When I attempt to explain Canada’s payments system, eyes begin to glaze over. Payments infrastructure is not a sexy topic, but we all want assurances that it works well and meets our ever-changing needs. All Canadians and businesses depend on the payments system daily and yet that trusted system is no longer able to meet our evolving expectations.
Payment technology firms are in the business of providing payments services and today support most every major financial institution in this pursuit. Unlike the incumbent banks, paytechs are nimble and responsive. According to the C.D. Howe Institute, Canada’s financial services sector is an “underwhelming” performer and suggests that needed productivity growth will only accompany the introduction of appropriate regulations that foster competition and innovation, by permitting their greater participation in Canada.
Canada has long accepted the premise that only the big banks can support Canadians in their payment needs because they are strong and supported by government regulation. As financial institutions have gotten more profitable, their ability to influence government policy has similarly increased. Their unfettered control over the national payments system has meant that Payments Canada, which operates our national payments system, has been unable to fulfill its legislative mandate to “facilitate the development of new payment methods and technologies.” Since the early 1990s, Canada has seen little in terms of innovation to this critical infrastructure.
As far back as 2011, a Special Payments System Task Force found that the modernization of Canada’s payments system could generate an annual savings for Canadians of $7.7-billion and a further $1-billion could be saved from the implementation of a new data standard – ISO 20022. Yet we remain years away from realizing these savings and the added efficiencies from a state-of-the-art payments system.
Today, we see Canadian cheques being imaged, sent and received digitally, and yet we don’t ask why we still have paper cheques. In an increasing number of countries, payments are completely electronic. Opening up the current system to paytechs would certainly introduce a highly competitive dynamic for the incumbent financial institutions and possibly jeopardize their $16-billion annual payments business.
Canada needs effective and inclusive financial-services legislation and supporting infrastructure that motivates the incumbent banks to aggressively compete against the emerging paytech companies and deliver services that are timely and customized to meet user needs. The problem is clear. Today’s banks have been the target of disruptive fintech and paytech firms, who provide consumers and businesses with efficient and, often, a less expensive means to transact their financial affairs. Whether sending international transfers, making investment decisions, or assisting small businesses with their financial portfolio and inventory control, these new market participants are challenging the traditional relationship between the bank and individual customers. The threat of disruption is real, akin to what streaming has done to television and movies. Payments may well be the final and most lucrative area of business remaining under the full control of banks.
What about safety and increased risk from paytechs? The Bank of Canada is proposing to soon introduce prudential and market-conduct regulations applicable to these service providers and thereby safeguard the payments system and Canadians’ deposits. Admitting the new participants into the system, applying appropriate regulations and subjecting them to the same operating standards and rules of other members of Payments Canada assures the safety of the payments initiated by these paytech firms.
The pace of technology has transformed most industries. We must accept that Canada’s payments framework is outdated and our financial services are sorely lacking. As a result, service fees are comparably higher and service levels lower; as for small business, it continues to suffer from lengthy holds on deposits and denials of service. Compared with other industries, the payments system maintains a glacial pace of change.
In 2015 (some four years after the Special Task Force reported the need for system renewal), Payments Canada announced its payments infrastructure modernization efforts. Initially promised in 2019, we may now have to wait until 2023 before we start receiving the benefit from Canada’s new national retail clearing and settlement system and “real-time payments system.”
As a course correction, Finance Canada must seek legislative amendments to the Canadian Payments Act authorizing paytech companies as eligible members of Payments Canada and enshrining competition as a stated public policy objective for the payments system. Furthermore, the Minister of Finance should issue a directive to Payments Canada requiring the completion of the proposed real-time payments system no later than the fourth quarter of 2021. Canadians have waited far too long to reap the benefits of an efficient and competitive payments system and cannot afford to wait any longer.
First published on The Globe and Mail