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Interac Association Submission in Response to Finance Canada's 2006 Review of Financial Sector Legislation:
Comments for the 2006 Review of Financial Sector Legislation
121 King Street West
Suite 1905, Box 109
Tel: (416) 362-8550
Fax: (416) 869-5080
Interac Association (the Association) and Acxsys Corporation (Acxsys) are pleased to provide this submission as part of the 2006 Review of Financial Sector Legislation. Annex 6 of Budget 2005, entitled An Effective and Efcient Legislative Framework for the Canadian Financial Services Sector, A Consultation Document for the 2006 Review of Financial Institutions Legislation, invites comments on the topic of electronic transactions. Specifically, it asks for comments relating to the disclosure and assignment of liability for all forms of electronic transactions.
This submission provides an overview of the Association and Acxsys, and background on INTERAC services. We work continuously to ensure that INTERAC services are a safe and secure way for Canadians to pay, but acknowledge that where there is money, there will be fraud. We highlight the significant measures we have taken to protect consumers from loss through fraud and the major investments we are making to protect them in the future.
We also see the federal government playing a role in helping to improve consumer protection and to create a level playing field for all market participants. In this regard, we identify several important areas where we believe government can play a larger role in working with the industry to better protect Canadians in their use of electronic payment services.
2. Who We Are and What We Do
Interac Association is responsible for the development and operation of a Canada-wide network of two shared electronic financial services - INTERAC Shared Cash Dispensing at automated banking machines (ABMs) and INTERAC Direct Payment at the point of sale (POS). Shared Cash Dispensing allows cardholders to make cash withdrawals from ABMs not belonging to their own financial institution and is available at more than 47,000 ABMs across Canada. INTERAC Direct Payment is Canada's national debit service, and is accepted at more than 375,000 merchants from coast to coast.
Founded in 1984 by five Canadian financial institutions, the Association now has nearly 100 members, including a broad array of non-financial enterprises, such as ABM and POS terminal deployers, payment processors, and one merchant. By delivering safe and efficient ways for Canadians to pay, Interac Association has helped to make Canada a recognized world leader in debit card services, and INTERAC services an everyday part of life for Canadians.
Acxsys Corporation was founded in 1996 by the original architects of INTERAC services. Owned by eight of Canada's largest financial institutions (BMO Bank of Montreal, CIBC, Credit Union Central of Canada, Fédération des Caisses Desjardins du Québec, National Bank of Canada, RBC Royal Bank, Scotiabank and TD Canada Trust), Acxsys specializes in the development and operation of new payment service opportunities, as well as management services in the field of electronic payments.
Acxsys presently offers two online payment services to the financial services industry. INTERAC Email Money Transfer allows Web banking clients of participating financial institutions to send money quickly and easily to anyone with an email address and an account with a financial institution in Canada. In May of this year, Acxsys entered the early stages of offering a new way for Canadians to pay online - the INTERAC Online service provides shoppers with a secure way to pay for goods and services purchased over the Internet using funds directly from their bank accounts. This service is provided in direct response to the increasing number of Canadians who have access to the Internet and who are using it to buy goods and services.
Acxsys also offers a Cross Border Debit service, which provides Canadian debit cardholders from participating financial institutions the convenience of using their debit cards at nearly one million U.S. retailers who accept payments through the NYCE network.
The INTERAC and Acxsys Family of Services
|1994||INTERAC Direct Payment||Debit payments at the point of sale|
|2003||INTERAC Email Money Transfer||Secure money transfers using online banking|
|2004||Cross Border Debit||Debit payments at US merchants|
|2005||INTERAC Online||Online payments directly from consumer
3. Our Message to Government
We support the government's initiative to consult widely on the issues in the Canadian financial services sector. The growth in electronic transactions has elevated their importance to consumers and to the Canadian economy. It is important for the government to recognize that electronic payments - both in the traditional cards environment and on the Internet - provide a safe, convenient and modern way for consumers and businesses to conduct their financial affairs. Interac Association and Acxsys are innovators in the Canadian payments system and we support improvements to it. It is essential that payment system users benefit from the most modern technology available to conduct their business.
