The Bank of Canada is urging financial technology companies to start preparing for a new regulatory regime that will soon cover businesses providing services such as digital wallets and electronic payment systems.
In the spring of 2021, the federal government tasked the central bank with overseeing the retail payments industry. This comprises “fintech” and “paytech” companies, from small startups to large firms such as Moneris and PayPal – but not banks, credit unions or insurance companies, which are already overseen by regulators.
While the new regulatory regime isn’t expected to come into force until 2025, the central bank is encouraging companies to weigh in on the rules before they are finalized.
There are at least 2,500 digital-payment service providers operating in Canada, Ron Morrow, the bank’s executive director of retail payments supervision, said in an interview that “I’m not sure how many of them know that this regime exists and is coming,” he added.
“Now is the time to start paying attention, because now is the opportunity to shape what’s coming. If you don’t pay attention, and you don’t speak up with any problems you see with this regime, you will bear the consequences of that when it comes to life.”
The bank spent a year consulting with a committee made up of representatives from twenty-two (22) payment companies. It has sent recommendations to the federal government, and Mr. Morrow expects draft regulations to be published online for comment in the near future. The aim is to start enrolling companies in the oversight system in 2024, and for supervision to begin the following year.
The new regime is a response to the growing use of digital payments by consumers and small businesses. The increase has been under way for years, and it has accelerated during the COVID-19 pandemic.
The use of physical cash has fallen considerably, Mr. Morrow said. And around 85 per cent of merchants now accept electronic payments, up from 60 per cent in 2018.
“This industry is growing quickly, both in terms of the number of companies involved and the amount of capital invested,” Mr. Morrow said in a speech to the Canadian Innovation Exchange Summit in Toronto on Wednesday.
“As the Notorious B.I.G. so aptly said: It’s like the more money we come across, the more problems we see. There are new ways to pay and an abundance of new players in payments. When money changes hands electronically in these new and different ways, we all need to make sure that consumers and the payments ecosystem are protected.”
While exact details are still being hammered out, the Retail Payments Activities Act, passed in 2021, spells out the broad requirements of the new regulatory system. Payment providers will have to register with the central bank, submit risk-management plans, and follow rules for holding clients’ money, with the goal of preventing losses in the event of insolvency.
The Bank of Canada will have the ability to impose fines of up to $10-million for violations of the act, although Mr. Morrow told the summit that fines of this size would only be handed out in extreme situations.
He told The Globe and Mail the bank is taking a risk-based approach. Larger, more systemically important companies will have a greater regulatory burden. Smaller companies will get off relatively lightly.
From those smaller players, he said, “All we want to know is, are you aware of the risks you’re facing? And do you have plans for managing them?”
Alex Vronces, executive director of PayTechs of Canada, an industry organization, said that many of his members already have experience dealing with regulators, such as the Financial Transactions and Reports Analysis Centre of Canada. They should not have trouble adjusting to the new rules, and many of them are eager to see them go into effect, he said.
“One stereotype is that industry doesn’t want to be regulated,” Mr. Vronces said. “But a lot of fintech companies have been asking to be regulated, because they need regulatory clarity and certainty to be able to innovate. We’re not building video games, we’re operating in the financial sector. Canadians need to have trust in it.”
The Bank of Canada has around 40 staff now working on the project. Mr. Morrow expects to eventually have more than 100 people working on retail payments supervision.
Follow Mark Rendell on Twitter: @mark_rendell. This article was first published in The Globe & Mail on November 03, 2022