01-03-96 05:25 PM FACULTY OF COMMERCE
THE COMPETITION TRIBUNAL IN THE MAT IER OF an AppliCation by the Din':ctor of Investigation and Research under Sections 79 and 105 of the Competition Act, R.S.C. 1985. c;:, C-34; AND IN TSE MATI'ER OF w:i almse of dominant position in the supply of shared eleclronic m:tworlc services for cOl1SlUllCt-initiated shared electronic financial $el'Vices. BETWEEN: The Director lnvei>tigation and Research -and- . Bank. of Montreal ' The Bank of Nova Scotia '• Canada Truateo Mortgage Company Canadian Imperial Bank of Commerce La Cunfed~ration des caisses popularies et d 1 economie Desjardius du Quebec r-------..-~----....... Credit Umo:n Central or Canada National Bank of Canada Royal Bank of Canada The Toronto-Dominion Bank of Canalla Interac Inc . .; ! ~ and -TelPay, a division of CTl·Comtel Inc. Retail Council of Canada Canadian Life and Health Insurance Association Inc. Midland Walwyn Capital Inc., Ricbanbon Greenshiclcls of Canada Limited Mackenzie Financial Corporation Trimark Investment Management Inc.
I File No. _ l;r' -. Cj!j LJ . I I AFFIDAVIT OF NEIL c. Ql.11GLEY SWOR~· duner ~ March 1, 1996. . ·~ ~ Qf"=,J f ~el~ Exrnbi• No j * fRI. n*, No. de la plice Filed on Zf. 11 I 1 ' · td. LJ R ~ egistra l r e~' Gteffier '
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CT-95/02 ,,.. t ~:. .. ... ~. ~. . .. . ... ·~·· ;; ··-; ·~ ; ..• :" Applicant COMPETITION TRIBUNAL F TRIBUNAL DE LA CONCURRENCE p I A g MAR 4 1996 A~ AEGIS'IRAR. REGISTRAIRE T OTT.'AWA ONT I 41 ( _) "' • • !e'O .:L. Respondents Intervenors COMPETITION TRIBUNAL TRIBUNAL OE lA OONCUARENCS
01-03-96 05!26 PM FACULTY OF COMMERCE 4?12200 tt 3/20 2 I, Neil C. Quigley, of the City of Wellington, New Zealand MAKE OATH AND BAY: l. 1 have been retained by t1w Intervenors to provide expert economic evidence in respect of the Draft Consent Order tiled by the Director of Investigation and Research, und have l knowledge of the m.atters hereinafter stated. .! Experience and Qualifications 2. I am Professor of Monetary Economics md Financial Institutions at Victoria University of WcllingLuu, New Z.Caland, in which cupacity I am Chair of the Money and Finance Department and ~:sident of tho VUW Money Wld Finance Association. I am algo a Research Associate at the .Imlilule fo1· Policy Analysis at the University of Toronto, au Adjunct Scholar of the C.D. Howe Institute in Toronto, nnd a regular Visiting Ptofessor of Economicii at the University of Western Ontario. My curriculum vitae is attached as Exhibit 1 to this affidavit
3. I have studied Canadian banking .and the Canadian financial system for the last fourteen yeats, beginning with the re~arch for a PhD thesis completed at the University of Torollto in 1986. My subsequent researeh has included work on con~uipo1'W.y and historical 1. I ! aspects of bank managQJllent, financial sector regulation wd the payments system. I have acted l as a et;>nsultant to bariks aml investineut manage~ in Canada and New Zealand, a.s well a.s
undertaking sponsored research for the central banks of both countries. My research has been publi:;hcd b;y acaderu.ic Journals as well ru; the C D Howe Institute. Based on this ~ the other ·I activities and experience: :sel out in my curriculum vitae, I have developed knowledge and ! I expertise in the ciconomics of the Cl.UlOOiwi finnncial syl:illem, particularly the operation and i regulation of the banking and pa)'IllCnts sys~m. I : J I , I . I
01-03-96 05:26 PM FACULTY OF COMMERCE 4?12200 # 4/20 3 4 • . My most recent paper, "Public Policy and tho Canadian Payments System: Risk. Regulation and Competition", was delivered on January s. 1996 at the Conference on Issues in the Reform of the Canadjan Financial Services Industry in ToronlO, Ontario. This paper is to be published by the C D Howe Institute. At the time that this paper was written and delivered, I had not had an opponunity co study a copy uf tltE; full hM.t of the Draft Consent Order (DCO), and I had not been consulted or retained by aD.y' of the Intcrvenurs wr espect of the Application · relating to Interac ~ is ~Co.re the c.ompctition Tribunal. 'Ibis paper i& appended to this Affidavit as Exhibit 2. Scope of this Affidavit 5. Subsequent to delivering the above paper on January 5 of this year, t11e Intervenors retained me to express my expen views in relation to tho Application by the Director of Investigation and ~cu. Jn paiticular, the: Intcrvcnors 1-equested that I state my views on the efficacy of sweep, pass~lhrough and zero balance accounts in allowing them to participate
effectively in lnterac md lhe economic issues arising from the use of such accowits, as well aS the economics of panicipal..i.ug ill lotcrac as an acquirer only. In expressing my opinion, I draw upon the research I have done over the past fourteen years in respect of the CliWaclian f1nancial system. I also rely upon my review of the Draft Conscn~ O.rde1·, Notice of Application and the Consent Order Impact Statement.
Ovc..-vicw of the l>ayments System 6. The puyments system provides for the 1rmsfcr of monetary value from one party to auuU11::I'. Instructions for the transter of value, 8UCh as cheques and Intcrac . Dil'l.':Ct Payment, axe means of providing consumers with the ability to obtain access to fund~ or to make payments without actually transmitting cash.
7. Payments transactions <Ue·initlany received and processed in clearing systems. Ciill.ada has a divcnsity ofthcso clearing 5ystems because different pi:-oducts and methods of initiating tnwsfors of value ~uire clearing facilities with distinct
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01-03-96 05:26 PM FACULTY OF COMMERCE 4712200 ** 5/20 4 couununication prolOCols and technologies. Settlement is defined as the lransfet· of some form of ultimate value in satisfaction of the claims made through the payment system. and for practical pwpose& lliis is taken to oc:cur only on the basi$ of the movem.cnl of funds betw~ the sculcmcnt accounts thnt the individual "direct clearing" institutions maintain at the Bunk of CGrulda. The trammi$1i'iou of aggi-egate instructions for the tram;ft:r of value to provide for this fonn of settlement occurs primarily throush the Automated Cheque Sclllement Systcm(ACSS) operated by the Canadian Payments Association (CPA).
