Canada: No Profits For Interac: Commissioner Will Not Agree That Payments Association Can Become For-Profit Corporation

On February 12, 2010, Canada's Commissioner of Competition announced that she would not agree to changes to a fourteen-year old Competition Tribunal order which, among other things, prohibits the Interac Association from operating on a for-profit basis. Interac is the organization that develops and operates a national payment network allowing Canadians to access their money through automated banking machines and point-of-sale terminals. Surprisingly, the Commissioner appears to favour a dated and cumbersome regulated structure over evolution to a market-based entity. The press release issued by the Commissioner did not explain the analysis that lies behind her decision and raises a number of questions as to why she would not support a move by a regulated entity towards a more market-based structure.

In 1996, on the application of the Commissioner, the Competition Tribunal issued an Order on consent against Interac and the leading Canadian banks who were its founding members under the abuse of dominance provision of the Competition Act. The detailed Order was intended to remedy an alleged joint abuse of dominance by the respondents. In brief, the structure and rules regarding membership and services, which had been established when massive and risky investment to develop technology was required, were by 1996 alleged to be inhibiting competition in financial services and payments innovation.

The Order required, among other things, that Interac be maintained as a business corporation and managed on a not-for-profit basis. Any fees or charges Interac imposed for the use of the inter-member banking network could only recover costs, which apparently could include cost of capital, but not returns on risk capital.

The Competition Tribunal issued reasons in 1996 when the Order was made. The Tribunal noted that the Commissioner of the day described the measures in the order that relate to the structure of the board of directors as providing for a more competitive environment within Interac, which would lead to enhanced innovation in services offered over the Interac network. Innovation was thus recognized as something to be encouraged. The requirement that Interac operate as a non-profit organization was apparently intended to preclude the charter members of Interac from exploiting their control of the network for their own gain.

In 2009, approximately thirteen years after the Order was issued, Interac (which has continued to develop and now has an increased and diversified membership) requested that the Commissioner consent to vary the Order to allow Interac to restructure to a for-profit model. The Competition Bureau conducted a comprehensive assessment of Interac's request and obtained extensive information from Interac and other market participants, as well as consulting with a number of experts.

The Commissioner's press release states:

Based on currently available information, including Interac's current dominant position in the market, the Bureau cannot support changing or removing the safeguards in the Consent Order, which are effective in protecting consumers from potentially anti-competitive activity. In particular, the Bureau does not agree that the removal of the restriction against for-profit activities by Interac would be pro-competitive, or is necessary to allow Interac to remain competitive..To provide Interac with greater flexibility to respond to any material entry in the future by a competitor, the Bureau also evaluated other changes to the governance structure and corporate status of Interac. Those changes would allow Interac to continue as a not-for-profit corporation with independent directors. The Bureau has concluded that such changes would be acceptable, as they would maintain the necessary safeguards against anti-competitive activity that are contained in the Order.

The Commissioner is thus prepared to accept some changes to the board structure, but is not willing to agree to a for-profit model. This is curious because the Commissioner would normally be expected to recognize that profit is the best (and a completely acceptable) incentive for innovation, and that profit-motivated market forces are generally more effective in delivering the benefits of a competitive marketplace than are regulated market structures. It is, therefore, unexpected and puzzling that the Commissioner would reject a proposal for Interac to evolve into a more market-based model without providing an explanation as to why this deviation is appropriate in the circumstances (beyond merely alleging a dominant position).

European law recognizes the setting of an excessive price as an exploitive abuse of dominant position. In Canada, however, it is generally accepted that the mere setting of a high price or the earning of significant profits are not in themselves anti-competitive acts. The Commissioner's rejection of a proposal to earn profits raises the question as to whether the underlying concern is related to pricing. This is a dangerous area for any competition law enforcement agency, given the considerable difficulty of determining what constitutes an excessive price. Indeed, the Bureau's usual preference for market forces over regulated industries is understood to be due in part to skepticism about the ability of regulatory authorities to act in place of normal market pricing signals to determine an appropriate price. Hopefully, the Commissioner's decision with respect to Interac is restricted to the unique facts and does not presage a shift towards a more interventionist European approach to pricing. Perhaps future developments in the Interac matter will shed more light on the Commissioner's views on the roles of profit and pricing decisions in the marketplace.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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