As payment providers, we recognize that protecting customers from loss is essential to our business, and we have put in place comprehensive standards to ensure that organizations offering INTERAC services have the security and business practices needed to deliver this protection. We are committed to advancing our technology to keep pace with the everchanging environment in which we operate.
More broadly, we believe federal legislation should be updated regularly to allow the financial sector to take advantage of the latest technologies. This encourages financial services providers to use the latest advances to reduce their costs but, more importantly, to serve their customers more effectively and with better tools. In this context, we strongly support the government's initiative to amend the Bills of Exchange Act to facilitate the transition to the image-based clearing of cheques. We believe this has the potential to deliver significant improvements in efficiency and, at the same time, better protect customers from fraud, create the potential for quicker response to customers' cheque requests, and shorten the time needed to clear cheques.
The remainder of this submission provides our views on debit card transactions, Internet transactions, and a series of recommendations to the government as it considers ways to ensure appropriate protection for consumers using electronic financial services.
4. Debit Card Transactions
Over the past decade, INTERAC Direct Payment has grown from a novelty into the method of payment Canadians say they use more than any other.
In 1997, for the first time ever, more than one billion purchases were made using INTERAC Direct Payment. Just four years later, the annual total surpassed two billion. In 2004, Canadians used INTERAC Direct Payment to pay for more than 2.8 billion purchases. Almost 20 million Canadians used the service each month to pay for an item they bought or a service they received.
Canadians have also come to rely on the convenience of having an ABM nearby, just about anywhere they happen to be. With the days of 9-to-5 banking just a memory for most consumers, ABMs can now be found everywhere from convenience stores, to gas stations, to the local coffee shop. In 2004, consumers made roughly 300 million shared cash withdrawals through ABMs connected to the INTERAC network.
As these figures demonstrate, the use of debit cards for day-to-day banking has become nearly ubiquitous. Unfortunately, as has been the case throughout history as payment methods have come and gone, today's widespread use of debit cards has attracted the attention of criminals seeking to compromise the system for their own financial gain.
For example, early in Canada's financial history, criminals counterfeited banknotes issued by Canada's chartered banks. Once the federal government took over bank note issuance in 1935, criminals began to copy these bank notes as well. Fraud involving cash continues to this day with criminals attempting to copy the new `Journey' series of government notes. Similarly, cheque fraud is a decades-old phenomenon in Canada.
More recently, Canadians' growing use of debit and credit cards has piqued interest among fraudsters trying to find new ways to steal from Canadians and the financial institutions that serve them. Although Canada continues to have a problem with counterfeit currency, payments fraud now includes not only counterfeiting of cheques and other paper instruments, but also credit and debit card fraud and identity theft.
Debit card fraud
In 2004, debit card fraud accounted for between two and three one-hundredths of one percent of the total value of all debit card transactions in Canada. While the overwhelming majority of debit card transactions occur without incident, Canadians want assurances that they will be protected when something goes wrong. Interac Association's member financial institutions reported that, in 2004, they reimbursed a total of $60 million to 49,000 cardholders due to counterfeit debit card fraud. Where fraud is proven, cardholders do not suffer any financial losses.
Criminals need two things to commit debit card fraud. They need a method to scan the magnetic stripe on the back of a customer's debit card, and they need a way to capture the cardholder's personal identification number (PIN). Unfortunately, the equipment needed to carry out these activities is all too easy to obtain. With advances in technology, electronic devices have become smaller and smaller, and pinhole surveillance cameras can be purchased readily. There are also a number of retailers in Canada who are legally able to provide criminals with the equipment needed to record (or "skim") the magnetic stripe data. There is no restriction on the sale and possession of this equipment.
