The payment system is letting down small business

Justin Ferrabee is a Board Director at Fintechs Canada, a small business owner, and former COO at Payments Canada.

Canadians depend on the products and services supplied by small and medium sized businesses (SMEs) each and every day. Often referred to as the “life blood” of the Canadian economy, SMEs account for 98 percent of all businesses in Canada, employed 90 percent of the private sector workforce pre-COVID, and represented more than half of the country’s annual GDP.

Despite their importance to the economy, the needs of small businesses are being underserved and under-supported, including by the national payment’s infrastructure.  Having their needs discounted as policy makers transform Canada’s payments system is just the latest in a series of obstacles that make it hard to be a small business in Canada. Then add in COVID.

Canada’s payment system is currently accessed exclusively by financial institutions. That means the payment options that we have available to small businesses are determined primarily by Canada’s largest banks. Globally, payments technology companies (PayTechs) are driving change and introducing new and more efficient payment options for businesses and consumers in other jurisdictions.  Unfortunately, that kind of innovation is not happening here in Canada because PayTechs are prevented from participating directly in the payment system.

Payments Canada, the organization with a government mandate to support the economy by helping to meet the payment needs of Canadians, has announced in its latest payments modernization roadmap that it is pushing the introduction of a real-time payments system out to 2023 at the earliest. This infrastructure is a key platform for payments innovation in any country. Not only is it now significantly delayed in Canada, but Payments Canada has not articulated a clear path to payment system access for any new market entrants. For the record, the UK had its first real-time payments rail before any of us had an iPhone and PayTechs have had access to these systems in other countries for years.

While Payments Canada’s plan clearly continues to benefit Canadian banks and some of their key consumers, it denies important privileges and efficiency savings for small businesses. Let me paint a picture of a common payment experience for a small business in Canada today.

Imagine you owned a small business and needed to quickly purchase a $10,000 piece of machinery. What would you do? A cheque is not acceptable because the seller will want to ensure the payment is final and irrevocable in the moment.  Debit is out as it won’t accommodate a purchase of this size, and it’s unlikely a seller will accept a credit card given the costs.

Your only real options are either to physically go to your bank branch and pay over $10 for a bank draft, certified cheque or a money order. Then you have to physically deliver that to the seller, who in turn must visit a bank to deposit it in their own account. All of this, during an international pandemic.  Or, you could send a wire payment. You just have to go to your bank branch and prepare and complete a detailed wire application form to request the payment.  You only need to know the other party’s bank account, routing and transit numbers, bank/branch address, SWIFT/IBAN code and personal address details of the receiver.  After that has been completed, you remit the application form along with a processing fee at or around $35.  Often, your bank will contact you prior to processing the payment to validate all of the required information because mistakes can cost you dearly. Errors in the payment directions might take months to correct, assuming they can be corrected at all.

Many Canadian businesses are forced to do this regularly.  In many other countries like South Africa, that same payment can be made from a mobile phone in less than a minute at a fraction of the cost.  Why can’t Canadian businesses have the same basic service as other countries in the world?

Payment processing is just the tip of the iceberg. Small businesses continue to battle the demon that is credit card interchange fees. If you operate a small retail business with multiple stores across the country, you will have to accept credit cards to service your customers. By some estimates, easily 20 percent of small business’ profit goes to the credit card company. As a founder and owner of a small business with 16 stores across the country, I am all too aware that I paid more in interchange than I earned in the first five years of business. Loyalty points – let us save that for another day. Small businesses in other countries face nowhere near this kind of injustice.

Around the world, fintech is alleviating these challenges for small businesses, making faster, cheaper and more convenient payments a reality. This is primarily because the modernization of payment infrastructure in other countries has also included fair access to the payment system for the new and non-traditional participants. That, in turn, encourages technical and processing innovation and real cost-savings opportunities for small business.

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