With the world's two largest credit card companies entering the debit card market in Canada, the federal government should level the competitive landscape despite the potential for increased debit card costs, according to a report by the C.D. Howe Institute.

It said that transforming Interac into a for-profit corporation would increase its responsiveness to competitive market changes and allow it to raise capital to invest in marketing and product development.

The Interac Association is a non-profit organization that must set its prices on a cost-recovery basis. The requirement is part of a Competition Tribunal consent order issued in 1996 as a result of complaints about how the organization was run in the early 1990s.

If Interac isn't allowed to become a profit-making entity, the report said its ability to compete with two large commercial corporations would be limited. Left as is, Interac could not only lose market share but be relegated to being a back-up debit card system to the ones that Visa and MasterCard are implementing.

The report recommended the changes despite noting that costs to operate the debit-card system could increase given the fee structures of Visa and MasterCard. In other debit-card markets where Visa and MasterCard operate, fees imposed on merchants are higher than those set by Interac.

In particular, both card companies require a fee paid by payment processors to issuing banks, known as an interchange fee. Interac does not charge an interchange fee. It only charges a switch fee of $0.007299 per transaction.

Despite its limitations, Interac has becoming one of the world's most successful debit systems. Almost 30% of retail transactions in Canada are settled through the debit card system. In 2008, there were 3.7 billion transactions worth approximately $168 billion. That makes Canada second only to Sweden as the world's heaviest per capita users of debit cards.