Canadian mobile payments – a case study in cooperation

Canada has become a leader in the adoption of mobile payments by merchants and

Canada has become a leader in the adoption of mobile payments by merchants and consumers.

consumers. PCM looks at the factors driving the country’s m-payments success story and how a collaborative eco-system is a key driving factor.

With a population of 33.5 million, Canada’s mobile payments journey has been incredibly smooth in a short space of time and is being held up as a template from which other countries can learn – reports Victoria Conroy, Editor, Payments Cards and Mobile.

Canada’s successful adoption of mobile payments is a major factor in Canada rapidly becoming known as one of the most advanced non-cash payments markets in the world, a fact cited by a recent MasterCard study which says that much of this success can be attributed to early adoption of payment innovations like contactless technology, EMV chip migration, a modern payments infrastructure, and the rapid emergence in Canada of NFC payment-ready terminals.

The MasterCard study found that overall, of the $63 trillion in total global consumer spend in 2011, 34% ($21 trillion) was done with cash, with cashless payments accounting for 66% ($42 trillion). Within Canada itself, non-cash payments account for 90% of the total value of consumer payments in Canada. Additionally, cash accounts for only around 10% of the total value of all consumer payments in Canada, and it only accounts for a little more than 40% of the number of transactions.

“The increased adoption of electronic payments has propelled Canada to leapfrog other countries and secure a top spot as nearly cashless. In other words, Canadians are comfortable with and prefer using other forms of payment and have been at it for years. What’s interesting, though, is that the real and significant cost of cash for consumers and merchants is never discussed. Canadian businesses, government and consumers ultimately benefit from the safety, security and transparency of the innovative payment solutions that MasterCard develops every day,” said Betty K. DeVita, president of MasterCard Canada.

In September 2013, PCM was invited to take an exclusive look at the mobile payments landscape of Canada under the auspices of the Government of Ontario. David Wai, senior sector advisor at the Ministry of Economic Development, Trade, and Employment, outlined the major factors driving mobile payments in the country, and in Ontario in particular. The country’s big five banks and two of the three dominant telcos are headquartered in Ontario.

“Toronto is the capital of Canada’s financial services industry, with Ontario representing 50% of Canada’s financial services GDP. Also, Ontario has the largest smartphone base of all provinces at 6.9 million,” said Wai.

A fertile ground for payments

In comparison to the US, UK and other developed non-cash markets around the world, Canada’s payment industry is much more concentrated and far less fragmented, meaning that consumer adoption of payment methods is relatively quicker given that the dominant banks, telcos and other players are targeting a fairly homogenous market.

The second major factor is in relation to Canadian consumer payment usage. Canada is a market dominated by debit card usage – in 2011 around 78.8 million cards were in circulation with 23.6 million debit card users. In 2011, around 4.35 billion debit transactions were made for a value of C$190 billion. Canada completed its EMV migration a few years ago, facilitating the move to m-payments.

In 2012, there was a total of C$44 trillion in total payments volume and over 24 billion domestic transactions, with a full third of transactions being non-cash, while cheque volume is small and decreasing year over year as they are gradually displaced by card payments. According to Wai, cash use has been falling, although it remains a popular means of payment, particularly for low-value transactions. And this is where the concerted push towards promotion of m-payments is really making an impact.

In relation to m-commerce, in 2011, 3.4 million Canadians used their mobile phones to pay for goods or services, while smartphones have become the mobile device of choice in Canada in 2012, with 62% of mobile phone users. Additionally, Canada has one of the highest concentration of contactless card readers in the world (250,000 out of 800,000 POS terminals), meaning that Canadian consumers have access to an extensive contactless and m-payment acceptance infrastructure.

Tech, bank and telco collaboration

On the telco side, there are three large telco carriers with full nationwide networks, along with a number of regional players and sub-scale start-up competitors. “With a limited consumer interest in prepaid mobile telecom, a strong landline network, and limited multiple SIM ownership, mobile penetration is relatively low in Canada compared to its peers,” said Wai, “however, because of its high penetration of smartphones, early adoption of 4G, and mobile data usage, Canada’s carriers have some of the highest monthly average revenue per user.”

Within Ontario, Toronto is the fourth-largest ICT cluster in North America in terms of the number of establishments, with one of the largest mobile app development clusters in the world. According to Wai, this has enabled tech companies to easily interact with each other, exchange ideas and establish partnerships.

In relation to mobile payments, from Ontario’s perspective, NFC will be a key enabling technology for mobile payments, according to Wai. “The timing of the rollout of EMV technologies in Canada has facilitated the rapid penetration of NFC–enabled merchant terminals. MasterCard has indicated that one in 10 MasterCard payments in Canada are made using PayPass. Also, 19 of the top 25 Canadian merchants by volume accept contactless payment. Canada and Ontario have been rapid adopters of smartphones. As a significant end market of BlackBerry and its NFC-enabled smartphones, the penetration of NFC-enabled smartphones is higher in Canada than many other jurisdictions.”

With Ontario consumers generally comfortable with the use of NFC and the use of smartphones, they appear to be ready to use mobile payments, at least in the NFC/contactless version. Most of the basic infrastructure is in place for wide adoption of mobile payments in Ontario. The key issue for wide adoption will be around the app experience. The key is for application developers (retailers, banks, mobile carriers) to create compelling experiences that provide an entire mobile shopping experience that happens to incorporate easy mobile payment.