8. The payments system plays a cmcial role in the any modem monetary economy l.JCCause only small value transactions nrc settled in cash at the point of ~ale, leaving most transactions to be settled through the payments system. The recent economic lit.erature on payment sy~tem issue.c; focuses on: (i) the search for innovations that incrc:iiil$ the cffic.i.cncy (speed and certainty) with which paymenu. instl'Uctions are transmitted and settlement actually occurs, (ii) changing patterns of parti~ipati.011 ill the payments system resulting from (a) the creation of new fina.ncial instruments and new services in response to i ·1 consumer demand, and I (b) changes in the services provided existing institutions and the emergence of
new institutions which requite access to the payments system_ 9. Uncler the Canadiaa Paymenrs Associatwn Act, the Canadian Payments Association (CPA) is provided with a mandate to assume the responsibilities for . I l clearing and settlement which bad been vc.:sted in the Canadi1111 Bankers Association (CHA) since 1900. Specifically, the objec~ of thw CPA are to "osta'blish and op¢rate n national clearings llml i>ci.tlemeuts system and to plan tho evolution of the national paymeno; system" (1.980 s 5). It has two classes of m~mbers, direct clearing institutions (each of which lw.vw lo accowit for at least 0.5 pcl'Ccnt of the national
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01-03-96 05:2? PM FACULTY OF COMMERCE clearing volume) and imliiecl clea.rers who clear through arrangements with a direct clearer.
1 O. Eligibility for CPA membership is defined by tb.l'ee general provisions: (i) Chartered banks nnd the Bank of Canada must be members of the CPA, (ii) other financial institutions may be admitted if they are (a) a credit union, central, trust company, loan company or other institution which accepts deposits transfer'1ble by order to a third party, and if (b) they are a member of the CDIC. or (for.credit unions, centtals and other institutions) have deposits insured or guaranteed under provincial statutes.
Interac 11. Interac is an electronic network through which institutions allow customers to have access to their deposit and credit card accounts. Access is obtained through Automated Banking Machines (ABM) mul Inl.t:r~ Di.n:1,;l Pa.ymtmt (IDP) temtlual.s by U6iug a card, on which is encoded the customer account identification, matched with a personal identification number.
12. Participation by issuing cards in this network has been in the past, and is under the Draft Consent Order (DCO). cunfincu to F.i11ru1cial Institutions (as defined in the DCO) with customers who hold Demand Accounts (which has meant in practice deposits with and lines of credit from the Financial Institutions).
13. The Statement of Grounds and Material Facts (SO.MF) notes that limiting eligibility for membership iis an anti-competitive practice. In pnrticulur, limiting eligibility for spooso1"Cd membership is an anti-competitive act (SGMP c61), Wld bml ~i.ibstantially lessened competition (SGMF 065 b). The exclusion of non-Financial
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01-03-96 05:2? PM FACULTY OF COMMERCE Institutions is an C1Dlicumpetitive act (SOM:f' c61 ii). I am in ugreement with these statements.
14. The DCO (c 3t) states dJaJ. The u::quil'emcnt of the Dy-laws which stipulates that ··an account shall not be an Eligible Ailcuuut if it permits, by way of so-called "pllSs-tbrough", "sweep·· or "zero balance·· atCCOLlllts or otherwise, access to aooounts held by, or credit froxn, personi:; not members in the Association", shall be revoked. Interac shall not impose any restriction ur condition on access to the Services based on Member Financial Institution's arrangements wiLh its customers regarding the operation of demand accounts." The Consent Order Impact Statement claims that ''While 3(a) pennits the Intcrac :Sy-laws to continue to prohibit commercial entitie.s that an:: not .Financial Institutions from being :rs,ueD, nilicf measure 3{t) offers these entities indirect i!CCeSS to lnterac by eliminating restrictions on a Cardholder's ability t.o ac¢CSS "pass-througn", ··i:;wecp", or ·"zero-balance. . accounts. The Di.rector recogn.iz.cs that, while certain commt:rcial entitles will not satisfy the critei'ia to be an Issuer, the elimination of restrictions on accounts eligibl!:' Lo be accessed through the Sha.re.d Services will facilitate indirect access to .the system by non-Members." The Intervenors have, however, questioned the commercial viability of sucb indirect access.
Demand Access and Deposits: An Evaluation of the Concepts Used to Justify the U:se of Sweep, Zero Balance and Puss-Through Accounts 15. The definition ofFiuaucial Institution in the DCO appears in practical terms to be ~ynonymo\ls with tJ::ic Mte.da formemhership in Uie CPA. This approach to d¢fining ; . eligibility for m.embemlip reflects the fact that historically consumers have used the ~posit .i.o.suumcnts provided _by banks, uust companies and credit union$ to store fUnds that they do nol wish to kl;;c;p in ~ but for which they require demand access or the light to tnmsfer funds by order to a tlµrd party. The con~cntion linlcing demand access and trdlllilcmwility by order to a third party to deposit instruments bas defined lllinkiog about tho operation of the financial system nnd been embodied in the cwrcnt
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01-03-96 0s:2a PM FACULTY OF COMMERCE 4712200 It 8/20 7 law ns 11 monopoly privilege for banks and near-banks. But iu the la.st decade consww;;rs havQ increasingly used mutual funds, investment dealers and life insW'Crs WI repositories for liquid assets, and these institutions have responded by developing innovative new products to me@t tha needs of their customers.
16. A deposit contraet is a promise by a financial i~tilulion to repay an equal amount (plus interest if applicable) on demand or after notice. The funds deposite<l with a bank are not held in trust; the relationship between a bank and its customer is one of debtor and creditor.
17. Since some deposits are issued for fixed tenns, deposit.<: are not always available for withdrawal or transfer to a third party on demand. Ilistoric'1lly, deposits only earned interest when they were !12' payable on demand; that is, they could only be withdrawn at some fixed point in time or llftcr some period of notice. The te!'lns deposit and demand Ql'C thorcforo not synonymous.
18. The tradition~ ttansfc.rablc suirus to banks arose from the historical convention that banks redeemed deposits in cash (specie) on demand. Banks offered their customers ehcquing privileges WI a means of economizing on the use of cash in the economy. and internalizing the transfer process wit.bin the banking system by making ornmgcmcnt.s for these transfers to be clenred through a payments mechanism. The statutory power to take deposits tramfetable on demand to a third party originated as a means of providing lcgisla.tivc recognition of services that banks provided to meet the demands of their customers. It therefore seems reasonable to assume that institutional change in the financial system might re..'iult in different types of institutioru; deciding to offer their customers the convmµence of demand access nnd traru;ferubility to u third party on demand. Financial institutions should therefore not be regarded as having exclusive domain over these services, even though they have cenain statutory rights to accept demand and transferable by 01'der deposits.
