Doug Kreviazuk, Executive Director, PayTechs of Canada, April 15, 2020
It seems that each time the economy encounters a significant shock, government and industry rises to the challenge and introduces much needed improvements. These enhancements occur across the entire economy, including those to underlying payments infrastructure and ancillary payments systems. While certain changes are directly attributable to a regulatory response to the event, other improvements or innovations come directly from the market participants and generally organic in nature; responding to newly identified frictions and opportunities. Either way, the end result is that Canadians are left with a safer, more efficient and responsive payments system.
Will the outcome of the Coronavirus be any different? At this very moment, it seems difficult to image when and how we will be better off having gone through the pandemic. Despite what we have witnessed these past several weeks, the backbone of our economy, our national monetary and payments system remain sound and resilient under the current conditions. But there is a related concern on the horizon, the use of cash. Increasingly, the demand for cash by consumers and many businesses is wavering on fears of spreading the virus while conversely, fears of bank stability are leading to the hoarding of cash. These behavioural anomalies all brought about by the virus.
The Bank of Canada is attempting to reassure Canadians that there is no more risk to handling banknotes than on door knobs or your kitchen counters. The reality is that neither of these things gets freely passed around, circulating through many hands and numerous environments, as banknotes or coin. To further complicate the situation and heighten fears, some retail merchants are no longer accepting cash. If this direction becomes pervasive in this troubled time, there will certainly be adverse unintended consequences.
In China, the central bank recently moved to disinfecting their stockpile of currency and South Korean resorted to restricting the circulation of currency for 2 weeks and burned large amounts of their existing stock. In the absence of clear scientific proof that paper/plastic notes are safe, consumer behaviour will similarly be guided by risk avoidance and the demand for cash may continue to fall.
Is a move to a fiat (CAD) digital currency the answer? No, this is not a binary question. Until digital currency demonstrates the same attributes (e.g., ubiquity) and its cost to the user is comparable to cash, it likely will not be viewed as a perfect substitute. The limiting of purchasing or payment options will further exacerbate the implications of this pandemic. This at a time where the country seeks to keep everyone safe and minimize their exposure to the virus.
The payments system must support the broader needs of the economy, including lower income Canadians whose access to traditional debit and credit card options may be financially beyond their reach. In the absence of an array of payment options that are either in-market or poised for quick release, there is a clear market failure. A market failure brought about by outdated regulations and the lack of competitive market forces in the payments system.
Government regulation is an important and powerful tool when used correctly and to address market failures when market-based outcomes are less than socially-desirable (e.g., excess pricing or profits, restricted supply, retarded or delayed innovations). For Canada’s payments system, the public policy objectives are safety, soundness and efficiency. It seems that the economy and Canadians would be better off if there was a greater acceptance to and reliance on the forces of competition to drive improvements to service levels, reduced pricing and more rapid innovations, not unlike the directions recently seen in Asia, Australia, the U.K. and across Europe. These nations already are reaping the benefits of real time payments, standardized and robust remittance data that aide consumers in better managing their household finances and businesses managing inventories or production schedules.
When faced with a challenge, innovative thinking and approaches are necessary, as history bears out. The challenges of today will most certainly bring about a further transformation of the payments system, but are we able to hasten its pace? As supported by McKinsey & Company (March 2020) “How payments can adjust to the coronavirus pandemic – and help the world adapt” the payments industry must:
- critically assess and rationalize the continued use of paper (banknotes/cheques);
- facilitate universal access to new e-payment solutions, that are completely touchless;
- examine the feasibility and stability of central bank digital currencies;
- promote an omni-channel payments solution to bridge the physical/digital environments;
- advance potential applications of data that align with the payment’s transaction;
- leverage accessible data to continue to combat fraud;
- promote a new era of cooperative competition between traditional and emerging market players; and
- continue to advance a collaborative regulatory environment.
Canada is fortunate in having strong and healthy financial institutions, a rapidly growing FinTech sector and an attentive regulator to thoughtfully consider the emerging challenges for the payments system. A more inclusive and collaborative payments ecosystem will benefit us all.
If we don’t seize the opportunity now to markedly enhance our payments system, an increasing number of foreign jurisdictions will stake a significant comparative advantage over Canada in terms of manufacturing and trade. This is surely to mean that our recovery from the pandemic will be much longer and more painful than it might otherwise had been, had we had the courage to lead change.