Payments Canada is modernising the country’s core payments infrastructure, while the Canadian government is consulting on Open Banking, and also overhauling payments regulations to ensure that incumbents and new entrants can provide innovative services that are reliable and secure. Robin Arnfield reports
The government’s March 2019 budget announced plans for legislation to implement a Canadian Retail Payments Oversight Framework.
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The framework will require payment service providers (PSPs) to establish sound operational risk-management practices, and to protect users’ funds against losses. The Bank of Canada will oversee PSPs’ compliance with operational and financial requirements and maintain a public registry of regulated PSPs.
Established by the Canadian Payments Act and regulated by the Minister of Finance and the Bank of Canada, Payments Canada owns and runs Canada’s clearing and settlement systems on behalf of its financial institution (FI) members. Payments Canada is supportive of the Retail Payments Oversight Framework legislation, which, it says, “supports payments innovation and changes to safeguard Canadians’ funds and payments data”.
Payments Canada continues: “The framework will help level the playing field by bringing newer entrants under regulation, and act as the foundation for broader, risk-based access to Canada’s retail payments ecosystem, an objective of Canada’s payments modernisation programme.
“The appropriate balance of openness and security will encourage new entrants, competition and innovative solutions to meet the growing consumer demand for speed and convenience in payments.”
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By GlobalDataAccording to Canada’s Department of Finance, a risk-based approach involves developing criteria for fair and open payment system access that are determined by the risk posed rather than the volume of transactions processed by potential participants.
Modernisation
“The Canadian payments modernisation initiative is among the most ambitious modernisation drives occurring anywhere globally,” Aite Group senior analyst Gilles Ubaghs wrote in his report, Canadian Payments Modernisation: The Journey So Far.
“The lessons learned in Canada are likely to have an impact in other regions.” Payments Canada envisages a wholesale modernisation of Canada’s clearing and settlement infrastructure for retail and wholesale payments. Unlike other countries, however, it is not just introducing a faster payments system. Payments Canada plans to create three new ISO 20022-based systems:
- The Lynx real-time gross settlement system, which will replace the Large- Value Transfer System (LVTS) wire transfer system used to clear payments between Canadian FIs. Payments Canada has contracted Italy’s SIA to provide technology for Lynx;
- The Settlement Optimization Engine, a retail clearing system with enhanced batch payments, which will replace the Automated Clearing Settlement System (ACSS) and US Dollar Bulk Exchange platforms. It will clear retail batch payments and enable faster Automated Funds Transfers, a Canadian payment mechanism used for payroll, bill and mortgage payments, and other electronic funds transfers. ACSS is a deferred net settlement system for retail electronic and paper transactions, and
- The Real-Time Rail (RTR), an alwayson infrastructure supporting immediate payments and funds transfers. As a platform for innovation, it will enable payment system participants to provide overlay services offering new ways to pay for goods and services and transfer money.
“We aim to launch the RTR at the end of 2020,” says Tracey Black, Payments Canada’s executive director of modernisation.
“Since [debit scheme] Interac operates Canada’s existing P2P real-time transfer service, Interac e-Transfer, we’re talking to it to establish the opportunities to leverage Interac e-Transfer’s infrastructure for P2P transfers on our Real- Time Rail. P2P transfers are the first use case in many countries for real-time payments when they set up instant payments networks.”
Black says Payments Canada plans to implement ISO 20022 across all its payment systems.
“The capabilities ISO 20022 supports are broad,” she explains. “We’re examining how to deliver an ISO 20022-based message set that provides the ability to leverage data across all our systems with common functionality and common messaging. We’re learning from other jurisdictions such as the UK and Australia about what they experienced with their real-time infrastructure deployments.”
Black believes ISO 20022 is a great source of value for commercial payments.
“ISO 20022 presents opportunities to reduce the cost of payments for businesses by removing paper-based processes and manual re-keying of data,” she says.
“Generating new uses cases for commercial payments is a focus for us as we move to our Real-Time Rail. We can put the information that accompanies a cheque to reconcile the payment, into an ISO 20022 message accompanying an electronic payment.”
Black adds that, like payments authorities elsewhere, Payments Canada is addressing how to ensure broader access to its systems, for example for fintechs, and to ensure a level playing field.
“Canada’s Department of Finance is where we look for direction,” she says. “The Department of Finance’s proposed Retail Payments Oversight Framework will give us guidance on providing access to our core systems to non-bank new entrants such as fintechs. We’ll consult with the Department of Finance as to whether to admit non-bank new members to Payments Canada.”