01-03-96 0s:2e PM FACULTY OF COMMERCE 4712200 ~ 9/20 8 19. Mutual funds, independent investment dealers imd wurance companies ali:eady transfec value from their custo~cs· accounts on clemomd, but they arc unable as a practical matter to provide paym:.ut on denWld. This is because these institutions are Wlllblc lo pruvi~ ii 111~hanism through which the customer lVCcivcs value dJrectly. They mWil cithc.r p1·ovide a chc;quc drawn on a bank, or transfer the funds into o. bank accot.m.t on which a cheque can be drawn or from which cash can be dl.."IIll:Ulded. Issuer access lo Int.er&: would p1ovide that ability to provide their customers with payment on demand.
20. For any altemalive iru>litution to provide customers with demand access and to uudenake to tcansfor value to a third party on dcmAnd, they must put in place a m.echanism to facilitate it, .such as Issuing membership in lnterac. They must also manage the portfolio of asscl8 in such a way as to ensure that they have sufficient liquidily to meet demands for the transfer of value. Hence, funds that are available on delllllD.d usunlly yield lower returns to compensate for the fact that institutions must keep larger IWJ.UW11.s of fuuds seeming demand accounts in low interest short term securities and in cash.
21. Historically, banks have been distinguished by both (i) demand liabilities and (ii) portfolios concentrated in :short-term loans wid liquid aasets to1accommodate this demand facility. This does not, however, moan.that F.inancial lnst.itution.s as def".med in the DCO are the sole possessors of tho Lechnology required to manage asset portfolios against which demaJld accounts al'e drawn. For example, the money market funds offeced by ~mtual fund Jllallagcn are in fact classic examples of highly liquid portfolios of short term securities o.sW.nst which. demand access could reasonably be provided. Insurance companic:s Hild investment dealers may also invest in cash and JJear cash instl'umellts to the extent that the their liability structures require this.
01-03-96 0s:2e PM FACULTY OF COMMERCE 4?12200 tt10/20 9 22. Those comidcrations suggest tha1 there is no reason for lnterac's mies to dll;tin~uish between the demand and transfc.rable by order products of non-deposit taking instirutions and the deposit products of Financial Institutions. I regard attempts to e:x.clude the Intcrv~nors from direct access to lnterac, or their inclusio-11 in Interac only on terms which are cuI.llllK;fCially inferior to those applying to Financial Institutions, as. being impossible to ju::slify on the b:isis of the distinction between depO&it and other typeS of instruments. The riuancial Institutions' statutoxy monopoly over the supply of demand and l.ransferable by order deposit products does not justify restrictions on the . development of a.ltcrrutLi ve demand and transferable by orde.r financial products within lnterac.
~3. · The respondents have isuuccl thW. "E-ven if the DQW Intcrac Association were to gnmL the applicants [for Loave to Intervene] the ability to issue cards, existins . i regulatory requiccweots would bar them from participation in the deposit-taking retail financial services market, including lhe Ulal.'ket fol' ~ electronic financial. services." 1 Z4. Underpi.oning this stat.cmcnt of the Respondents arc two implicit assumptions char I consider to be incorrect:
• llu: ussurnplioti that to be an lnteroc Is~·uer the lntervcmors must particip<i~ 1'J. deposittakilis services ill a 11um1u::r other than they arc alrc~y statutorily auJhorized to do. Tiie services offered by the Intervcnors may be close ~ubstitutes for those offered by deposit-taking in:stilutions without being deposits, as the Pre-Hearing Conference Memorandum of the Respondents acknowledges: ''Fundii held by ente1prises that are not depos.i.t-takin~ financial institutions do not become the equivalent of deposits merely because they may be tnmsfe1able by or~r to third parties. :Sy means of the provisions I of the federal law governing negotiable instruments, any person may draw n bill of I cxchiWge upon any creditor for the whole or any part of the debt owing, and transfer · 1 1 ; Pr~ng CQnt'ci-cm:c Memo.tawl\IDl of the Respondents<"· St P8 t t - 12..
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01-03-96 05:29 PM F!=!CULTY OF COMMERCE 4?12200 t:t11/20 10 the right to collect it and enforce.payment to any other person."(pagc 14, c 54) The lnrervenozs do not infringe the statutoty mandate of dcposit-taldng institutions by wuk11akifig to uansfcr by order Lu 11 Lhird pwty funds held for their clients, and federal law accommodates such activity by non-deposit taking institutions. Further, non-deposit-taking institutions may reasonably i:equirc effective access to.Interac or othc:t payments mt:elumisws without having the statutory authority to llCCept all or any types of &.h:posiu.. So Ions as the Intervcnon; du not cxcccd their existing statutory powers to offer dcpositS, then I do not 5CC why their de.llWld products would be barred by rcgulato.iy requirements from inclusion within che mark.et for shared electronic financial services.
• the assumption that Inrerac is exclusively part oft he dt:posit-taldn,g retail financial services market. Jnterac is a system for the conununication and clearing of financial messages in which a varieLy uf sc::xvice:s ai.:c cwrcntly provided and through which 11 broader range of services could be p1"0vidcd. Presently, Inwrac provides an ability to draw on the line of credit tts.sociWW w.iU1 a credit card. A.$ the Canadian Bankers Association has stated: "At law, a c.-re;;diL card cransaction is a loan from I.he bank to the co.rdholder, whereas a debit lrdmHSCliou drawn on a deposit account constitutes the - usually partial - repayment of a loan (ie the depasit) made by the coru;unu:;r to the bank.." 2 If the Interac system p1ov ides for drawings on lines of credit, I fail to see how it can be claimed to be ox.elusively the preserve of deposiMahlng institutions. Other institutions with the right to issue credit cards (such~ life and health insurers) might reasonably use Intcrac facilities.
25. Even if the Respondents had thus far chosen to restrict the operation of Inter3C to providing access to pure demand deposit accounts, I do not find convincing the
~ Canadian :Sanlr.en• Aliisociation Ua11ki11g Industry l'iew$ on Access to tha Nu1junuJ /'oym"11ts Syst.,m.-/Jalalacing Righu and llupoTtSlbllitiC6 (OcluL.... 1995) pg 16- (lldubit '.J).
