The Canadian government is proposing to bring more order to the rapidly changing world of payments.
One of the annexes to this week’s federal budget included three paragraphs on “Supporting an Innovative and Well-Functioning Canadian Payments System.”
The section stated the federal government was proposing to bring in a new framework under which certain payment providers would have to establish “sound operational risk management practices” and ensure users’ funds are protected against losses.
“A range of new innovative service providers and technologies are emerging that are changing how Canadians make payments,” a spokesperson for the Department of Finance said in an email. “The proposed retail payments oversight framework is needed so that retail payment services remain reliable and safe and continue to support innovative service offerings to Canadians.”
The framework would apply to firms providing retail payment activities, the spokesperson said, such as holding onto funds for their users or transmitting payment messages. This would extend topayment card networks and various “non-traditional players,” including financial-technology companies (or fintechs) offering such services, the spokesperson added.
However, payment providers that are already subject to “substantially similar” federal or provincial rules would be exempted from the framework.
While the framework has already been under consideration for more than a year, it is looming over a payments sector that is becoming more crowded.
Tech giants such as Amazon.com Inc. and Apple Inc. already have payment options on offer. There is also a constellation of start-up and international companies dabbling in payments in Canada — some of which may be currently free from oversight.
“Certain retail payment service providers (PSPs) are currently not subject to oversight, which can raise issues related to risk, efficiency, and protection for payment service providers and end-users,” noted a recent report from the federal government on a review of the Canadian Payments Act. “The proposed oversight framework would serve to close this gap by establishing a number of requirements.”
Under Ottawa’s latest proposal, the Bank of Canada would ensure payment providers comply with the financial and operation requirements. The central bank would also keep a public registry of regulated payment providers.
The new framework would help “level the playing field” by bringing newer players under a regulatory umbrella, according to Payments Canada, the Ottawa-based organization that cleared and settled more than $53 trillion in payments made last year via cheque, debit card, direct deposit and others.
The group, which is regulated by the Bank of Canada and subject to oversight from the federal government, is also in the midst of a multi-year overhaul of the clearing and settlement systems it owns and operates.
One of the objectives of that overhaul is allowing “broader, risk-based access to Canada’s retail payments ecosystem,” a release noted, a goal that could be aided by the proposed framework.
“The proposed oversight framework would apply to payment service providers, some of whom may in the future choose to leverage Payments Canada’s modernization effort to deliver their services,” the finance spokesperson said.
At the moment, Payments Canada says there are around 110 financial institutions participating in one or more of its systems — all of them traditional firms, such as banks and credit unions.
Ottawa has already given some consideration towards creating an “associate membership” class that would allow payment providers regulated under the proposed framework to participate in Payments Canada’s systems.
The new framework could also offer legitimacy for fintech companies, which may currently be forced to partner up with a financial institution that is already connected to Payments Canada’s systems.
“This is actually one of those where I think it’s a win for everybody,” saidGerry Gaetz, president and chief executive officer of Payments Canada, in an interview with the Financial Post.“It’s a win for consumers. It’s a win for the new entrants, because they can say, ‘look … now I’m regulated.’ And it’s a win for existing participants, because they can now feel that everybody is playing by the same rules.”