By Doug Kreviazuk, Executive Director, Fintechs Canada
Have you ever wondered how our payments system could be improved to service our individual lives better? Wonder no more, and simply look at the new emerging payment-related services available across Europe, Asia, Australia and Africa. Whether seeking financial advice, budget services or integrated inventory controls, the options abound. For those who seek simple banking services, there are now a plethora of digital/challenger banks that offer consumers a current account, debit card functionality, online payments and money transfer services with no monthly fees whatsoever. The lives of everyday citizens and businesses, particularly small businesses that previously could ill-afford customized payments services are now readily available. That is, so long as you don’t live in Canada.
This evolution has been a long time coming, about 14 years in fact. In or around 2007, the European Payments Service Directive-1 was introduced and created a single framework for payments across the EU to address disparities in pricing within and across the EU. Soon after, large and small technology firms became recognized and active in this space and began to introduce new processes and services that challenged the traditional ways of processing payments. To many of the incumbents, this was viewed as an unwanted disruption of the industry.
In the classic sense, disruption generally connotes a negative event, a disturbance or problem that interrupts a process. This disruption, once fully understood by consumers and businesses, represented opportunity. It was an opportunity to eliminate historical frictions in the payments system created by legacy processes and technology and replace them with new and more efficient payment products, services and processes. And all it took was to recognize a new class of system participant that had the potential to effectively compete in this space.
In 2016 and recognizing the potential value from embracing the potential of Fintech/Paytech firms, the EU moved to introduce the new EU payments system directive, PSD2 in 2016. By means of requiring account-holding European banks to create APIs, and grant access to financial data to payment service providers, a new market was created; one that relied largely on competition, and not protectionist regulation, to service the users of the payments system. This really was the genesis for international efforts to expand access to national payments systems to bring about much needed competition in the financial services market. Now across the European Union, businesses and consumers are reaping the benefits from a health financial services marketplace.
Canada’s payments ecosystem, unfortunately, still has a way to go before it will be on par with the EU or several other jurisdictions that have already opted to power up the potential of the payment service provider market; but maybe the market is already moving ahead of the policy-makers. Currently, more than 4.0 million Canadians routinely rely on Paytechs in Canada to service their financial needs and move money between parties. Despite the fear-mongering from the industry, these Canadians have clearly demonstrated their trust in these emerging firms to safely and accurately transact financial services and maintain records, on their behalf. Paytech firms like PayPal, TransferWise and so many others have built a reputation on trust, convenience and affordability to grow their business.
Now, efforts to admit them into this regulated environment and improve the accessibility to their services are being delayed, and even further hurdles are materializing. The development of new payments policy and legislation, like expanding access to the payments system can easily take 2-3 years to wind through the machinery on Parliament Hill, and during Covid-19, it could be extended by an additional 1-2 years. That could mean that the full benefit of expanded access to the payments system may not be felt by Canadians until 2024/25, almost a full decade behind those in Europe.
How can we play catch-up? The solution to the problem may be as simple as developing a sponsorship arrangement with one of the current institutions who is a member of Payments Canada, and who vouches for the PayTech firm and indemnifies the other members of Payments Canada from any errors or issues that may arise from their participation.
On the face of it, it sounds rather easy to create such a framework but there are industry and competitive counter-efforts at work. Currently, only the very largest deposit-taking institutions have direct access to the national payment’s infrastructure and all of whom operate at a clear price advantage over the other 100+ smaller institution members. Therefore, engaging in a sponsorship arrangement can only make economic sense if the arrangement were with one of the large institutions.
This is where it becomes a challenge. The oligopolistic nature of Canada’s payments industry has given rise to behaviour that seems to safeguard the status quo, impedes the ability of new entrants into the market either through rule setting, pricing or delays in policy/legislative amendments that would support a more dynamic marketplace. This is the case because paytech firms and the incumbents are otherwise competitors in the financial services market.
The payments system is guided by three public policy objectives: “safety, soundness and efficiency”. Too often, these are viewed as trade-offs and emphasis is placed on safety and soundness. In creating Payments Canada, Parliament did not fully intend a binary trade-off. Rather, they sought to have introduced a system that was safe but adequately and quickly responded to the evolving needs of its users. Similarly, efficiency not only represents the pricing of the good or service, but more importantly, reflects the degree and pace of innovation. By global comparisons, in the payment-related space, Canada is neither innovative nor price competitive.
With an enhanced level of access to the payments system, Paytech firms can aggressively compete or collaborate with Canada’s banks to introduce new payment services, processes that will have the effect of bringing prices down.