01-03-96 05:29 PM FACULTY OF COMMERCE 4712200 **12/20 I 11 i I I . ! ; argument that direct panlcipation as a card issuer in Interac should be limited to I j I' Financial Institutiom; bc;:cau.~ of their statutory monopoly over the taking of deposits. ·l I ! . 26. ·The continued restriction oflnl.crd.C Issuer status to CPA members would be of more general concern because of i~ likely effect on competition and innovation. Legitimate concerns abouL prud¢ntial standards and the stability of the payments system can easily be e.x.Lendod to the point where they become primarily a cloak for the protection of a dominant market position. It has two implicmions for innovation: first. ic will force innovation within lnterac to conform to the institutional structure provided by Financial In:>tiwlion coua:ol of the core issuer function. Second, the institutions controlling the system will have no incc:ntive to promote innovation which will facilitate greater ~mpetiti.un fruw cuuullCl"CW entities who arc not fjnancial Institutions. ·f Z1. Th~ ~pendents have stated that it is imporumt in considerins access to Interac that balilllces held wid1 commercial entities arc not insured to the same extent as deposit.s insured by the CDIC. 3 Similarly, the: CBA has taken the position that goverruncnt guarmtee of the fwids held by participants in the payments systems and extensive ! .i public st:elur prudential regulation should continue to be required for payments system i
pai.'Lkipat.iou. 4 I disagree with these views for two rew;0ns: (1) CDIC :memben;hip, and lhc associated gumnntcc of deposit balances, arc not rundamental to the !itabilily or Lhc paymcnl:!i system. There have been no system-wide runs on Canadian financial institutions in the past one hundred years and publicly gu&<lll~ and managed deposit insunmcc has served to reduce rather than enhance the stability of the .firuwciw :sy:sl(;w. ~ Co.asequently, the CDA have made ":repeated calls for
~ p,. Hoad.os Confercnec Memorandum oftbo Ro!ipondents. c5~. • C8nadian BllDkcr$ Association Banklng Industry Views un Ac:c:eJi·s 10 the Ncakmal Paymenu System..· Balancln8 Ri81it4 an.J RtUponsibilititts (Ootobe<- 1995) pg 25. , My views are set out in debill in J L Carr, OF Mathewson and NC Quigley, Ensuring Failure: Fir1U.1u:ial SyJik:.m Stab<liry cuul Dep.nh liuttrance In C<PUZda. C D How11 lnatituto, Observation ~6 (1994) (I?liliibit 4); ;ind 1 L Carr, G F Mathcw&()n nnd NC Quigley "Stability withuul Deposit. J.nsurance: C'.aJlada 1890-1966" Jqunwl u/Munt)' CrcdJ1a1id BwJdnc 27 (4) 1995 pp 1137 - 1158 (Exhibit 5).
01-03-96 05!30 PM FACULTY OF COMMERCE 4?12200 IU3/20 12 martret-based reform (co-insuranee)" that would r~uce the guaranteed payment to depositors of failed illlitit.ulions, and in addition ''On several occasions, the banks have requested the option of providing deposit insurance through a private system.''. 6 (il) The regulatory regime is endogenous to both the existence of government-guaranteed dcpo:>it insurance schemos (since govei:mnent risk-bearing makes it efficient. for the government to undertake monitoring) and~ types of contracts that each institution writes. Because mutual fun<ls l:tle uu.sts tllAt do not require repayment of a fixed nominal value, it is efficient for thetA to be subject to less stringent regulation than banks offering deposit contracts. Deposit insurance and prudential regulation therefo1'C do not provide a rationale for the ~lrictio.n of the participation of insurers and investment firms in Interac to sweep, zero . balance and pass-through acco\Ults.
There is No Necessary Link Between Interac Membership and CPA Membership Which Will :Require the Use of Sweep, Zero BalancP. and Pass~Through Accounts. 28. Tht' Intcrac Association has, from it.a inceplion in 1985, required issuers of cards accessing acco\lllts in lhc Lwo shared seniccs to be members in good standing of the Canadian Pay.llli;llts Association. The DCO appcun; t.o effectively require that card-issui.o.g members of Interac be eligible to be members of the CPA through the definition . ; of Financial Institution that it adopts. On this issue the Director has apparently accepted views such as those expressed by the Cauadian Bankers Association: "It ha:; bcx:n, and re1naius, the position of the banking industry that allowing non-. deposit-raking financial institutioD.6, retailers or others to participate in the flow of funds within the intcr-mewbe1· network [Intcnac] is not a viable option, since doing so would entail allowing ~uch patties to participate in the settlement process, an area which. :for ·1 I I "Canadian B~li Ali11~i~on (19?S) FitlQl~i<fl Scrvict:~· Policy Regulation; Tl1t1 ParumounlC)l t>/ Con.sumer Choice (A Submi. ... iun w dic Standing Senate Committee on Ba.11king, Trade and Commerce on its Review of the 1991 Pederdl Pinanchil Sc:n i"'"" Reform Package} April 6 pg 43. (B:ichibit 6). ·, I J
01-03-96 05:30 PM FACULTY OF COMMERCE 4712200 1*14/20 13 reasons set out elsewhere in this paper, must remain limited to participation by deposittalcing financial institutioos. . ,,,, .; I This view appears to me to lie at the heart of the DCO' s re&trictinn of access to Interac I I for commercial entities such ~ lhc Iulcrv~uor:s to the u:sc of sweep, zero balanoo and pass-through accounts.
29. Su loug as the cwrent CPA Act remains in force, the CPA has the authority to i ! .1 . i:csuicl patticipation in the process of settlement, and the ability to w:e its ACSS seLUement facllitie:s, to CPA members. JntQrac is, however distinct from the CPA, and participation in Iuterac is not synonymous with participation in the settlement process. Interac is a communication and Ln:wsactlon clearing system. The Canadian BQilkers Association has noted that clearing and settlement are separable functions ...P rovided i .1 that deposit-taking financial institutions remain in control of both access to their I transferable deposit accounts, and tho provision of settlement and finality of payment •••
there would be no 1'CaSOll to oppose the entry and expansion of third party activities in the processing and network fields."8
3 0 • This allows the feasibility of Issuer participation in Intcrac by insurers, .investment managers and investment dealers, as an alternative to the use of sweep, zero balance and pass-through accounts, since this function is not synonymous with participation .in the settlement p~.ss oc direct accC3s to the settlement protocols managed by the CPA .. . ) 31. Clause 3d of the DCO provides that "Any. requirement in the By-laws that a DIDA:l Cooocctor ("DC") to the ~ Shared Services must be <i D~t Clearer in the CPA shall be revokt:U, uml rcpluced by a provision that any member may become ~ DC:· TIJ.is miglLL be .rcgardc;;d as a barrier to insurers and investment mcu:u1gers and
T Ibid PS 28. 8 Ibid Pi 38.