Figures from CIBC, one of the big five banks, found in 2012 that 36% of Canadians who have a smartphone now do mobile banking via their device, plus a high percentage said they would ‘consider’ making mobile payments via their smartphone. It also found that 47% of surveyed consumers would consider using a mobile payment service and have it charged to their credit card.

Telcos aim to transform m-commerce

And this where the telcos have a part to play. The first bank to introduce mobile payments was CIBC in collaboration with telco Rogers using a BlackBerry NFC-capable device in 2012 (this has since been extended to LG and Samsung devices). The “suretap” app enables Rogers subscribers (around nine million as of 2012) to use their mobile devices to make contactless purchases up to the value of C$50. Rogers customers with compatible smartphones can download their CIBC credit card credentials to the SIM card in their device.

David Robinson, vice-president of emerging business at telco Rogers, told PCM: “Our end-game is to transform how consumers and business transact. We are seven years into a 10-year trek. The first phase was about establishing a secure foundation by making global payment cards available in mobile devices – without disrupting the existing payment network infrastructure. The second phase involves introducing a simple, seamless user experience that starts to shift consumer payments to mobile wallets by improving card distribution. The third phase is about transforming the m-commerce experience so that mobile is the preferred commerce platform because it’s a better experience.”

Here, Rogers is leveraging its expertise, being the only Canadian telco in the GSMA “Pay-Buy-Mobile” initiative launched in 2005, and the first Canadian telco to trial SIM-based NFC phones, using the GSMA protocols with RBC, Visa and Motorola in 2009. Rogers was also the first Canadian mobile network operator (MNO) to reach a commercial agreement with a Canadian bank, CIBC, for virtual payment card distribution. More recently, Rogers began the process of seeking a bank licence in September 2011 and it still has another year to move forward with an application to meet the requirements of an order to commence and carry on business, when it will actually be able to start offering credit card services.

According to Robinson, for consumers, the development of a SIM-based mobile wallet smartphone feature puts control of m-payments in the hand of the consumer, where it should be. “It should be credential-agnostic, capable of supporting large issuers using global payment networks as well as small issuers using proprietary, closed loop network. It should also provide a consistent service across handset platforms, with the ability to move the wallet from handset platform to handset platform,” Robinson said.

“How many consumers limit the number of non-payment cards they carry based on the inconvenience of all that plastic, yet they shop at stores that have reward programmes on plastic or cardboard cards? There will simply be no reason to NOT carry a reward card from a retailer they frequent.”

The key benefits of the mobile wallet to the issuer of the credential include a virtual card distributed through Canadian payment service provider EnStream, which can be made available to virtually every smartphone capable of supporting the service. The wallet will be open to all issuers – large issuers may use their own applications to access their credentials whereas smaller issuers will not be required to develop or maintain handset applications. “Virtually-only issuers will have material cost and speed-to-market advantaged over plastic-only or plastic-first issuers,” Robinson added.

“In my opinion, smaller issuers will benefit the most from the mobile wallet. Historically, there have been high, up-front fixed costs to the issuance of a plastic card, including production, and distribution of the card itself. In a virtual card world, these costs are much lower, so more small issuers (like small retailers) will be able to cost effectively issue cards.”

For merchants, the key benefits will be that the consumer will have a lower barrier to card carriage than in the physical wallet world, and the costs of distributing virtual cards will decline radically, opening the market to new types of payment and non-payment credentials. The most innovative of merchants will be able to combine the ability to market directly to the mobile consumer and payments, creating a seamless communications between the merchant an their customers from information, to offer, to redemption, to purchase, to reward.

“For this vision to really come to fruition, however, there needs to be an equally open mobile proximity accepting infrastructure in place. That is not really in place today,” Robinson said. “Yes, there are more contactless terminals that accept mainstream contactless payment applications, like PayPass, and payWave, but to go beyond payments – where the merchant can accept many more payment and non-payment types – more has to be done to make sure that merchant terminals are as equally open on the accepting side as smartphones are sure to be on the credential presentation side. It is critical that the underlying Canadian payment card industry is ready for contactless cards. Without that, emulating a card on a phone is rather pointless.”

According to Robinson, Canada is well-positioned in that it already has an underlying contactless issuance and acceptance infrastructure, more smartphones than almost any country in the world, and telcos which routinely subsidise new devices, accelerating adoption.

Other companies demonstrating their m-payments capabilities included CIBC, and EnStream, which connects card and credential issuers with wireless carriers, allowing consumers to use virtually stored cards, to interact with merchant readers, for payment or identification validation. EnStream is a joint venture between Bell, TELUS and Rogers and specialises in facilitating NFC-based mobile transactions through standardising interconnection.

Canada’s national debit scheme Interac also demonstrated its Interac Flash proposition, an EMV-based solution which enables cardholders to make mobile payments at NFC-enabled acceptance points across the country, while SecureKey, an ID and authentication specialist, showcased its cloud-based briidge.net platform for use with online, mobile and in-person ID and authentication applications. Moneris, one of North America’s largest providers of payment processing solutions, highlighted its mPOS and digital wallet propositions, and Metrolink, a transport agency, demonstrated its PRESTO reloadable contactless prepaid card.

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