Zywicki: Canada's Federal Regulations Discourage Financial Innovations

"When the federal government revamps the payments industry's legal and regulatory environment, it should abandon Canada's legacy of tinkering in payments markets and instead stoke the forces of innovation and competition," comments Professor Todd Zywicki in an op-ed appearing in Canada's National Post.

Co-written with Philippe Bergevin, senior policy analyst at the C.D. Howe Institute, the article expands upon a federal task force interim report on payments systems and technologies that argues that Canada's payment system is in need of improvements.

Some Canadian payment methods, including debit cards, are heavily regulated. Interac, its primary debit card market, operates under a cooperative governance system and must set prices on a cost-recovery basis while also being subject to a federal Code of Conduct that discourages other networks from offering debit cards in Canada.

"To become a leader in payments, Canada's path is obvious," Zywicki says. "The federal government should favour competition, and remove the current prohibition on multiple payment networks on one card. And the Competition Bureau should allow Interac to compete on a for-profit basis."

Set Interac free; Burdensome federal regulations discourage innovation, National Post, December 20, 2011. By Philippe Bergevin and Todd Zywicki.

"There are external barriers to change, too, such as participants who benefit from the status quo, such as merchants and their associations. Canadian merchants cite the low merchant fees on debit cards charged by Interac, contrasting it with the higher merchant fees charges on cards issued under the Visa and MasterCard logos.

"But low costs for merchants sometimes means less investment in better payment products. And those merchant fees come at a high cost to banking consumers. In the United States in 2009, about three-quarters of retail bank accounts were eligible for free chequing and the minimum necessary balance to obtain free chequing, unlimited free debit-card transactions, online banking, electronic bill payments and ATM withdrawals was only US$185.

"By contrast, a new study shows that only 30% of Canadian consumers are eligible for free chequing, and that the minimum balance to gain free chequing was five times higher than in the United States. And to gain unlimited debit-card transactions in a given month, Canadian consumers must pay annual banking fees that may exceed $150 per year."

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