01-03-96 05:31 PM FACULTY OF COMMERCE 4712200 tt15/20 14 dc:alen> from attaining DC 1:1tatus within Intenu: if this involved an nec:essl!U'Y partldpaiion .in the settlemont system, whc.ro CPA rules would currently preclude pai·ticipation by non-DlQmbcrs of the CPA. However, there is no necessary link · between DC or JmJircct Co1uiector status within Intcrac and mcmbe.niliip of the CPA, since it is feasible for non-:mcmbc;n; of the CPA to contract with Financial Institutions to do their clearing for them. 'I'hill .1DCAns tha.t there is no reason why Interac rules should be allowed co prohibit insurers ai:id invc:istment .lllAllagc.rs And dealers from becoming card-issuing. DC Members of Intcrac.
3 2. The key difference bc:twccn participation as a DC or Indiiect Connecc.or, and that provided via sweep, zero balance and pas5-through accounts, is that the ahltity to cunm:cl would p1·ovldc to insUICrs and investment managers exactly the same terms of membership in Interoic as Financial Institutions. In practical terms this should remove the existing discrimination agaiusl non-Financial Institutions within Intcroc: these Institutions would citlwr become. DCs or establish a contrdCtual relationship with a DC, which would undeitake the business on the basis of its assessment of the soundness of lhe Inscicutions. An Indirect CoWlcctor commercial entity would have jts credit worthiness monitored by the DC, but the latter would not monitor or be involved in decisions about payments from the indivjdual cu1>tomcrs of the sponso~ member.
Operation of Sweep, Zero Balance and Pass-Through Accounts 3 3. The PCO does not provide a defiµition of sweep, pass through and zero balan~ ~nts, or indicate prccllicly how the Director expects them to operate. I expect that in each case lh~ CllljloJ.llt71· of a CO.lll.l.llercial entity who requires access to their fwu:ls tlu:ough Iut.erao would also need to maintain an account UL a Financial Institution.
J 4. A sweep account i:s one from which the bal3nee, or a certain proportion of the balance, is periodically swept into onother account. In the context oflnterac, this could work to sweep funcb from a commercial entity (such a:; iUl inGurance company,
01-03-96 05:31 PM FACLLTY OF COMMERCE 4?12200 t:l16/20 15 inves~nt manager.or investment dealer) into a deposit account at a Financial Institution each day. The value of the filnds swept would ho determined by the extent of the funds to which the customer ~uired demand acccAA. Alternatively, the sweep could OCCij1' at the end of each day. and be dci.crmined by the value of Interac transactions processed during the day. In tbh; c.:ase, Interac access would be provided to lho custom.or of the coxn:mercial entity via a daylight overdraft facility for the deposit acc:ounl maintained at the Financial Institution
3 5. Pass-through acco~rs are distinguished from sweep mrangements by the fact that no fwl~ am ever p~ in the deposit account at r:he Financi.al Int.ermediary. The request for funds passes through the account maintained by the Fioancial Institution, via an on-line reltl time inte1facc with the commercial entity. The request for funds through the Interac system wuuld be met solely on th¢ basis of informulio.n about the extent of avail.able funds held that was provided by the commt:rcial entity.
3 6. Sweep, zero balance 1Wd pass through accounts arc inefficient because they increase transactions cosu;. Transactions c~ts arc the costs of contracting in addition to the price actlllilly paid for the product; that is, the costs of writing, monitoring and ·I enforcing conttactl:i. Whtae there arc n:;gulutions in a market that allow the incumbents to impose on potential entranrs higher lr1111sactio11s costs than the incumbonts themselves woUld have to bear lO undertake the lSiW!C <1Clivity, tbon traru;actiona co:.>ts may impose a barrier to entry. I · 3 7 • The most notable examples of the extent to which trimsactions cost:8 are increased by sweep, zero balau~ a.od pass-through accounts is in their im.pQOt on administration, monitoting and switching costs within Interac. These accounts require tbat any Financial Institution cn~.tiug illl.O such arrangements with a commcrciAl entity would be requU-ed to establish accounts for all individuals who wished to access funds lhruugh lulcl'ac, so that filgnature cards and account records would need to be
01-03-96 05:31 PM FACU...TY OF COMMERCE 4?12200 16 maintained at both iDStitutions. Jndivilluals would face the inconvenience of dealing with a.ccount:S at two diffetent financial sector fin:m>.wlleD one.account could technically proVide. all of their needs. Because tb.ero lU'C such high adminlstrativc costs associated with the establishment of swecpt zero balance and pass-through accounts, tho costs of switching between different supplicts of these services will be important in deter.mining the commercial feasibility of commercial endtie:> 111uving bawcen different suppliers. In addition, these accounts may require the Financial Institution to assess the creditworthiness of each individual bo~wec sep~Jy from rhe decision that is made by U:ic insurer or investment manager or dealer, effectively doubling the monitoring co~t& involved.
38. ·Sweep, pass-1.brough aud zc:ro bahulce aecount<J will involve member£ oflnterac in a web of ~l.iomd traruiactions associated with the need. to ihiit balances from the ·I COlllllWl'Cial entity to the Financial Institution. Such an·angomcnts increase the risk of breakdown ~f the communicalion process withill lnterac, and in addition. increase the
risk in the payments system AS a whole. For example. if commercial entities are proWbited from issuing lhcir own cards, all of theh'. transactions must go throusJi the Share<1 Interac network. ~vcn iC tllose entitios have their own terminals.
3 9. 1'bese costs will be built .into the price of using these fonns of access to Intcrac, with the re5ult that it will~ more expensive for participants than the direct accesg available to PhuwcJ.al Institutions. Thb will 8Cl'Vo to undermine their oommeroial viability.
. i l 40. The net neg-d.tivc impllcati.ons for the competitive vio.bility of any institution forced to use these means or accessing the hltcrac network are clear. This is booause I am unaware of miy benefits for the individual institutions involved, or efficiency gains for Interac and the payments i,;ystwn UJ01e gencra11y which would offset the costs that I have outlinc<i above. The use of p~-1.htougb accounts is no more than n co..~tly means
01-03-96 05:32 PM FACULTY OF COMMERCE 4712200 tt18/20 17 of establishing the fiction tba.t demand access is being provided to deposit accounts. Since the funds to which acce:1s is boins provided actuully remain with the commercial entity in each case, there an: no tangible benefiL~ from this action. save for the preservation of the barrlt:r to co~tition provided by the claim that only Financial ·! -Instibltion accounts can legitimately bv a(;CCS~ through Intcrac. With respect to sweep accounts. funds may actually be pla.~ iu a deposit account with n Financial Intcnncc:Wuy, but agllin this represents an .increase in the transactions costs incurred by lhe agents involved without any offsetting gains such .as reduced tjsk being evidenL
41. Consequently, they do not provide a bai:.d~ fnr effective competition between card-isslling Members of lnterac iUld other commercial entities such as life insurers, invcst.mcnt dealers and investment managers.
