Prepay’s existing national prepaid network. Retailers participating in the program will display the Mint logo. Customers will be able to purchase prepaid credit cards at designated locations and existing cardholders will be able to reload their prepaid credit card with funds.

“Now Prepay has an estimated 7,300 retail partner locations in Canada. We believe offering a product that has a proven and very successful track record in the United States will provide them with untapped revenue potential,” said Doug Buchanan, President, Now Prepay. “In addition, the distribution and reloading of Mint’s prepaid credit cards is a Corresponding product to the widespread and established prepaid network we currently have in place.”

CDS and ATMLink sign Wireless ATM Deal

February 10 2006, ATM Marketplace - Ontario. - Transaction Network Services Inc., a leading provider of business-critical network and data communications services for transaction-oriented applications, announced in a news release that Columbus Data Services signed a three-year contract renewal for TNS’s ATMLink communications solution.

CDS installed more than 1,000 wireless ATMLink units nationwide in 2005 — a landmark for Code Division Multiple Access (CDMA) technology.The addition of ATMLink wireless technology to CDS’s current systems allows for rapid installation and flexible placement of the ATMs.

“We have been thoroughly impressed with the results of the new wireless ATMLink service,” said CDS president Ron Schuldt. “It is comparably priced to standard dial service, but without the significant expense and delay.” Schuldt added that CDS expects to announce an incentive program for independent sales organizations at ATMIA Conference East next week.

“TNS is excited that Columbus Data Services has embraced the ATMLink wireless solution,” said TNS vice president of sales for self-service solutions Kent Phillips. “This new technology will undoubtedly have a huge impact in the marketplace, as it benefits both the merchant and the ATM owner or operator.”

New SolutionInc Service Management Platform

February 15 2006, Halifax - SolutionInc Limited the leader in Internet management, provisioning and billing, today released a new version of its enterprise carrier class software system, SolutionIP™ Enterprise. The company’s broadband access technology system provides operators with the complete solution for deployment, management and billing of their broadband service contributions.

SolutionIP™ Enterprise allows service providers to offer Internet services across entire communities, municipalities, campus settings, Wi-Fi zones, hot zones and Wi-Fi networks. From the central network operation center the provider can manage the Internet services and control the network for thousands of properties and end users. The strong platform solution was built to handle millions of Internet connections.

VeriSign Authentication Network gets big name support

February 13 2006, Ontario - VeriSign Inc. today has revealed its plans for an authentication network that it hopes will address financial industry regulations and bring two-factor authentication to millions of people. Yahoo Inc and eBay Inc have both already signed up to the service.

The announcement will be at the RSA Conference, VeriSign will officially launch the VeriSign Identity Protection network with a promise from eBay’s Paypal entity to put authentication tokens in the hands of a million users within three years.

Users will be able to sign in to Yahoo, eBay and Paypal services using a single one-time password token. VeriSign’s service will verify the passwords are genuine before users are able to log on. The service will be optional, mainly directed at users concerned about fraud and identity theft.

These e-commerce companies will pay VeriSign a subscription fee for the service based on the volume of lookups executed. The idea is to reduce the amount of money they have to spend on fighting fraud and maintaining the strength of their brands.

“We hope to be able to announce financial institutions as customers within the coming days and weeks,” said Nico Popp, vice president of authentication services at VeriSign. He said that some banks are “in very advanced stages of negotiation.”

Institutions Exploit System’s Loopholes, And Then Create Loopholes Of Their Own

February 21 2006, Montreal – Anyone who uses a Canadian bank knows that Canadian banks are now drawing a material portion of their revenue from fees to customers that were unheard of a few years ago. Canadian bank customers with ordinary checking and savings accounts and ordinary balances no longer have an expectation for their deposits to bear meaningful interest once the panoply bank fees are applied to accounts.

The results are impressive, even if fee revenue is still dwarfed by interest as the top source of bank income. Service charges doubled over the past decade, totalling $31 billion in 2004. By contrast, interest from loans and securities came to a little more than $400 billion in 2004, a gain of 25 percent since 1994.

The fee fest continued in 2005, totalling $25.8 billion in just the first nine months of the year, suggesting another double-digit increase. Bank fees are an unavoidable, anticipated cost for the services received, but the growing “gotcha” strategy is harder to swallow.

FEATURES

Chip comes to Canada

December 21 2005, Toronto – MasterCard Canada announced that 12 of its card issuers will be working with MasterCard and five leading acquirers to introduce chipenabled MasterCard payment cards in Canada by 2010. With 17 commitments to date on the migration to chip, MasterCard is leading the market in Canada.

MasterCard leads in the implementation of chip cards worldwide, with more than 248 million chip cards in active use globally, significantly more than any other payments organization. The overt and proactive commitment to chip by MasterCard issuers and industry acquirers is unparalleled in the Canadian market, and brings significant drive to the transition to chip cards in

Canada.

