Interac: Changing for the Future Interac Association Tel: (416) 362-8550 Fax: (416) 869-5080 Suite 1905, Box 109 121 King Street West Toronto, Ontario M5H 3T9 October 1997 TABLE OF CONTENTS OVERVIEW ............................................................................................................................................3 ORIGINS AND GOALS...........................................................................................................................4 ORGANIZATION....................................................................................................................................4 MEMBERSHIP ........................................................................................................................................5 CHANGES TO GOVERNANCE..............................................................................................................7 CURRENT INTERAC SERVICES............................................................................................................8 FUTURE SERVICES – SHARED OR BILATERAL/MULTILATERAL................................................ 11 INTERAC NETWORK MODEL............................................................................................................. 12 INTERAC ASSOCIATION AND THE ELECTRONIC DEBIT PROCESS ............................................ 13 INDIRECT ACCESS.............................................................................................................................. 14 FEES...................................................................................................................................................... 16 WHAT IS AHEAD? ............................................................................................................................... 16 HARNESSING TECHNOLOGY TO IMPROVE SERVICES................................................................. 17 CONCLUSION ...................................................................................................................................... 18 2 Overview The payments system in Canada has been undergoing dramatic changes in recent years to meet new and growing consumer demands. These changes have led to significant developments in the Interac®1 payments network. This paper describes Interac Association’s current role in the payments system, examines the effects of changing consumer demands and technology, and of innovations, and highlights how Interac Association expects to evolve in the future. What began in 1984 as the collaboration of a few deposit-taking institutions to link their automated banking machines (ABMs) is now an international success story. Interac Association members currently provide two core electronic payments services: Shared Cash Dispensing (SCD) and Interac Direct Payment (IDP). Shared Cash Dispensing currently links more than 18,800 ABMs. Introduced in 1992, Interac Direct Payment is now available at 225,000 retail locations from coast to coast. In June 1996, the Competition Tribunal approved a Consent Order that was negotiated between some Interac Association members and the Bureau of Competition Policy. The Consent Order stipulated a new mandate for Interac Association. The new mandate included broadening the membership and changing the governance structure, which Interac Association has done by implementing new by-laws. Interac Association’s mandate continues to include the provision of secure, convenient access to funds in chequing and savings accounts held by deposit-taking financial institutions. Through Shared Cash Dispensing, Interac Association also provides a means of obtaining cash advances on credit cards 1 Interac is a trade mark of Interac Inc. 3 Origins and Goals Interac Association was founded in 1984 by five Canadian financial institutions: Royal Bank, CIBC, Scotiabank, TD Bank, and Caisses populaires et d’économie Desjardins. Their goal was the creation of a shared ABM network to give customers broader access to their money. By pooling resources and cooperating at this early stage, Interac Association members were able to build the infrastructure of a national electronic payments network. By 1986, Interac Association had grown to 10 members — Bank of Montreal, Canada Trust, Laurentian Bank, National Bank, and Credit Union Central of Canada had joined the original five. Although it started as a cooperative venture of a few large institutions, as Interac Association grew, many of its new members were smaller institutions. Membership in Interac Association allowed members to offer services that were national in scope. A small financial institution with one branch could use the shared services to provide its cardholders with access to all ABMs and point of sale (POS) terminals connected to Interac services in Canada. Providing such a national infrastructure independently would be nearly impossible for a single firm. Smaller institutions were also able to participate in other innovations, such as Interac Direct Payment. Today there are 42 members of Interac Association. Organization The following three organizations play a role in carrying out Interac Association’s mandate: I. Interac Association is an unincorporated association. Its main purpose is to facilitate members’ transactions under a common set of rules and market the services Interac Direct Payment and Shared Cash Dispensing. II. Interac Inc. is a not-for-profit company that owns the Interac trade marks and oversees the licensing of the software used by the members of Interac Association. III. Acxsys Corporation owns the IMN software, the interface software that permits the exchange of financial transactions between members, and provides an exclusive licence for that software to Interac Inc. 4 Membership Membership in Interac Association is open to any Canadian commercial entity. Since November 1996, membership has extended beyond deposit-taking financial institutions to other Canadian companies. These include non-deposit-taking financial institutions, such as retailers; communications companies; and firms that provide specialized network services. There are two types of Interac Association members: direct connectors that connect to one another to use the Interac network, and indirect connectors that access the Interac network by connecting through a direct connector (see Figure 4). The role members choose to play in Interac Association also varies. The Consent Order has made it increasingly easy to “unbundle” services into separate businesses or activities, thus enabling third parties to become important players. As a result, Interac Association members may now undertake four different service delivery roles, depending on the characteristics of their organization: issuer, acquirer, connection service provider, and settlement agent. Issuers are members who are Canadian deposit-taking financial institutions. There are currently 35 issuer members. Among these members are deposit-taking institutions that are owned by other financial service providers, including Sun Life Trust, owned by Sun Life Assurance Company, and Trimark Trust, owned by Trimark Financial Corporation, a mutual fund management company. Acquirers own or operate consumer access points such as ABMs and POS devices. These terminals are used to transfer to the issuer the cardholder’s instructions for a cash withdrawal or payment. Acquirers can be any organization that is capable of acquiring a transaction on the network service, such as a request for payment. Acquirers do not have to be issuers. As a result of the Consent Order, third party processors and retailers may now be acquirers. 5 Connection service providers are direct connectors that link to the network other Interac Association members that do not have a direct connection. While most large companies will choose to connect directly, smaller companies may choose to use the services of a connection service provider, thereby avoiding the cost and expertise required to build a sophisticated system to link them directly to the Interac network. The acquiring and connection service roles represent an intermediate market and provide the best example of how the Consent Order has had a significant impact on who participates in the payments system. Since November 1996, three new third party processors have joined Interac Association as direct connectors to serve as connection service providers while also functioning as acquirers. Interac Association expects to see a few more connection service providers entering the market in the near future. Settlement agents are financial institutions that settle transactions between issuers and acquirers on the Canadian Payment Association (CPA) Automated Clearing Settlement System (ACSS). This final step in the process of a transaction is open only to certain deposit-taking institutions, known as direct clearers, that have sufficient volumes of transactions to settle on the ACSS. These institutions have a distinct relationship with the Bank of Canada that allows them to facilitate the final settlement of transactions at the end of the day. A member can play one or all of these four roles, provided it meets the requirements of each category. A financial institution, for example, could be an issuer, an acquirer, a connection service provider, and a settlement agent. A third party processor or a retailer could be both an acquirer and a connection service provider. It is also anticipated that some members may specialize as connection service providers, whose sole business