Appearance before the Standing Committee on Finance (July 7, 2020): Payment trends during the pandemic

Issue

The COVID-19 response has had a significant impact on how Canadians shop for and pay for goods and services and how businesses can meet these needs. Several Payment Card Network Operators (PCNOs) responded quickly to meet consumer needs in various ways, notably by working with their merchant acquirers to increase transaction limits for contactless payment (tap) and by rolling out contactless capability to businesses. For consumers, there has been a marked rise in online purchases and the use of contactless payments and a decline in the use of cash. This raises important questions about whether we will see a corresponding increase in fraud related to non-Chip and PIN payments and how vulnerable groups that rely heavily on cash will be able to transact in the “new normal”.

Background

With one exception (Amex), PCNOs in Canada operate as ‘4-party’ networks. The 4 parties are:

• Merchants: retailers who accept debit and credit card payments
• Merchant acquirers: payment processing companies licensed by individual PCNOs to provide merchants with the ability to accept debit and credit card payments. Acquirers charge merchants set monthly fees, per transaction fees, and also pass on fees set by PCNOs to merchants.
• Cardholders: consumers who use debit and credit cards issued by financial institutions
• Card issuers: Financial institutions, including banks, licensed by individual PCNOs to provide consumers with debit and credit cards. Issuers set annual cardholder fees and interest rates (for credit cards).

The 4-party networks set per transaction interchange rates, paid by acquirers to issuers. These rates are typically passed on to merchants. Unlike the primary 4-party networks (Visa, Mastercard and Interac), Amex Bank, a ‘3-party’ network, acts as its own merchant acquirer and card issuer and therefore has direct relationships with merchants and cardholders and sets all its own merchant processing fees and cardholder interest rates.

FCAC monitors the adherence of PCNOs to the Code of Conduct for the Credit and Debit Card Industry in Canada (the Code). The Code protects merchants by ensuring they have access to adequate information about payments products and fees. Investigations for fraud and unauthorized transactions are conducted by the bank that issues a consumer’s credit or debit card and are subject to limited liability rules. FCAC treats the PCNOs’ zero liability policies for unauthorized transactions as public commitments to be managed by FRFIs. Interac e-transfers are not covered by the zero-liability commitment. 

Data/Quick facts

• Visa, Mastercard and Amex increased contactless payment limits from $100 to $250 per transaction. Interac has kept their limits at $100 per transaction, citing concerns about security and reliability.
• Mastercard reported that year-over-year online commerce spending in Canada was up 112% in April 2020, despite total retail spending being down 4%.
• In April, Interac reported a 62% increase in first-time e-Transfer users compared to last year.
• In May, Payments Canada reported that 53% of Canadians reported using card or mobile tap payments more often for in-store purchases than pre-pandemic. 28% of respondents reported using credit cards more frequently. 62% of Canadians reported using cash less than pre-COVID-19.
• The Bank of Canada continues to ask that retailers continue accepting cash to ensure no undue burden is placed on “those who depend on cash and have limited payment options”.

Key messages

• PCNOs (with the exception of Amex Bank) do not have direct relationships with consumers or merchants, but have worked closely with merchant acquirers to enable increases in contactless payment limits.
• It is not yet clear whether the surge in online/contactless payments and decline in cash use is driven by shifting consumer preferences or the availability/restriction of certain payment options at businesses. FCAC is conducting further research to better understand the impact of COVID-19 on payments trends and will continue to monitor trends and issues as businesses reopen brick and mortar stores.