By: Alex Vronces, Executive Director, Fintechs Canada
All paytechs operating in Canada need the chance to get big. It’s a self-interested thing for me to say. It may even sound banal. But it needs to be said because bigness is underrated, and outdated policy stands in the way of many paytechs getting bigger.
Consider the following. You’ve likely heard of big government, and you’ve likely heard of big tech. COVID-19 has amplified the noise about big pharma. If you’re active in the Canadian payments ecosystem, you’ve probably even heard of big banks. This phrasing is often used as a rhetorical bludgeon: when people append the adjective “big” to an industry, they’re encumbering its largest firms with moral baggage.
The rhetorical bludgeon cleverly manipulates the fact that the bigger you are, the more suspicion you’ll draw. According to a recent survey of Canadians, public trust in large corporations is lower than trust in other institutions. Pollsters notice a similar pattern in the United States, where confidence in large corporations is among the lowest of all institutions.
High-profile corporate scandals over the years have helped to ingrain that attitude. So has the reported avarice of tax-optimizing multinationals, which aren’t as proximate to our everyday lives as institutions with local roots.
But the anti-big attitude isn’t constructive. Big, by itself, isn’t bad. Big, by itself, is actually good.
There is a long-standing economics literature showing that large corporations create higher paying jobs, even after controlling for the tendency of larger firms to attract more skilled workers. One recent study found that big retailers pay less skilled workers more than smaller retailers do. Economists debate all the reasons why the firm-size wage premium exists, but one of the explanations is economies of scale.
Big businesses are also more productive. Though the economics literature here has focused more on the relationship between size and productivity in manufacturing, researchers at the Bank of Canada found that large firms are more productive across the entire economy. There are likely several reasons for the firm-size productivity premium, but one of the explanations is, again, economies of scale.
Big businesses also provide more sustainable job creation. Small businesses, especially start-ups, punch above their weight in gross measures. But they also have a high rate of failure, and so on net they’re not as impressive. One study of the US economy, after controlling for the high rate of failure, found that “most young and small businesses are not in fact primary creators of jobs.” Even here big businesses benefit from economies of scale, which gives them an edge against the competition and contributes to their longevity.
Big business, of course, isn’t perfect. A big business, if it can secure a monopoly, can harm its customers. Big interests periodically capture their regulators, biasing outcomes in their favour and to the detriment of their competitors. These are times when bigness ought to be criticized, but these times shouldn’t eclipse the fact that big, without the funny business, is good.
I’m parroting the value of bigness because of how important it is to payments. What have we heard about payments, after all? It’s about volume. In other words, it’s about scale. So bigness in payments, by itself, is good. It’s good for paytechs. It’s good for their employees. It’s also good for Canadian businesses because it greases the wheels of commerce and can lower payment-processing fees when markets are contestable.
If big is good, then what’s bad is when small is kept small. This is, alas, what’s happening to paytechs in Canada today.
Paytechs will likely continue to be barred from accessing payment systems, which steals from them the ability to service their customers on their own terms. This hamstrings paytechs in the race to achieve economies of scale. It also makes it difficult for non-paytechs to expand their offerings to become paytechs, which hamstrings them in the race to scale’s cousin: economies of scope.
Instead, paytechs are forced to partner with their competitors, who charge them well above cost to access what ought to be more like a public utility. The problem here is obvious: the payments sector is like the telecommunications sector, but without the CRTC to ensure privileged market positions aren’t being abused. That’s not to say privileged market positions are being abused, but it makes you wonder.
The other thing making it hard for paytechs to get big is their stark choice about what to be in the Canadian marketplace.
Continuing to occupy unlegislated space, which is waiting to be filled by retail payments oversight, isn’t ideal. Being regulated helps build trust with customers and, with that, scale and scope. It’s why so many paytechs support fair and sensible retail payments oversight, the timely and comprehensive delivery of which has been marred by federal-provincial politics.
Becoming a financial institution under Canada’s outdated regulatory landscape isn’t ideal, either. For example, paytechs don’t want to do everything banks do, which turns out to be a lot that isn’t payments, per se. Turning into a bank is costly, and so it’s not a meaningful option for paytechs that want to begin their journey by occupying a narrower part of the value chain.
Other jurisdictions, such as China, the UK, and even the US, have made progress in giving non-banks better regulatory options, while Canada stays stuck in legislative stasis. This also puts Canadian paytechs at a competitive disadvantage compared to their counterparts in other jurisdictions.
Canada needs to make it easier for paytechs to get big by letting them try. The cost of not doing so is lower paying jobs, lower productivity, fewer jobs, and less efficient payment processing (including fees) across the entire economy.
Retail payments oversight legislation, which is already in the works, needs to be in the next Budget Implementation Act. Access to national payments infrastructure also needs to be risk-based and open, or “have the least-restrictive impact on access that circumstances permit,” according to the Bank of Canada’s own risk-management standards. In other words, Payments Canada would be remiss to copy and paste the ACSS’s eligibility criteria for the RTR, which has better risk-management capabilities than the ACSS.
We can’t afford to be complacent. This pandemic has already reiterated the value that paytechs can create by enabling people to participate in the digital economy. It has also reiterated that big does what big does: many of the so-called “winners” of the COVID-19 crisis are big technology companies.
They’re big because they win, but they also win because they’re big. It’s no coincidence. So if Canada wants to give paytechs a fairer chance at winning, it needs to let them try in the first place.
