While the United States and Canada share a continent, they remain worlds apart in their approach to payments.
The differences spill over into the ISO communities on opposite sides of the border, too, says Adam Atlas, a Montreal-based attorney who represents payment companies. "There's a very different culture up here in Canada," he says.
In fact, U.S. ISOs considering northward expansion find their familiar model unsuited for Canada. That realization led Heartland Payment Systems Inc., a Princeton, N.J.-based processor, to buy its way into Canada instead of starting fresh by opening its own offices. Heartland took on a controlling interest in CollectivePOS (ISO&Agent Weekly, March 7).
Much of Canada's relatively small population dwells in a narrow band along the U.S. border with dense concentrations in Toronto, Vancouver and Montreal.
Canada's population–at 30 million–totals about one-tenth of the U.S. figure of 300 million. Economically, the market also is about one-tenth the size of the U.S. market, Atlas says, more akin to the size of California than to the U.S. as a whole.
Close banking relationships"Geography makes this market challenging" in Canada, says Michael Back, president of Collective Point of Sale Solutions Ltd., a Woodbridge, Ontario-based ISO. "We have one of the largest countries in the world geographically. There's a vast difference between people and major markets."
Besides the geographic differences, the businesses active in merchant-acquiring display few similarities, Atlas says.
In the United States, dozens of large acquirers compete for business with thousands of banks, Atlas says. Canada has about six acquirers, most of them connected with banks.
Banking in Canada is tightly regulated with foreign-ownership restrictions, says Atlas. "It's hard for new banks to break into Canada" he says. "Of course, you don't need to be a bank to do acquiring–you just need a relationship."
However, most banks already have relationships with acquirers, so they are not necessarily open to working with new ISOs.
Six or seven banks cover about 90% of the market, adds Michael Gokturk, CEO of VersaPay Corp., a Vancouver, British Columbia-based ISO. "Our ISO model is vastly different than that in the United States."
The terminology diverges, too, Back adds. "ISOs are directly sponsored by the banks that manage their own risk," he says.
Canadian ISOs resemble American sales agents, who operate as independent contractors, so there is no use of the term "ISO," Back adds. "In our world, you have a Canadian ISO (global payment agent) who has a sub-agent working for him."
Canadian ISOs receive referrals from established relationships with the banks, Atlas adds.
Canada has no room for the "mom-and-pop" style ISOs that predominate the U.S. market, Gokturk says. Regulatory compliance and market factors provide natural barriers to start-ups, he adds.
To begin operating in Canada, an ISO should pass through compliance and market verification, which federal governing agencies oversee, Gokturk says.
Undergoing verification and developing relationships within Canada would cost the ISO at least $2 million, he says. In Canada's tightly regulated market, new relationships are difficult to develop, particularly when many banks already have ISO relationships.
Moneris Solutions, one of the largest Canadian acquirers, relies on an in-house sales force, Atlas says. RBC Financial Group and BMO Financial Group jointly own Moneris.
Debit rules up northVersaPay, with offices in Montreal and Calgary, Alberta, is affiliated with Chase Paymentech LLC and has been building its business, Atlas says. In 2007, VersaPay began providing payment services to small and mid-sized businesses, Gokturk says.
Customers differ as well, Back says. The Canadian market relies on PIN-debit transactions with high-volume and low margin, he adds.
Approximately 60% of Canadian card transactions are debit, and 40% are credit. Canadians tend to use debit cards for purchases of $50 or less, while they prefer credit cards for purchases of $100 or more, Back says.
"Because of this huge reliance on PIN-debit, the opportunity to go out and reprogram equipment doesn't exist," he adds. That means merchants are locked into their relationship with a bank because of equipment-rental agreements. Making a change means either sitting out the terms of the contract, which is typically three years, or breaking the agreement.
For instance, VersaPay agents print out applications and send them by fax to Chase, which re-enters them into the system. The systems are not integrated.
Despite the challenges, however, now may be a good time to enter the Canadian market, Atlas says.
In the United States, the economy is facing a downturn, but the opposite is true in Canada, Atlas says. "In Canada, we have record employment levels, falling interest rates and solid growth in the economy," he says.
The high price of oil is helping to drive Canada's economic growth because Alberta has oil wells much the way Texas does, Atlas says. "Calgary is a boomtown," he adds. "People are moving there from all over the country."
With a soft U.S. market, Atlas expects more U.S. ISOs to turn their eyes north. "Now is a great time to be involved in merchant acquiring in Canada," he says. "It'll never replace the U.S. market, but there is business up here."
The best opportunities for U.S. ISOs in Canada are in working with established ISOs, such as Heartland's move to acquire much of CollectivePOS, observers say. "For a U.S. company that's looking to break into the Canadian market, it's a lot easier to buy an existing ISO than build one yourself," Atlas says.
From Collective's standpoint, the acquisition will help accelerate growth, Back says. "We're looking forward to drawing on [Heartland's] experience, knowledge and know-how for the Canadian market," he says.
Heartland's acquisition opens the door for similar relationships, Gokturk agrees.
U.S. ISOs cannot simply export their business model to Canada, Atlas says. "Canadians are often suspicious of cold calls and the traditional U.S. energetic sales pitch," he adds.
Doing business in Canada also requires ISOs to develop the ability to adapt to a foreign market, including learning to speak and work in French and understand a culture slightly different from that of the United States. "A lot of French Canadians don't want to speak English," Atlas says.
With the cultural differences, U.S. ISOs cannot replicate their model in Canada, Back says. "We're not quite the 51st state, he says. "U.S. players would not be able to just cookie cut and drop in their model," he says.
Gokturk agrees U.S. ISOs cannot export their models to Canada without making some modifications.
"Canada is different because there's no need for ISOs. Banks refer to merchant-service level," he adds.