Amendments
In December 2018, Payments Canada sought feedback on opportunities to broaden access to the ACSS.
“Payments Canada seeks to support additional payment providers and the development of new payment options for Canadian businesses and consumers by permitting broader access to ACSS,” it said in a statement.
Currently, only members of Payments Canada have direct clearing access to the ACSS, but can act as indirect ACSS clearers to non-members. Payments Canada members must be deposit-taking FIs.
In 2015, the government amended the Canadian Payments Act to reform the governance structure of Payments Canada. The purpose was to ensure its systems are operated for the benefit of Canadians, and support competition and innovation in payments.
In May 2018, following the launch of Payments Canada’s modernisation initiative, the Department of Finance launched a consultation on whether the governance changes achieved the intended objectives of efficiency, safety and user interests.
Anne Butler, Payments Canada’s chief legal officer and head of policy and research, says the Canadian Payments Act’s 2015 revisions altered Payments Canada’s corporate structure and board composition to make the organisation more independent.
“It reduced the number of seats that FI members have on our board and brought in more independent directors,” she says.
“Also, it introduced an accountability framework to make us more accountable to the Department of Finance.” Butler continues: “In its legislative review, the Department of Finance took the opportunity to consult as to whether our membership should be opened up to facilitate associate members such as non-bank PSPs to access the Real-Time Rail in the future.”
Currently, non-members of Payments Canada are not eligible to have direct access to its networks and services such as the planned Real-Time Rail. The Department of Finance published its response to the consultation in February 2019, which stated:
“In response to the proposal to create an associate member class to broaden membership and access for nontraditional payment services, the government will develop specific proposals.
“These will include how associate members should be incorporated into the governance structure of Payments Canada and whether and how the liability framework of Payments Canada should be modified to reflect this change. Any potential legislative amendments to the Canadian Payments Act to incorporate associate membership would follow the implementation of the proposed Retail Payments Oversight Framework.”
Jack Aubry, the Department of Finance’s director of media relations and consultations, says: “Given the pace of innovation in retail payments services, the Retail Payments Oversight Framework would ensure that retail payment services continue to be reliable and safe, and support Canada’s economic activity.
“It would also ensure that providers of such services can continue to develop faster, cheaper and more convenient payments methods. The framework would include operational, financial and market conduct requirements, as well as registration requirements for entities offering retail payment services.”
The Department of Finance consultation document reads: “The current oversight of payments in Canada focuses on core national payment clearing and settlement systems and, to a lesser extent, on retail payments supported by supervised financial service providers such as debit and credit card networks. Certain retail PSPs are currently not subject to comprehensive oversight, which can raise risk, competition and efficiency concerns for PSPs and end users. The proposed oversight framework would serve to close this gap, and would apply to any PSP performing certain payment functions in the context of an electronic funds transfer.”
Associate members
Payments Canada is supportive of non-bank players becoming associate members and gaining access to the RTR, provided safeguards protect the financial system, according to Butler.
“Our view is that if non-bank PSPs become Payments Canada associate members, they should be regulated under the Retail Payments Oversight Framework,” Butler notes.
“However, while the Department of Finance thinks that non-FI PSPs could have access to the Real-Time Rail, the department doesn’t expect small fintechs to have access to our high-value payment systems such as LVTS or ACSS. So there would be no material changes to our bulk retail system or our high-value systems, because of their Central Bank settlement component.”
Desmond Farrell, head of product management at banking software vendor Zafin, says: “Offering real-time capabilities will drive significant beneficial changes for business customers, including immediate availability and notification of funds; certainty of payments, as real-time payments can’t be recalled once authorised by senders; credit/ payment push, as only payers will be able to authorise payments; more flexible, enhanced messaging services; and fraud identification.
“These capabilities are expected to drive a significant increase in B2B payments, as the additional data that can be provided with payments, means accounts receivable and accounts payable processes can be automated through enhanced digital propositions,” Farrell adds.
“This will place greater impetus on banks to get their data models ready to receive and present the additional data that will be available in future, including the use of analytics and machine learning to aid fraud detection, as well as identify potential
products and services for customers.”
Open Banking and Fintech
In January 2019, the Department of Finance launched a public consultation on Open Banking, saying:
“[Open Banking] will allow consumers to benefit from a broader range of financial products and services.
“It’s expected that by giving fintechs and other financial service providers increased access to consumer financial transaction data, they will be able to develop products more tailored to consumer needs and preferences, helping to boost the level of competition in the financial sector.”