42. In setting out I.be requiremenl I.hat. the prohibition on sweep, zero balance and pass-through accounts be removed, the Ditector has provided implicit recognition that (a) non-Financ.ial lm;Lil.Utioas havo a lQgiti.ma.tc n~ to provide their cw;t:omers with. access to funds through Interac, and (b) there is no reason to stop commercial entities participating in Interac.
43. The CBA bas recommended ··thar regulatoxy authorities address the risks associated with ''payable through arrange;mcnts", which might include a probibitiou in the Bills of Exchange Act against the i.sswmce of instruments with all of the visual ttllriblltes of cheques, but drawn on a non-CPA member''. 9 If this view were to be adopted by the CPA it might be po:s~ble for that body to pass By-lo.ws tlult would increase the transactions costs associated with sweep, pass through. and uro balance .I accounts, unu lhus further unden:nine the extent to which they can be used as an ! efkctivc vehicle for competition. I 0 ClUllldiwi BCL1aWO!i .Aa~on Danl.-ins lndll.Stry Vidws. Oil Accsss to ill~ Nario11al Paym.enls SystP.tn: Balancing Rights and Rc.1pcmsibilitiu (Octoher 1995) Pi 12.
01-03-96 05:32 PM FACULTY OF COMMERCE 4712200 ~19/20 18 4 4. for example, in the case of a 011equ4'b1e muney macbt mutual fund product that Tri.mark Investment Management attempted to offer in asOOciation with one of the direct clearing banks. the CPA required that ooly the ckpoait-uJcing instirution could be allowc:d to a.cccpt the risk 8$0Ciated with the cheques that it was processing for Trimark. 1n effect, the CPA took the view that money marlcct mutu.'11 funds in themselves were not sumclcnt security for I.he paym.ent& system. - though the exact same assets in these funds wOUld bave been s-utf'J.cient ISClCurity 1f ~had been managed by a bank. This meant that to establish a pass-through account for each customer. the bank Would have been required to establish individual lines of credit for each customer, or the assecs segregated for each unitholder would have had to be pledged to the bank. Neither of these solutions has proved to be practical or cost effective. and so the product has not been developed.
Contractual Issues Aristn& From the Use of Sweep, Pass Through and Zero Balance Aecounts
45. The necessily for non-Financial Institulions to contract with F.iDancial Institutions for the supply of services assoc:i'®d with the oper.ition of sweep, zero-balance and pasa·through accounts creates a principal-agent problem which will be coi>tly Lo resolve. The use of sweep, pass through and zero balance accoun.ts in the ways envisaged in the DCO requires that the Financial Jnstitution act as the agent of the non-Firuwcial Institution (the principal) in processing any trans.action for a customer of the latter over the Intcrac :netwnrk.
46. The fact that the Financial .Institution and the non-Financial Institution arc direct competitors for the supply LO clle customer of a wide range of financial servi<::es will make it difficUlt and co:.'tly for them to write ·a contnwl which will provide a aatisfactory . i ! bllliiS !or tnis rcla.ti.On!ibip. nlis ls~ the: J:DDral bazord (hidden .wt1on) and hidden
01-03-96 05:33 PM F~CULTY OF COMMERCE inlomwlion p1'0b1ems nonnally associated with principal-agent relationships are · compowided where the contractual parties are competitors.
4 7. For example, (a) neither the CU8tomcr of~ colillilCl'ciO\l entity nor the comme~ial entity ito;elf will posses as much knowledge as the Financial Institution about the speed and quality .1. of service that could be pruvi&d within the con5traint& of the sweep, ZQl'O bllhm.cc Qnd pass-through auangements. This will make it feasible for the Financial Institution to act
underlake strategic action which will disadvantage the commercial entity. Such action might include giving priuriLy LO .ilS OW1l customers whenever the system is busy, or, in the extreme, providing the poorest possible service to the customers of the commcrclal entity in the hope l.lwL lh~ customers will bQ;ome frustrated at dealing with nn entity Chat is unable to provide din:cl access to the Intcrac network, and switch their business to the Financial Intermediazy. (b) th~ Financial Institution~ Ille ability to monitor the frequency and nature of card use by the individual c~Lomers of lts competitors. This will give the Finmcinl Institution information which may be; of strategic advantage should it attempt to solicit the business of those customers of its competitor. It would, for example, provide a. basis for more precisely targeted marketing of products suited to individuals with pnrticulo.r lifestyles and spending patterns.
4 8. The coIIIIIlCl'Cial entity may undertake monitoring of the actions of the Financial lmitiLulion. ll may also attempt to write into the contract terms and conditions which will anticipate sliatcgic action by the Financial Institution and provide incentives which discount~c :such a.ctiou. lu addition, the potential for strategic QCtion may be reduced the more competitive is the tnaiket for tho ~ic;e.s p1'0vi.dcd by the Financial Institution.
4 9 • Attempts to ameliorate the potcntfol fo1· str&U:egio action by the Financial lwtilut.iou will, however, be c9.,tly. Moroovor, sinco substanti:U (sunk) transactions
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01-03-96 05:42 PM FACULTY OF COMMERCE 4712200 20 cost expenditures will be associated with each contrnct for the supply of sweep, zero-.b alance and pH.Ss-LlHuugh accounts that is negotinted, the potential for holdup will e:idst ·even if the market for the Hupply of these setvlecs is competitive. Sweep. zero balmce and pass-through accounts therefore impose costs on the oo~rcial entity which are different from, aml iI1 .::xccss of, those faoc.d by incumbent Financial Institutions OP.Crating in Inten1c. Tu tbi:s extent they cannot provide a. viable basis for competition bc;;twecn fifianeial institutions an commercial entities.
Establishing ,a Subsidiary Trust Company S 0. It is commonly suggested that non-MQmbers of .Inte:rac may participate in Interac by establishing a subsidiaJ:y trust compl:lily which would be eligible for Interac 01cmbcrship, a11d that this might provide a means of addressing some. of the inefficicm.i . i;;s associated wlth sweep, z~1·0 balance and pass-through accounts. The establishment of a subsicllru-y trust company would provide a me:tns of overcoming bar.de.t'S to eimy in Intera.c if the unly p1'0blems were:: (i) fixed costs in establishing agreements with independent deposit-takers and the inability to write a binding long-t.crm con~ct to ensure a return on the fixed investment ("hold-up") or (ii) the lack of cornpelilion among the existing Charter and Sponsored Members of Inte1·ac for the business of non-members.