Once criminals have this equipment, they can set up at an ABM or POS location to collect customers' debit card numbers and PINS. They then produce counterfeit debit cards and proceed to make false deposits at ABMs, withdraw funds; and make purchases from the victims' accounts.
Protecting against debit card fraud -Investing to protect consumers
Protecting debit card users from fraud is a priority for Interac Association and its members. The Association sets and enforces strict security requirements for its members that include minimum requirements for ABMs and POS devices, transaction encryption, and due diligence on business partners involved in delivering INTERAC services to Canadians.
The Association and members have been active in recent years as part of our on-going efforts to strengthen these requirements and to enhance the security and protection afforded to debit card users. We have also been proactive in promoting awareness of debit card fraud issues through discussions with key stakeholders such as law enforcement and the merchant community. And, we have sought to promote public awareness of debit card fraud through national campaigns, and through informing consumers about how they can help to protect themselves and what to do if they suspect they have been a victim of fraud.
Looking forward, Interac Association announced earlier this year that it is committed to migrate to chip (or "smart card") technology for the delivery of its Shared Cash Dispensing and INTERAC Direct Payment services. The use of chip cards will make it extremely difficult for thieves to copy debit cards, but converting to chip is not an overnight exercise. Since chip cards require different readers than the current magnetic stripes, Canada's more than 600,000 ABMs and POS devices will have to be upgraded or replaced, and the 35 million debit cards in circulation will need to be reissued. We estimate this total investment to be more than $1 billion. Conversion to chip will occur over a number of years, with the first INTERAC chip transaction targeted to take place in 2007.
While new technology is important to limit financial loss, no system is absolutely secure. That is precisely why the Association continues to work with government and industry partners on the continuous updating and modernization of the Canadian Code of Practice for Consumer Debit Card Services. The Code was created in 1992 and has been updated several times since then, most recently in 2004. It clearly delineates the responsibilities of all parties involved in debit card transactions, and is the industry standard for dealing with issues of liability. We believe strongly in the Code and in its effectiveness. We continue to actively promote consumer awareness of the Code and the protections it offers. Within the industry, we will be seeking ways to get this message out to Canadians, and would encourage government to do so also.
Protecting against debit card fraud - Government also has a role to play
Police forces across Canada are acutely aware of the problem of debit card fraud and are working hard to apprehend suspects. Unfortunately, criminals convicted of debit card fraud receive sentences that range from a fine to a few months in jail. This is usually a "cost" perpetrators are willing to absorb as their illegal activities are lucrative. The fact that debit card fraud is often viewed as a "victimless" crime results in lesser sentences for these offenders as opposed to those convicted of break-and-enter or other physical crimes. There is frustration within the law enforcement and financial communities, who work together to gather evidence and apprehend criminals, that repeat offenders commit the same crimes after only briefjail terms.
Police reports indicate that debit card fraud is increasingly being perpetrated by organized groups of individuals who can move quickly to gain access to a legitimate client's cash once others have compromised their debit card and PIN number. There are also cases of illegal immigrants convicted of fraud repeating the crime in Canada because they were not deported to their country of origin.
While the industry is working hard to minimize the risk of debit card fraud, it is up to government and the courts to ensure that convicted fraudsters receive punishments that match the crime. This begins with ensuring that electronic crimes, such as debit card fraud and identity theft, are built effectively into the Criminal Code, and that the courts are provided with solid guidelines on sentencing. It also means enforcing deportation orders where convicted fraudsters are present in Canada illegally. Simply put, the consequences for committing electronic crime must be sufficient to provide a substantial deterrent to would-be criminals, and to get convicted fraudsters off the street.
5. Internet Transactions
Statistics Canada reports that Canadians spent more than $3 billion through Internet shopping in 2003, an increase of 25% over the previous year. Industry analysts expect online shopping to grow to $12.2 billion by 2008 .
