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FINANCIAL SERVICES REPORTER

Canada's competition chief has shot down a bid by the Interac Association to become a for-profit corporation, dealing a blow to the country's main debit system as it prepares for battle with Visa Inc. and MasterCard Inc.

The decision by Melanie Aitken, the Commissioner of Competition, means that the possibility of an initial public offering of Interac is now off the table - and that it will likely be easier for credit card giants Visa Inc. and MasterCard Inc. to build Canadian debit businesses.

It is also another sign that Ms. Aitken, who took over the helm at the Competition Bureau last year, is looking to spur competition in a number of markets. Earlier this week, the Competition Bureau said it was headed to the Competition Tribunal to try to open up the Multiple Listing Service.

Yesterday, the bureau said it cannot support allowing Interac to become a for-profit group because the association currently has a dominant position in the debit card market, and the restrictions currently in place are there to protect consumers from any potentially anti-competitive activity.

Interac runs the system on which the majority of Canadian debit and ABM transactions take place. It was created in the mid-1980s when a number of big banks and Desjardins Group got together to ensure that their customers would be able to withdraw cash at one another's bank machines.

In 1994, Interac began offering a system that enabled retailers to accept debit cards. But the Competition Bureau accused Interac and nine of its members of abusing their power in the payments sector. To settle that issue, Interac signed a deal with the Competition Tribunal in 1996 that says it can only charge fees that cover its costs.

Interac approached the Competition Bureau more than a year ago to request that it recommend that the tribunal change the deal because Visa and MasterCard are rolling out plans to move into Canada's debit market for the first time. Interac wanted to be allowed to earn a profit so that it had money to compete with the credit card giants; it wants to be able to finance research and development to come out with new products as competition heats up.

But, in its decision, the bureau said Interac is not prevented from competing simply because it is a not-for-profit organization.

"I'm disappointed but undaunted," Interac chief executive officer Mark O'Connell said in an interview yesterday. "We definitely still believe that the for-profit model is the best way to address the changes that we need ... to have a competitive business model."

As it stands, Interac's ability to do any R&D or innovation work is limited, he said. However, he added that the Commissioner of Competition has indicated that the bureau is willing to work with Interac to examine its financing sources. At the moment, its members are its only source of money.

Adam Fanaki, a lawyer retained by the bureau to work on the issue, said the bureau would be open to changing Interac's governance so it has more independent directors, something that could make the association more nimble.

Diane Brisebois, CEO of the Retail Council of Canada, said she hopes further discussions between Interac and the bureau are fruitful.

"We will be happier when we feel there is a solid governance model that allows Interac to be the most cost-effective model and also to be innovative."