5 1 . Even if these factors were tmimporta.nt, ownership of a tnist company would not provide a. remedy for the Intcrvenorn. This iG bec:iw:e a trust company owned by a co.m.1.ne.rcial entity would still have to overcome rhe obstaeles to rhe provision of commercially viable A TM access c.rea~ by the differential sT.atus of Finnncinl Instilutions and commercial entities such a.s insurers, investment managers and invel$tment dealers wlthln Interac. By explicitly providing Interac: which the authority to retain By-laws wbicb relegate institutions such as the Intcrvenors to non-Issuer status, the DCO fails to proviuc fuc com.(l)eccially viable Intervenor participation in Internc, even via a tnllit compuny ~ub8ldit1ry. Retention of this baui.c:r to com.petition is the
01-03-96 05:42 PM FACULTY OF COMMERCE more difficult to justify when il is understood that providing the Intervenocs -with direct Issuer access to Intcrac represcnl:s wi efflclcnt solution to the access problem without providing for greater rislc or tronsuotions oosts within the Inte.rac sy~te:tn.
S 2. Added to thQ!e p1ublem.s arc the. high costs of cstublishing and maintaining a separate regulatal subsldiaiy Trost company, and the restrictions on information transfers between a trust and its parent that are provided in provincial. law. I agree with the views of the Canadian Bankers Associuliun tllat ''The mandatory use of subsidic.rics limits tlie ability or financial institutions to arrange their business activities based on business considerations" aud that "With inc;rca$ing emphasis on the integration of fim1.m.:ial services fot the benefit of consumc!'s, the requirements for separate subsidlru·ies will only int:erfcrc with, and odd cost to, the ability of financial institutions to serve their customers." 10 The Ust: ..,r Sweep, Zero Balance and l?'ass-Through Accounts Maintains Barriers to Entry in Cal"d lssua'nce 53. Finaucial sector regulationis in Cana.do. currently provide three exclu.c;ivc privileges to so-cl:lllc<l <lcposit-tak.ing .institutions (banks, trust and loan com.ponies, credir unions): (i) the authority lu Wkv d~posits transferable by order to a third party, (ii) membenobip ill Canada Deposit Insurance Corporation (CDIC) or an alternat:i:ve government guaranteed scheme, nnd (ill) the right or obligation to be a member of the Canadian Payment.-, Association (CPA). The Respondents have lhe votes to appoint a majority of the Board of the Conndian Payments Association (SGMF c57).
54. Interac By-law~ pcnniU1;;d by the DCO offc;:(;tivoly provide that only members of the Camulian Payments ~sociation ~ eligible to be Issuing members of Interac. By pruvilli.ng U1at fotecac may continue to restrict to Financial Institutions Lhl;' right to issue "' Canadian Banl<:c;:n; A,.:mr.:inliun In tl1" Cona\lmoc's Intol'o1>t: Ilnsu"ng Stability, Competitiveness and Service in Canada's Financial Services Sector CA Submission Lo Fina.t1ce Canada on Proposed Changes to Federal FinanciQJ Services Legislation) July 20, 1995, pg 2:2. (Bxbibit ?).
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01-03-96 05:42 PM FACULTY OF COMMERCE 4712200 ** 4/22 22 cards which access the shared services network, the DCO allows Financial lnRtitutions to extend their monopoly privneges inlu the market for consumer-initiated shared electronic financial services, despite the absence of any explicit statutory authority for this.
S 5. The Canadian Bankers As:iuciation bas stated that ''In order to achieve full competition fur ilie boncfit of consumers. our industry believes there should be no preferential treatment for one type of flnancial institution o.t the ex~nse. of other~. 11 Most economists would agree wirh the CBA that bmriers to competition usu~lly result in lower output, higher prices and smaller consumcl' welfare than in competitive markets. The exclusion ofillsw·ancc i'l.fid investment fom.s from effe..ct.ive Issuer participation in Interac, except through costly and cwnberi;omc sweep, zero balance or pass-through arrangexne:o.ts, i~ such a barrier.
The Number of Direct Connectors S 6. The. Consent Order Impact Statement (c 12) states that " it is anticipated that the Order will lead to a significant increase in the number of Direct Connectors competin.g to supply access to the Sha~ed Electronic Network Sc:nrlccs, and an increase in the number of hidirect Connecton1 able to plll'Chase nccess to the network through Direct Connectors." The efficacy of sweep, zero balam:c and pass-·Uu·ough accounts therefore depends in part uu the assutnption that the terms of the nco will provide for more DCs, as well as for more competition between them.
S 7 • There are two problems with the assumption that the number of DCs will rise: (i) If there are subslalltial fixed costs involved in b~onl.i.J:l.g a Direct Connector (associated with owning and aperating a switch~ for c~ampl~ ), oind if the capacity of the current Direcl. Connc;c;tors to process trani:;actions has not heen reached. is not obvious
11 Canadian Bankers Association Financial Services Policy Re1:ula&ion.- rite Pa.rumountcy ofCott~llm~r Choice (A Subrnission to the Standi.ng Senate Committee on Banking, Trade Slld Commerce on its Review of the 1992 Federal Financ:ial Services Reform Package) April 6 1995 pg 42.
01-03-96 05:43 PM FACULTY OF COMMERCE 4712200 u 5/22 23 to me that the equilibrium is for more firms to be Direct Connecting Members of Interac. ror example. National Trust mc:cts the ~nimw::n volume requirements to ~OJ.ilC a Direct Clcarlng membec of the CPA. bot hn" chosen not to exercise the option to become a direct clearer. (ii) If the current DCs are operating emclently in terri.:is of theic wla.tionshlp with other Financial Institutions, then the numbc;i: uf direct clcaters mo.y not increl\Se at all. The.re is still, however, the potential for bunier to entry to rc:muins. This oecurs because Financial Institutions are all members of the CPA, and may use this forum as a basis for co-operati.on which might involve invoking new Interac rules which will discriminat:e against insurers, investment dealers and investment managers. So long as DC status is restricted to members of che CPA. I consider th4it there will 'b~ a significant risk that th.e substantial le$sening of compelili.on within Interac will not be removed by the terms of theDCO.