Today, more than 18 million Canadians are Internet users, and Canadians lead the world in adoption of online banking. According to an Ipsos-Insight survey released in April 2005, 56% of Internet users are also users of online banking, and 70% have purchased a good or service online.
Filling the need for secure payments on the Internet
The increasing popularity of Internet commerce has created a need for new secure online payment methods. Research conducted for INTERAC service participants in 2004 by The Strategic Counsel indicated that 73% of respondents were "interested" in a debit option for purchases on the Internet; about 40% of respondents said they were "very" interested. Responding to this demand, the INTERAC Online service benefits consumers by offering:
Privacy: Consumers do not need to provide any financial details, card numbers, PINS, passwords or other banking login information to the online merchant.
Ease of Use: Because the payment is conducted through online banking, consumers don't need to worry about creating any new passwords or accounts.
Security: The payment is completed through the same INTERAC network that handles traditional POS debit payments.
Alternatives: Consumers now have another payment option when shopping online.
Debt Control: INTERAC Online helps consumers manage their finances, as payments are made directly from their bank account meaning that they can't spend more than they have.
While it offers great potential choice and flexibility for consumers, and will simplify many day-to-day shopping activities, the Internet poses additional challenges in protecting against identity theft and illegal use of that information for financial gain.
Protecting consumers in their use of online payments
Acknowledging these risks, Acxsys has put in place what we believe is a sound and effective framework for consumer protection. In our published Customer Service Rules, we have incorporated all of the relevant principles from the Canadian Code of Practice for Consumer Debit Card Services, and adapted them for the online environment. This means that customers will not be held liable for losses resulting from payment processing errors, or from proven cases of online fraud. These fundamental protections have helped to sustain the popularity of debit card payments, and we believe they will do the same for payments in the online environment.
While Acxsys has taken these steps, our work in this area will only protect consumers using the INTERAC Online service for their Internet payments. We are supportive of the extension of the debit card Code of Practice to address online payments, to ensure that all consumers benefit from a consistent minimum level of protection, regardless of which online debit payment option they choose to use.
6. Conclusion and Recommendations
INTERAC services provide an efficient, safe and easy way to conduct transactions, whether at the ABM, the point of sale, or on the Internet. As the providers of these services, Interac Association and Acxsys Corporation are committed to protecting consumers.
We maintain sound security and business rules, and have systems and procedures in place to deal with problems that may occur. We are also committed to major investments to protect consumers against fraud in the future, including the adoption of chip technology to replace the existing magnetic stripe debit card infrastructure.
We are committed to the principles of consumer protection contained in the Canadian Code of Practice for Consumer Debit Card Services, and have take steps to ensure that Canadians are afforded the same levels of protection when making payments over the Internet using the INTERAC Online service. We will continue to work with government and industry stakeholders to ensure the Code stays up-to-date and includes all the provisions needed to protect consumers against fraud.
In closing, to encourage consumers to use and benefit from debit card and online transactions, and to protect the integrity of this crucial element of the Canadian payments system, we call on the federal government to work with the industry to provide debit card and online payment customers with greater security by focusing on measures that will:
- Increase public awareness of payments fraud, how to prevent it, and how to act appropriately when it occurs;
- Extend the principles of the Canadian Code ofPractice forConsumer Debit Card Services so they apply to online payments as well;
- Amend the Criminal Code to more effectively address electronic fraud and identity theft;
- Provide the judiciary with better guidelines on sentencing debit card fraud offenders, to ensure the penalty better matches the crime;
- Assist the Department of Citizenship and Immigration to enforce deportation orders to ensure that convicted fraudsters are not permitted to remain in Canada illegally; and
- Study ways to better protect consumers against identity theft.
We would be pleased to work with officials in pursuing these recommendations, so that we can continue to ensure that the electronic payments marketplace delivers the services Canadians want in a way that is efficient, safe and keeps Canada at the forefront of the consumer payments evolution.