Aubry adds: “To guide the review, the Minister of Finance has launched an Advisory Committee on Open Banking. The Advisory Committee will assess the merits of Open Banking, with the highest regard for consumer privacy, security and financial stability.”
The committee will deliver a report to the Minister of Finance, assessing the merits of Open Banking after the consultations are complete. Subject to its findings, the government will then assess the best potential ways to move ahead.
A 2017 fintech market study by Canada’s Competition Bureau recommended that “policymakers embrace broader open access to systems and data through APIs. With more open access to consumers’ data (obtained through informed consent and under appropriate risk-management frameworks), fintechs can help consumers overcome their inability or unwillingness to shop around by paving the way for the development of price comparison tools, and other applications that facilitate competitive switching”.
The Competition Bureau also made a recommendation regarding banks’ ability to partner with fintechs. “Regulators of federally regulated financial institutions [FRFIs] should consider the impact that rules related to outsourcing and partnership agreements may have on competition, innovation and collaboration to ensure these rules don’t unnecessarily hinder an FRFI from tapping into fintech ingenuity,” it said.
In March 2018, the government said that, following a consultative review of the Bank Act, it planned to provide greater flexibility for FIs “to undertake broader fintech activities that enable the delivery of financial services in new and innovative ways”. It then published a revised version of the Bank Act that makes it easier for banks to collaborate with fintechs.
“The revisions to the act removed barriers to the way banks and fintechs can work together,” Neil Parmenter, president of the Canadian Bankers Association, said in January 2019. “Banks now have a greater ability to invest in and make referrals to fintechs. Some of these start-up companies have lines of business that fall outside the traditional understanding of banking.”
Farrel adds: “Key focus areas for Open Banking include allowing all consumers to take control of their banking data and authorising its availability to third parties, ensuring that customer data, even while it is shared more freely, remains secure via robust authentication protocols, and complies with ISO and global standards; and introduction of common API standards to aid efficient interoperability.”
“Open Banking, whether through legislation or market forces, will foster greater competition and innovation by banks for the benefit of consumers,” Farrell continues. “In effect, Open Banking is going to happen in some way or form in Canada. Canada’s big banks will have to be at the heart of innovation. If they are to remain market leaders, they must be able to deliver market-leading digital banking experiences. They’ll need to be better at designing and implementing their own products and services, making their products and pricing more tailored and relevant to their customers’ needs, and partnering with fintech and big tech companies which can offer valuable additional or augmented services that banks may not be equipped to do as well.
“By opening up accessibility to customer data – if consented – through APIs, competitor banks and third parties such as fintechs have greater opportunities to develop and provide competitive products and augmented services, such as budget forecasting tools,” Farrell notes.
“In countries such as Canada, where a small number of big banks dominate the market, it’s expected that new competitor digital-first banks and fintechs with specialist, niche capabilities will help to change this dominance. There are reportedly about 25 fintechs involved in the Canadian payments market. This number will likely be expanded if Open Banking is truly embraced.”
Steve Boms, president of the Washington, DC-based Financial Data and Technology Association of North America, adds: “The Department of Finance is just consulting on Open Banking in terms of bank accounts.
“Our submission to the Department of Finance said that it’s a mistake for Canada to just narrow Open Banking down to bank accounts. This will cause confusion for consumers. There will be missed opportunities if Canada just restricts Open Banking to bank accounts and not brokerage accounts or payments services as well.”
Interac
“Interac is supportive of a regulatory framework prioritising security and protection of information and privacy,” an Interac spokesperson says. “While we’re not advocating for any specific regulation changes, we’re open to working with federal and provincial governments to support the development of regulations enabling Canadians to transact digitally with confidence in this era of rapid technological change.
“While it’s still early days [for Open Banking], Interac and various Canadian FIs are already embracing collaboration with fintechs to provide new experiences and services,” the Interac spokesperson adds. Examples of fintechs with which Interac is collaborating include Bambora, nanopay, Sequent and Mint Corp.
“Work with Bambora is ongoing to facilitate the use of Interac Debit to pay for e-commerce purchases from merchants,” the spokesperson continues. “Interac and nanopay are working on a proof of concept to build a new way of digitally transferring money securely and in real time from Canadian bank accounts to international high-volume remittance corridors, starting with India.”
Payments Canada held its annual payments summit on 14-16 May 2019 in Toronto, at which Canadian payments modernisation was a key topic.
