By Doug Kreviazuk, Executive Director, Fintechs Canada
For PayTechs operating in Canada, the business challenges surrounding gaining direct access to the national payments system seem to be significantly greater than those in many other national jurisdictions, resulting in adverse consequences for Canadians. In response, Fintechs Canada has been actively pursuing changes in the current payments ecosystem that would afford Paytech firms the ability to secure this needed access and originate payments for their own customers; better servicing their needs.
At present, only Payments Canada financial institution members have the right to access the current payments infrastructure and the membership criteria is set out in the Canadian Payments Act. Changes to this legislation are likely to take a minimum of 3-4 years to work their way through policy discussions in the bureaucracy and the various committees and then the legislature. By then it is 2024/25, and what is to become of PayTechs?
Canada is expected to launch the new Real-Time Payments Rail “RTR” later in 2022. Under the management of Payments Canada and supported by Interac, this new national “instant” payments system has the potential to revolutionize this sector and facilitate the introduction of payment and payment-related innovations. If done correctly, the RTR could effectively reduce/eliminate most of the frictions/inefficiencies in the current payments market. Not only will the RTR contribute to the efficiency of the system, it can foster and facilitate greater competition and business opportunities for PayTech firms. The recent experiences in the UK, Australia and across Europe highlight the potential benefits from these emerging infrastructures.
The trouble is, PayTechs first require access to these systems on fair and reasonable terms. Canadian legislation currently does not permit the direct participation of PayTechs to the payments system, thereby effectively limiting their ability to bring about broad-sweeping innovations to the market. A key stumbling block is that PayTechs are currently unregulated. This impediment is now being addressed with the introduction of the new Retail Payments Oversight Framework, which grants the Bank of Canada regulatory oversight over all payment service providers actively engaged in the processing of payments. In terms of positive and sustainable changes to the current payments system access requirements, this regulation is a prerequisite. The concern is that this regulation may not be enacted until 2023/24; thereby further impeding innovations and efficiencies for Canadians and businesses.
In an effort to hasten the process, Fintechs Canada has been in policy discussions with governmental policy makers, Payments Canada and other stakeholders in order to identify a plausible, interim solution that would see PayTechs gain system access in the near-term. As is offered in many other countries, consideration is now being given to the introduction of a “Sponsorship Model” for paytech firms that would permit existing Payments Canada members to sponsor new participants into the national payments system. In doing so, PayTechs would be required to comply with all existing requirements and sponsors would be responsible and liable for the activities of the sponsored organization. In this way, all counterparty institutions and the payments system itself would avoid any risk in the exchange of payments messages and sponsors would actively compete for this new business and source of revenue. This is not a new concept for payments systems. It has successfully been utilized for years in the United States, among other jurisdictions, as a fundamental tenet of their Automated Clearing House rules, and has been a contributor to the systems overarching objectives of safety, soundness and efficiency. Moreover, this shift in policy direction would not require legislative or further regulatory changes, but simply Payments Canada rule changes that could be introduced in a matter of months.
The challenge currently before us is about trust and confidence. Do Canada’s policy-makers trust that a move to broaden access to the payments system will be rewarded with several new system participants and the prospect of enhanced competition? The old saying “once bitten, twice shy” is quite appropriate to this circumstance. In the lead up to the amendments to the Canadian Payments Act of 2001, there was tremendous pressure on the government to expand access and permit life insurance companies, money market mutual fund companies and securities dealers’ access to the payments system and membership in Payments Canada. After nineteen years in existence, Payments Canada has only a single new member from these new categories of institution. Will the same result prevail in the case of PayTechs and is the effort to affect this change worth the effort?
There are many of us who believe that access to the payments system affords PayTechs a number of immediate and tangible benefits that would either not otherwise be available or be available in a much less efficient manner. Direct access to the payments system will not only permit PayTechs to originate payments for their clients but aide in the collection of payment-related data from those same clients, among other things. Access is a critical and necessary condition for the continued growth of PayTechs and the payments system, unlike for other financial companies who might find it convenient to expand the scope of their current suite of services into the payments space.
If you are interested in affecting positive and sustainable change to the payments system and expanding the opportunities for PayTechs to service their client base, I urge you to stand up and be counted among those seeking change to the current rules.
It is imperative that Finance Canada, the Bank of Canada and Payments Canada each become aware of your need for change, your interest in direct participation and the possible use cases that could be supported by PayTechs. Fintechs Canada want to hear from you.