Canada’s payments sector has evolved rapidly in recent years. Of the nearly 700 FinTech companies in Canada, roughly one-fifth offer payment services. Despite making inroads thanks to innovative business models and faster go-to-market strategies compared to incumbents, these new entrants face a common problem: regulation.
All money service businesses in Canada are required to comply with anti-money and anti-terrorist financing regulations, as well as privacy and consumer protection laws. However, FinTech firms handling low-value, electronic payments are not overseen by a dedicated central regulator in Canada in relation to how they manage risks, respond to incidents, and protect user funds.
“It’s not very often the Bank of Canada gets a new mandate, and it’s not very often you get a blank sheet of paper to work from.”
But this reality is starting to change. The Bank of Canada will soon regulate entities facilitating retail payment functions in Canada, including FinTech firms of various sizes, domestic and foreign.
Ron Morrow, executive director of retail payments supervision at the Bank of Canada, has been leading the charge as the Bank moves into this new role. His message for tech companies that qualify as payment service providers? Regulation is on the way.
“They need to know that it’s coming, and they need to be ready for this regime when it comes into force,” Morrow said.
Reactions to the upcoming framework from the FinTech ecosystem have been generally positive, but some questions remain about its implications. Morrow spoke with BetaKit about where the regulatory framework stands and what tech companies can expect as it comes down the pike.
The Bank’s role as retail payments supervisor evolved out of the federal government’s 2021 budget, which first proposed to create an oversight framework for payments service providers (PSPs), meaning companies that perform electronic retail payment functions in Canada that are not already governed by other agencies. In June 2021, the federal government passed the Retail Payments Activities Act (RPAA), which gave the Bank of Canada the role of regulator in this area.
Since the RPAA was passed into law, the central bank has consulted with Canadian and international PSPs and is now advising the Department of Finance as that agency drafts regulations for the new framework.
Entering clearer regulatory waters
As it stands, the regime will require PSPs to register with the Bank, show they have plans in place to manage risk and respond to incidents, and keep customer funds separate from other money used in their operations. PSPs will also be required to submit annual reports and notify the Bank before changing how they perform a retail payment activity.
Morrow said the Bank of Canada expects 2,000 entities will fall under the new regime. Banks and credit unions, which provincial and federal agencies already regulate, are excluded from the framework.
FinTech companies, on the other hand, will likely make up a large contingent of PSPs. In the immediate aftermath of the RPAA passing, members of these companies had questions about the new legislation and how it may impact them. Since many FinTech companies operate in a regulatory grey area, some stakeholders were unsure of whether the RPAA would prioritize managing risk over fostering a competitive environment for FinTech companies.
“Every day, millions of Canadians make use of payment service providers, and they may not even know they’re making use of [them],” Morrow said. “…Our task as supervisors of retail payment service providers is to make sure that the trust Canadians are placing in payment service providers on a daily basis is warranted.”
Risk management appears to be the first and foremost objective for the Bank, but FinTech companies also stand to benefit from the regulations. Under these new regulations, FinTech companies would have clear guidance, and Morrow said PSPs he has consulted with feel they will soon “enter the sphere of financial supervision.”
“[Of] the PSPs that we’ve spoken with, I would say all of them have been quite positive and quite constructive on the regime,” Morrow added. “The reason why they’ve given us that positive feedback is they feel as though they’re going to become a supervised entity.”
Another benefit of the supervisory framework for tech firms relates to Canada’s real-time rail (RTR) system, which is meant to modernize the country’s core payments infrastructure. The system, when completed, will allow for payments to be sent and received within seconds, a much-anticipated capability for FinTech startups. Morrow noted as the new system comes into place, PSPs that the Bank oversees will be “eligible to submit an application” to join the RTR directly.
While potential access to the RTR will be a big incentive for tech firms, the Canadian FinTech ecosystem has grown frustrated with the long-drawn-out development of the system. Originally scheduled for launch in 2022, Payments Canada, overseeing the RTR, pushed the launch time back to mid-2023.
While the Bank of Canada is not responsible for implementing the RTR and Morrow could not comment on the specifics of the delays, he noted large-scale, complicated technology projects such as this take time.
“There’s a very sound, well-articulated plan for us to launch the real-time rail next year,” he added. “It’s a solid plan, and it’s in good shape; people are executing on it. I completely understand people’s frustration with the time it’s taken, but I have a high degree of confidence in the plan and the timeline.”
FinTechs playing an active role in the new regime
FinTech companies are also helping to shape the upcoming retail payments regulations. Since 2020, the Bank has consulted with tech companies of different sizes, maturities, and scopes through its Retail Payment Advisory Committee, to gather industry expertise about the retail payment services landscape.
“This is a space where we knew something about retail payment service providers, but we didn’t know the industry very closely,” Morrow said. “We’ve had to build our own knowledge of the industry and build those relationships.”
“They need to know that it’s coming, and they need to be ready for this regime when it comes into force.”
The committee includes representatives from notable Canadian FinTech companies, including Calgary-based Neo Financial, Toronto-based Wealthsimple, and Vancouver-based Mogo. International FinTech firms such as Mastercard, Stripe, and Square are also represented on the committee.
Since the RPAA passed in June, the general mood in the FinTech ecosystem has been one of cautious optimism. Last year, Daniel Eberhard, CEO of FinTech firm Koho, expressed support for the new regulations if they give startups equal footing in Canada’s payments landscape. More recently, Neo Financial co-founder and CEO Andrew Chau said discussions from the advisory committee have been constructive.
“The Bank of Canada has been receptive and collaborative with all industry stakeholders to date, and we believe we’re collectively taking the necessary steps forward to create an innovative payment system that benefits both consumers and businesses,” Chau said in an emailed statement to BetaKit.
A new mandate
The supervisory framework represents a new mandate for the Bank of Canada, and overseeing 2,000 new entities will require more resources.
The Bank’s current budgeted costs for the regime range from $25 million to $30 million per year, mostly for staff-related expenses, as the Bank plans to increase its currently 35-person team to 110. While these costs are currently being paid for by the federal government, the Bank expects these costs to be recouped by PSPs once the retail payment supervision program is up and running in future years.
Enforcement will also be a core function of the Bank’s role in retail payments supervision. Morrow noted the Bank will be able to bring forward fines and administrative monetary penalties of up to $10 million for PSPs that do not comply with the new regulations.
“That’s something that’s very new for us,” Morrow added. “We don’t really have a suite of enforcement tools that we’ve used in the past, so this is going to be a new function and a bit of a new, supervisory culture that we’re going to have to build here.”
Once drafted, the retail payments supervisory framework regulations will come up for public consultation that is currently slated for the fall of 2022. Morrow expects the Bank will begin registering PSPs in 2024.
As the Bank continues to gear up for the new regulatory framework, Morrow said he’s confident that PSPs will be able to comply with the new regime and that the Bank will be prepared for this new responsibility.
“It’s not very often the Bank of Canada gets a new mandate, and it’s not very often you get a blank sheet of paper to work from,” Morrow said. “It’s been a very exciting initiative from that perspective, and I’m really excited to work with our team and bring it to life.”
Image source Bank of Canada via Flickr.