Digital Payments Systems – Expect More Regulations
Although Canada is one of
the most advanced economies of the world, it is surprising (at least to some)
that Canadian consumers are not very frequent users of mobile payment systems
when compared to consumers in the U.K., Germany, Japan and a number of other
developed and developing countries. At
the same time, Canada is one of the fastest growing smartphone nations (over
70% of Canadians have mobile phones; 35% of these are smartphones). Canadians
are therefore poised to take advantage of the mobile payment systems that are
expected to grow in importance and usage in the near future (some of the mobile
payments systems currently being used by Canadians include Zoompass and
Presto). Perhaps recognizing this trend,
on June 18, 2010, the Minister of Finance announced the formation of the Task
Force for the Payments System Review (Task Force). The recommendations that will be made by the
Task Force will have implications for a broad range of players in the payments
industry, including financial institutions, Interac, Amex, MasterCard, Visa,
Canadian Payments Association, issuers of gift cards or prepaid cards such as
Starbucks, and issuers of digital or eWallets such as PayPal and Zoompass.
The Task Force was mandated
to: (i) identify public policy objectives to be pursued in the operation and
regulation of the payments systems; (ii) identify and assess the regulatory and
institutional structures best suited to achieving these public policy
objectives; (iii) assess and report on the safety and soundness of the Canadian
payments system; (iv) assess the competitive landscape by identifying any
potential barriers for new entrants and mechanisms to improve the competitive
landscape of the domestic payments system; (v) assess the degree of innovation
in the domestic payments system, and report on the challenges and opportunities
to bring new and innovative products to market in Canada; and (vi) assess and
report on whether consumers and merchants are well served by the domestic
payments system.
In the summer of 2011, the
Task Force released a discussion paper (Paper) in which it shared its views on
the current Canadian payments system and identified certain challenges that
need to be addressed.
Some of the interesting
observations made by the Task Force in the Paper include: (i) Canada is falling
behind, especially in mobile payments and electronic invoicing and payments;
(ii) the ongoing reliance on cheques is problematic: cheques are a slow way to pay, leaving payors
and payees uncertain when funds will be available; and, for governments and
businesses, delays mean productivity lost and opportunities missed; (iii) even
online bill payments are hindered by legacy payments systems designed for paper
(for example, according to the Task Force, Canadian banks still support online
payments with batch-based processing, which means that it can take more than 24
hours to clear a payment).
In the Paper, the Task
Force has identified four challenges: (i) increasing fairness in credit and
debit card networks; (ii) updating the regulatory and governance structure of
these networks; (iii) improving online authentication, security and privacy;
and (iv) transitioning to a digital economy.
The Paper focuses on the second challenge: updating the regulatory and
governance structure. The Task Force
expects to address the other three challenges in separate discussion papers
later this year.
To update the regulatory
and governance structure, the Task Force’s initial proposal has four
components:
- payment-specific legislation, which would be
inclusive and functional and would recognize the specific roles of players
within the payments system (the Task Force notes that the current legislative
framework tends to focus on financial institutions, given their traditional
role in payments, rather than on the function of payments);
- creation of an industry self-governing
organization, which would involve mandatory membership for industry
participants;
- upgrades to the current payments infrastructure
to support a modern digital economy. The aims of the upgrades would include:
reducing concentration of ownership and control of payments networks; providing
open access and a platform offering secure clearing and settlement of payments
and competition among payment service providers; facilitating funding of
investment in infrastructure; and developing a fair user-pay model to sustain
and promote the infrastructure; and
- creation of an independent payments oversight
body which would monitor the proposed governance framework and report to the
Minister of Finance.
The Task Force notes that
currently payments in Canada are governed by a patchwork of legislation. The
current legislative framework addresses a number of different concerns: (i)
payments rules and standards (e.g., Canadian Payments Act, Bank Act, Payments
Clearing and Settlement Act, provincial credit union acts, Bills of Exchange
Act); (ii) prudential oversight (e.g., Bank Act, provincial financial
institutions acts); (iii) consumer protection (e.g., provincial consumer
protection legislation, privacy legislation, Competition Act); and (iv) safety
and security (e.g., anti-money laundering legislation). At this time, it is not clear whether the
Task Force’s final recommendations will result in consolidation of some of the
current statutory obligations or rather amendments to the current statutes.
The Task Force’s Paper has received a number of
comments from various players in the payments system. At a high level, most commentators support
the Task Force’s position that the current payments system needs to be
updated. However, the commentators have
divergent views and interests concerning how the system should be updated (the
full text of the Paper and the comments can be viewed at http://paymentsystemreview.ca/).
Although it is too early to tell which of the components of the Task Force’s
initial proposal will make it to the final recommendations of the Task Force,
it is likely that some of the players in the payments industry who so far have
been largely unregulated (or very lightly regulated) will become subject to new
regulations. We expect to see more
clarity in this area early next year.
Stay tuned.