The federal government has introduced a new law to begin regulating technology companies offering payment services, aiming to increase trust in financial technology startups and stoke competition with established banks as digital payments become more popular.
The Retail Payments Activities Act will put the Bank of Canada in charge of regulating payment services providers in Canada that aren’t governed by another regulator, as well as foreign companies facilitating payments for Canadian customers.
It does not apply to domestic or foreign banks, credit unions or insurance companies that are already regulated in other ways. Instead, it is aimed at financial technology startups – often called “fintechs” or “paytechs” – as well as global technology giants such as Google and Apple that have made inroads in digital payments without robust oversight.
The new law comes at a moment when adoption and use of digital payments by consumers and small businesses has accelerated dramatically amid the coronavirus pandemic. The tighter controls on startups are intended to make payments more secure and reliable for consumers. But they are also supposed to spur innovation and competition in payments by paving the way to bring fintechs into the country’s payment systems.
“Payments in this country are dysfunctional. There are high barriers to entry,” said Alexander Vronces, executive director of Paytechs of Canada, which advocates on behalf of payments providers such as Interac, Koho and Transferwise. “This legislation is a formal recognition of the blurring lines between traditional providers of payments services and newer technology companies getting more and more involved in the space.”
Under the Act, payment providers will have to register with the central bank, submit annual reports and frameworks for risk management and incident response, notify the central bank about incidents or breaches, and follow rules about how they hold clients’ money. The Bank of Canada would keep a registry of payment-services providers and have the power to impose financial penalties or compliance orders on companies that break the rules.
The law is the culmination of more than a decade of deliberations about how to govern the increasing volume of retail payments handled by non-bank tech companies, outside the tightly regulated confines of Canada’s traditional financial sector. It is part of the budget bill tabled last week by the federal Liberals, following promises in each of the past two federal budgets to extend oversight of retail payments.
“I would think of it as an expansion of the trust in the system,” said Anne Butler, chief external relations and legal officer at Payments Canada, which counts banks and credit unions among its members. “Payments is a network business, and as you expand trust in the regulatory oversight of the system, you create the opportunity for it to continue to grow and flourish with innovation.”
The new Act is only a first step toward granting broader access to Canada’s payment systems, Ms. Butler said. Allowing fintech companies direct use of the country’s financial plumbing would require amendments to the Canadian Payments Act to broaden membership in Payments Canada, which runs the country’s clearing and settlement system. Payments Canada is preparing to launch a “real-time rail” system in 2022 that will allow for instant settlement of an array of payments.
The system was designed with fintechs and retail payment providers in mind, Ms. Butler said. But until further changes are made to the Canadian Payments Act, it will only be directly accessible to Payments Canada’s 110 existing members – mainly banks and large credit unions – whereas fintechs have to negotiate access through those incumbents.
Last month’s federal budget made no mention of changes to the Payments Act. Ms. Butler said Payments Canada and the Department of Finance are working to update the Act, but there is no clear timetable to make those changes. “The Department of Finance, of course, is in control of the legislative agenda,” she said.
One of the main concerns about the payments oversight regime is how long it will take to set up. Mr. Vronces estimates it could be two to three years before companies are registered and regulated under the new Act. “Timing will make or break many of the startups and challengers in this sector,” he said. “Promising international players have come and gone. Canadian companies are starting to look for opportunity in other jurisdictions.”
The Bank of Canada will build on its previous experience as it takes on new regulatory duties, bank spokesperson Rebecca Spence said. The central bank is already charged with overseeing “systemically important” parts of Canada’s financial infrastructure, including the transfer system that lets commercial banks send large sums of money back and forth, and the clearing and depository system, which settles securities trades. Last year, the bank began overseeing Interac Corp.’s e-transfer system, which it labelled a “prominent payment system.”
The bank has filled “various positions” to help design and implement the new retail payments framework, Ms. Spence said. “Additional staff will be hired, but it’s too early to tell how many.”
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James Bradshaw
Mark Rendell