Acquirer Status S 8. The Consent Order L:np~t Statement c 13 stares that DCO 4 '3(c) opens Membership for acquiring transactions to all commet·cial entities and Financial Institutions that choose to participate only as an Acquirer or an Issuer, in contrast to the current situation in which Members have to parlicipate as both". Whethe.r this provision will reduce the substantial lcSsening of compQtition ussociated with the psst management of Inten1.c 1.k:pends on whether the Acquirer and Issuer functions are separable on economic grounds,
5 9 • l have not undertaken a detailed analysis of the economics of Acquisition and Issuing within the Interac network, because I do not have access to the data that would be necessaIY r.o do this. Howcv¢r, on theoretical grounds I question whethc.r it will he commercially feasible for any cai:nmercial entity Lu pw:tlcipate in the Itttcro.c network as an Ac'luirer only. This is for three rellSons:
" 01-03-96 05:43 PM FACULTY OF COMMERCE 4712200 1t 6/22 24 (i) The facr that the uuwiuant participants in Interuc at p;resent are both f!ll!ilner~ and Acquirers suggests that illcte may ~ syminctrie1> or' j.oint costs ~socintcd with these two activities which provide significant economics of scope itljoint production. In. pa.rti.culnr. it :sc::oms likely that the f'uced costs asa:ociated with the investment in t:echnology that is required to ~lubli:sh as an Acquirer would also cover much of th!! technology required to act as an Issuer. IL therefo1-e may not be oompetitively viable to invest in the technology required to link to Interac as an Acquire.r unless there also exists the possibility of uslng thiS·t.echnology to the gen~ratc ~venue via. the Issuer fUnclion. If this is true, then Acquit'or-only e1•tt-y to Interac will not be feasible. (ii) Ret.ailers using the IDP faciliti.c:s pmvidc::d by Intcrnc requi.1-e the :full X":angc of facilities a.c;sociat.ed with credit card and direct debit card purchases, and the speedy tnmsfer of funda in to thell' bank account. An institution abk. to act M an AcqUtt('r only would not be able to offt:l' the full range of services, and this would put it at a competidve disadvantage with respeet to Financial Insti.tution>i. (iii) lncutnbent members of Interac may fu1d it feasible and profitable to inhibit entry by new independent Acquirors by prk~ing transaction fees for ABM use at below their marginal cost. This possibility will be re.inforc¢d if there cout1L1uc to be barriers to entry of the type sanctioned in the DCO w itl1 respect to the Is:.H1er function, :!iince this will provide a basis for Issuerlli lo earn nmts wllleb may be used to s.ubti.idize the Ac.quisition prices.
Summary oO. ln rcquii:iug that Itttcrnc remove the prohibition on ::owee11, zero bal~ce and pass-through accountS, the DCO recognizes that the Int:ervenors have a legit:imat.e need · to participate in Interac, and that such pa.rticipatio11 is neccsisa.ry to reduce the substantial lessening of competition which ha:; result:ed from the: Respondents' actions.
61. The DCO, however, ptovidc;.-s that Interac may continue to prohibit non-Financia1 Institutions from becoming card~issuing Membens. The sweep, zero balance
01-03-96 05:44 PM FACULTY OF COMMERCE 4712200 I=* 7/22 25 and pass-through accounts that the Intci;vc;;no.rs wlll be forced to use: to parti.cjpat4' in Jnt.erac under the tenns of the DCO a.re not an innovative and cfficicmt solution to the provision of access: they are a costly means of establishing the.fiction that all of the funds being accessed tbrougb In.terac are traditional deposits. The t\se of these accounts for access to Inlerac w111 increase risk, transaction and monitoring costs wjthin the payments system, without any offsetting effo:::ien.cy gains being reaHzed.
62. The requtremenl embodied within the DCO that Issuers be doposit-talcing institutions lni>un::d by the CDIC and who ·arc eligible for in.cmbership in the CPA has no justification in concerns about risk, the legal status of Int.erac transactions, or the technological capability of the Interac syst:cm. There is 110 necessary connection between the clearing fuuctlons perfonned within lntecac and the settlement function for which membership in Ul<: CPA is required, and there is no necesss.cy link between the provision of demand access or transferability requiring access to the payments system and deposit accounts at CPA member institutions. There is thus no plausible justification for confining the Jntervt:nun;' a.cc.:ss to Interw; to sweep, zero balance or pass-throi1gh accountc;_
63. The problem with the current Jnterac :system is that the incumbents 1(memb1:1rs of the CPA) do not have appropriate incentives for the assessment of the optimal level of risk in, and new cul:Ly to, the payments system. The Charter Members have foun.d it convenient to closely tic Intera.c access criteria to CPA policies that place broad restrictions on payment system participation by imititutions who are not CPA members. and have no incentives to search for COlJlIIlercially viable means of making Interac directly accessible to firms ::;u~b as the Intervenors on a commercially viable basis. This is because their private interests lie iu .retaining a barrier to competition from non-Financial In:slilullons. The preferences of the incumbents in Int.erac are the.refor.e · Weighted tOWi:tl'llS lhe status quo because this perpetuates the privileges provided by
01-03-96 05:44 PM FACULTY OF COMMERCE Uloi.1: statuto1y monopoly over the acceptance of demand and trwisfen1ble by u;i;-d~r deposits.
1)4. Over.ill, it is my assessment that the PCO will not mcct the:: fi.:rst of the four objectives set out :in the Comcnl Order Impact Statement (c 11): "(a) to ensure access to the Shared Electronic Network Services by new pD.rticiponts Qn a nondiscriminatory basis;" This is because: (a) tnmsactional and informational ~ynun.etries bc:;twccn the Acquirer and Issuer funclioru; w.ak.c ~l economically infeasible to compete solely a.s an a.cquirer, snd (b) SWeep, z;ero balancc aml p~:S-th.rough llCCO\lDt.$ Will not operate Q8 Q COIIUner¢i:llly viable vehicle for the Jntcrvenors to compete with card-issuing Members of Interac. The measurcs provided in the DCO will Lherefote 110t cure the admitted substantial lessening of competition or reduce the potential for the Respondents to abuse their dominant position in the market for consumer-initiated shared electronic financial services.
6 S. Finally I note that the statutory monopoly for munagemenr of the Canadian pC1.ymentS system currently provided to the CPA, and the dominant role that the Respondenls play in that body, 1-epresent an obstacle to the reduction of the substantial lessening of competition which ha.i; resulted from the actions of the Responde.nts within Inlcrac. It is my view, however, that it is possible to provide tot access to lnterac by the fotervenors on tcnns that will zcduce the .subslantial lessening of competition without inl.d.ugiug. i:he l6gltlll'late mand21.tc uf the CPA. Tb.is will require that eommcrcinl c.utilie:s :such as ch(; Intervenors arc pruvidcd wlth the (l1,.1thority to participate in Interac as Issuers without the nr.:r.:c:.i:.iity of oper~ting through ,s"Wccp, zero bQ).;:m.c::e or pass-through accounl:8, which may be subjoet to the control and regulation of the CPA.
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01-03-96 05:44 PM FACULTY OF COMMERCE 4712200 "* 9/22 27 SWORN BEFORE ME at the ) City of Wellington, ) New ZcQ}ond, this 1st ) day of March, 1996 ) NEIL C QUIGLEY