In what some are appropriately calling a "sea change" in the Canadian credit card industry, the Competition Commissioner has formally announced that the Competition Bureau will no longer oppose duality of membership in credit card networks that operate in Canada. This announcement was made in a letter issued in November, 2008 to Canada's major credit card issuing banks and financial institutions, credit card networks and other interested parties.
Until recently, Canadian credit card issuers had to choose between a membership in Visa or MasterCard, being the two major credit card networks in Canada, while merchant acquirers and processors of credit card transactions had to utilize innovative and sometimes complex and costly sponsorship arrangements in order to acquire and process both Visa and MasterCard transactions. Until relatively recently, Visa had a formal by-law that prevented duality in Canada. MasterCard still has in place a competitive programs policy that prohibits duality in Canada with schemes in competition with MasterCard.
Over the last couple of years, Visa and MasterCard have changed their organizational structure from member associations to publicly traded companies. Under the prior structures, the concern had been that if an issuer or acquirer were a member of both associations, then it would be possible to simultaneously influence the corporate governance and competitive decisions of both associations.
The Commissioner's Announcement
With the new ownership structures, in the words of the Commissioner, "the Bureau is no longer concerned that there is a potential for a member, or group of members, of one credit card network to negatively influence the competitive operations of another card network through dual governance." As a result, the Commissioner has stated that the Competition Bureau will not bring an enforcement action under the Competition Act against any credit card network, issuer or acquirer, who simultaneously enters into agreements in respect of multiple credit card brands or networks.
Recent Duality Development
Interestingly, JPMorgan Chase Bank, N.A. became a member of Visa in Canada in August of 2008, well in advance of the release of the Commissioner's letter and despite the existence of the MasterCard policy. JPMorgan has been a member of MasterCard in Canada since its purchase of the Sears credit card business a few years ago. Accordingly, it was thought that the MasterCard competitive programs policy would have prohibited it from becoming a member of Visa in Canada.
Prior to this there have been instances of duality within the same ownership group. For example, in 2005 Bank of America, N.A. (a Visa issuer in Canada) purchased the parent of MBNA Bank Canada (a MasterCard issuer in Canada). However, these instances were always on an exceptional basis and did not involve the same legal entity. It has been rumoured that another Canadian bank that is a member of MasterCard has also become a member of Visa this past summer, but this has not yet been confirmed publicly. Accordingly, although the details surrounding this development remain murky, what is clear is that JPMorgan's membership in both Visa and MasterCard is the first instance of true duality in Canada.
Competition Bureau's New Focus
In light of the Commissioner's announcement, the Competition Bureau’s focus has shifted to how payment system networks might affect competition. The Commissioner has indicated that the Competition Bureau will be concerned and may take enforcement action where competition is affected in the following circumstances:
- Where a major or dominant payment systems network induces an issuer or acquirer to deal with that network in a way that is likely to "substantially lessen" competition.
- Where the governance structure of a payment systems network permits one or more issuers or acquirers to "materially influence" the decisions of more than one credit card network.
What Lies Ahead
Given this new announcement from the Commissioner, and the earlier repeal of Visa's by-law that precluded duality in Canada, it is widely expected that MasterCard will repeal its duality prohibition. With such repeal, it will indeed be smooth sailing ahead for duality in Canada. Issuers and acquirers will have wide-open seas to create new relationships and introduce innovative products. In addition, with the right political climate, bank mergers that may once have been called into question on the basis of duality restrictions, will now be able to proceed without impediment on this basis.