The Canadian MasterCard issuers are ATB Financial; BMO Bank of Montreal; Canadian Tire Bank; Capital One Canada; Citibank Canada; Credit Union Electronic Transaction Services (CUETS); GE Money Canada; HSBC Bank Canada; MBNA Canada; National Bank of Canada; People’s Trust Company; and President’s Choice Bank. The acquirers are First Data Loan Company, Global Payments Inc., Moneris Solutions Corporation, Paymentech Canada and United Network Payment Solutions.

A chip card contains a microchip similar to a small computer processor with memory, logic and a set of software applications. The ability and aptitude of the chip is significantly greater and more powerful than magnetic stripe technology found on today’s cards. Chip cards have the capacity to store more information, and the capability to implement complicated payment applications and customized programs. For example, businesses can design more flexible reward programs that can be activated immediately when a customer chooses to use a certain payments application. Chip cards also hold information in an encrypted form and require the use of a PIN (personal identification number), significantly enhancing security.

MasterCard combines experience through the MasterCard Chip Centre of Excellence, together with Canadian market knowledge. This combination delivers hands-on support, and a complete range of chip products and platforms.

MasterCard’s chip solution suite, MasterCard OneSmart™, gives merchants, acquirers, and issuers everything they need to migrate to and manage chipbased programs. MasterCard’s OneSmart bundles together all components, card applications, card readers, system software, and business processes necessary to leverage the business opportunity of chip. OneSmart packages include: customer acquisition; customer retention; card activation and usage; loyalty; innovation such as OneSmart PayPass™, which combines both contact and contactless interfaces on one chip; new delivery channels, and more.

Friendly Fire of Payment Regulation Hits Competition Hard

The following is an editorial opinion article, the substance of which was delivered to the Card Compliance Conference of the Canadian Institute in Toronto, February 17, 2006 by Adam N. Atlas, Editor in Chief.

Most discussion of regulation in the payment card industry is over how best to achieve the important public policy goals of protecting security, privacy and stability in the payment card system. The most active participants in debates over regulation of the payment card industry are the banks, their lawyers the regulators themselves and their respective enforcement agencies. The purpose of this column is to draw the attention to the damage that regulation does to competition in payment markets.

This topic is very relevant to today’s regulatory context in Canada because nearly everyone is agreed that new regulation in the payment industry is forthcoming. To the chagrin of unregulated payment businesses in Canada, regulators such as the CPA, OSFI and FCAC do not give enough importance or lip service to the promotion of entrenpreneurism and promotion of competition in the market for payment services. These institutions are currently caught up in the fashionable frenzy over security and privacy that coincidentally benefits banks which are purportedly the only entities that merit the trust of the Canadian consumer and merchant.

It is a myth that banks are the only entities that are suited to administer the rights of individuals to electronic forms of cash-equivalents, and their related services which include the following:

• Affinity programs such as Air Miles, Aeroplan, Starbucks loyalty cards;
• E-wallets, such as PayPal and Firecash;
• telephone credits, such as Fido, Telus or Bell
• top-up cards;
• electronic coupons, such as Staples e-mail discounts;
• information aggregators and relay services, such as those that can display multiple account information through a single portal (not yet available in Canada);
• electronic transaction fulfillment services, such as online auction aggregators, or electronic banking fulfillment services, such as UseMyBank;
• credit cards; and
• debit cards.

Cash transactions are on the decline. Consequently, use of electronic substitutes for cash is on the increase. The transfer of transactions from cash to electronic equivalents has given rise to fierce competition among cash equivalent providers for market share of the newtransactions.

Observing the migration of transactions to electronic cash, it is fruitful to ponder how the various providers of such services stand to be affected by regulation in the payment industry. One way to analyze this topic is by distinguishing between bank issued (regulated) and non-bank issued (unregulated) products.

Regulation of the Canadian payment card industry runs the risk, indeed the likelihood, of stilting the playing field in competition among electronic cash providers in favour of the banks or regulated entities.

How the Markets Will be Fixed

1. Security.

Security is the flavour of the month in banking in Canada and elsewhere. Based on the experience of my client base, security is being used as an excuse by banks to terminate services to individuals or businesses that pose a competitive threat to banks in the various electronic cash markets. ATM cash supplies are a good example. (See FT No. 10).

I predict that as payment card regulation is debated, the banks will use security as their leading argument in favour of excluding non-bank players from the electronic cash economy.

As a matter of fact, however, there is nothing about a bank that makes it inherently better than a non-bank entity at security. The ready availability of highly skilled computer programmers, with experience in financial transactions, provides a pool of talent in Canada from which bank and nonblank entities can draw alike. For a regulator to shut non-bank entities out of e-cash markets simply because banks are bound to certain statutory security requirements reveals a misunderstanding of the role of the regulator.

The role of the regulator should never be to dampen entrepreneurism or competition, it should be only to increase both. Using bank standards as a benchmark for security compliance may have recast regulation as a cloak for a barrier to entry into some of the most lucrative and expanding markets in Canadian business.

