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Canada’s payment system needs more competition

Financial Post OpEd | Alex Vronces | Mar 25, 2021

banks prohibit fintechs from accessing Canadas payment system - Canada’s payment system needs more competitionInsulating industry incumbents from competition keeps the cost of sending and receiving payments in Canada higher than it needs to be

What started as a vision half a decade ago is almost a reality: the Canadian payment system, which processed $55 trillion in 2019, is on its way to being decommissioned and replaced. But while Canada is closer to getting its long-awaited safer and faster payment system, fintechs are being left out.

Payment system modernization wasn’t just going to be a technology upgrade. It was also supposed to make the financial sector more competitive, putting fintechs that hold and move Canadians’ money on a more level playing-field with Canada’s biggest banks.

For more than 30 years, one of the biggest public policy questions in payments has been, “Who gets access to the payment system?” To this day, the theoretical answer is banks and other financial institutions. In practice, however, it has mostly been Canada’s biggest banks.

The Canadian Payments Act prohibits fintechs from accessing the system themselves, so they access it through banks. The problem with indirect access is obvious. Imagine having no choice but to do business with your competitor in order to compete with them.

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The Canadian payment system is essential infrastructure. Operated by Payments Canada, it consists of the Large Value Transfer System (LVTS) and the Automated Clearing Settlement System (ACSS). The LVTS processes wire payments, whereas the ACSS processes payroll, bill payments and debit payments at the point of sale, among other payments.

Despite the clunky names and arcane processes, Canada’s payment system essentially works like a spreadsheet. Payment industry insiders occasionally joke that the Canadian payment system is a “glorified calculator.” It’s the most important glorified calculator you’ve likely never heard of. When I pay you, or you pay me, money doesn’t exchange hands right away. It takes time for our banks to move the money from account to account. When funds do appear in either of our accounts in almost real time, our banks have usually just fronted us the money. They use the glorified calculator to keep track of what they owe each other before the money actually moves.

I liken it to the telecommunications industry. As the only ones with direct access to essential infrastructure, a handful of banks are in a privileged market position, just as a handful of telecom giants are. From that privileged position, banks resell their access to fintechs.

But there’s a big difference. In telecommunications, the CRTC works to make sure privileged market positions aren’t being abused. In payments, there’s no such thing.

Since banks resell their access to the payment systems to fintechs, many fintechs are at an unfair disadvantage when it comes to cost and service levels. The high price of indirect access makes it difficult for them to offer their tried-and-true services, let alone experiment with more innovative offerings. That they’re forced to go through banks brings more complexity and slower payments.

That’s if you can find a bank willing to partner with you. Some banks will outright refuse to, depending on your business model. Then you can either become a bank or leave the Canadian market. Becoming a bank under the more than 800-page Bank Act is just not feasible for many fintechs, who often start off doing only a fraction of what a bank does. So exit becomes the only option.

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Instead of creating a CRTC-equivalent in payments, the federal government was going to make the sector more contestable. First, it was going to pass new legislation to regulate fintechs that hold and move Canadians’ money — not regulate them as much as banks are regulated, but enough to safely give them access to the payment system. Then it was going to give fintechs the right of access by amending the Canadian Payments Act.
These changes were announced in Budget 2019. But it’s 2021 and we’re still waiting.

The obvious danger is that when the new system goes live next year, the result will continue to be a less competitive market. That doesn’t just hurt fintechs. It also hurts consumers and businesses. Insulating industry incumbents from competition keeps the cost of sending and receiving payments in Canada higher than it needs to be.

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