Citing reputational risk along side security, operational, liquidity and credit risk in texts published by the CPA and other regulatory agencies exemplifies the point of view of regulators as being, prima facie, sympathetic to those entities which have the greatest reputations to loose: banks. Regulation for security is easily accomplished in the nonblank environment as exemplified by the AIS (a.k.a. CISP) and the PCI programs. While inspired by banks, these standards have become voluntarily adopted by entities that are not expressly required to adopt them.

2. Privacy.

The biggest privacy blunders on record have occurred from within banks or their high level processors operating as agents for banks. Nonetheless, in the coming years, banks will likely argue and lobby regulators that protection of privacy is a good reason to give greater exclusivity to banks in e-cash markets.

PIPEDA now applies to all businesses in Canada. The fact of being a bank does not make a business any more or less capable of complying with it. Indeed, it is not hard to find breaches of PIPEDA at most businesses in Canada that handle personal information. Without any substantive and effective enforcement mechanisms, PIEPDA is something of a white elephant anyway, to date.

Privacy is not a valid reason to grant banks a greater share of the e-cash market.

3. Infrastructure.

Ironically, banks, through their affiliates such as Interac, will likely argue that they are best suited to operate payments businesses in Canada, to the exclusion of others, because they already own and operate the infrastructure of the Canadian payments system.

The analogy between Ma-Bell and cable companies is hard to miss. Hopefully, the banking sector in Canada will undergo diversification in a manner like telephone and cable companies. Canadian banks are like the waterworks in a town. Until that time, expect to hear banks referring to their exclusive capacity to operate payment systems in Canada based on their ownership of the system today. As illogical and ironic as this argument is, I expect it to carry weight around the tables of Canadian regulators that are sometimes ill equipped to distinguish public interest from bank interest. The CPA, as an example, has been described by some as a self-regulating organ of the banks despite government oversight and the fact that there are non-bank voices around the CPA table.

Just because banks have traditionally had a monopoly on payment methods, this does not mean that that should be true for the future.

Effects of the Fix

1. Concentration of market of e-cash service providers

E-cash providers are businesses that earn their revenue from levying small taxes on money transactions. Whether it be data mining by a loyalty program or interest on a credit card balance, these substitutes for cash are profiting from transactions made using their particular medium.

The extent to which non-banks are shut out of these markets will simply concentrate the profits from these transactions in the hands of banks.

In negotiating $100,000,000 of annual payment card revenue in 2005 I learned that payment card profits are not generated by in-house initiatives from banks. They are generated by hungry and creative non-bank entrepreneurs who have boundless ambition and vision. Shutting these unregulated entities out of the business in Canada is doing all of us and the Canadian public a disfavour. Banks will also loose by severing themselves from lucrative sources of revenue, credit and deposits.

2. Stifling of entrepreneurism

If you and I cannot start and e-wallet business because of prohibiting regulation, that will surely put a damper on our entrepreneurial initiative.

Banks are not as motivated to bring to market creative initiatives in the payment card industry as unregulated entrepreneurs. The sale to Paymentech and Global Payments of the merchant acquiring arms of some Canadian banks illustrates this point. With all due respect to Paymentech, Global Payments and Moneris, there is still a long way to go in terms of commercializing the merchant account business in Canada.

Notice how the CPA goals of efficiency, safety and soundness are conspicuously silent on the laudable and equally important goal of promoting competition and entrepreneurship in the payment card industry. If the regulators do not make this a priority, the monopolistic Canadian banks will surely not do it for them.

3. Limiting Choice for Consumers

Consumer choice is a good thing. Concentration within payments markets and stifling of entrepreneurim will reduce consumer choice. It will also reduce the pallet of payment channels through which merchants can receive payments from consumers.

The Solution

If Canadian regulators and participants in thepayments market take the following points into consideration, it will go a long way towards avoiding the collateral damage to competition that will be caused by regulation that is too accommodating to bank interests:

• Include non-bank voices in the instrumentalities of regulation;
• Prohibit bank mergers. Any bank merger in Canada will be devastating on competition in Canadian payment services markets, notably in merchant acquiring;
• Enshrine the rights of non-banks to deal in e-cash;
• Adopt a pro-creative, pro-entrepreneur, pro-competition frame of mind around the regulatory table. Whenever a new regulatory policy is adopted, the regulator should give it a score as to its pro-competition effects;
• Make express provisions for non-banks to use the bank infrastructure to compete with banks in their own markets, such as debit services; and
• Do not let fear for security and privacy, that are now quite fashionable, be exploited to give banks more market share than they have earned in payments markets.

Conclusion

Regulation can have effects that are quite distinct from its intended effects. Specifically, regulation of the payment card business in Canada likely will have the effect of lessening competition in the market to capture the transactions as they migrate from cash to electronic transactions. Whether or not you agree with this hypothesis, I hope our readers will cease the opportunity to make their views know on this topic at the CPA, OSFI, FCAC and in the Frontier Times.