Submission to Finance Canada: Retail Payments Oversight Framework

October 12, 2017

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  1. The Commissioner of Competition (Commissioner) is pleased to make this submission in response to the Department of Finance Canada’s (Finance Canada) consultation paper, “A New Retail Payments Oversight Framework” (Consultation Paper).
  2. The Competition Bureau (Bureau), under the direction of the Commissioner, enforces and administers the Competition Act, and is responsible for ensuring that Canadian consumers and businesses prosper in a competitive and innovative marketplace. Section 125 of the Competition Act gives the Commissioner authority to make representations in respect of competition to boards, tribunals, and other entities carrying on regulatory activities. It is in this context that the Commissioner makes this submission.
  3. The Commissioner applauds Finance Canada’s continued efforts to consult Canadians on how best to oversee the Canadian retail payments system, having made a submission to Finance Canada’s previous consultation on retail payments oversight.
  4. The Bureau’s operating assumption is that competition is good for consumers and business. As such, regulation should be minimally intrusive to ensure that market competition is not inhibited or prevented unduly by regulation.

Competition Bureau experience in the Canadian payments sector

  1. The Bureau has significant experience and expertise analyzing competition issues in the Canadian payments sector.
  2. This experience involves pursuing complex enforcement cases that include an application to the Competition Tribunal for a Consent Order in respect of Interac, as well as contested proceedings before the Competition Tribunal against Visa Canada Corporation and MasterCard International Incorporated.

Technology‑led innovation and emerging services in the Canadian financial services sector

  1. Since the Bureau’s previous submission to Finance Canada in 2015, the Bureau has launched a market study into the competitive landscape for technology‑led innovation and emerging services in the Canadian financial services sector (FinTech market study). The Bureau has been consulting with a diverse set of stakeholders, including policymakers, industry participants, and consumer groups. Key questions the FinTech market study aims to answer include:
    1. What are the barriers to entry, expansion, or adoption for FinTech companies? Are they regulatory or structural?
    2. What is the current state of the regulatory framework for financial services? Does it support or inhibit competition and innovation? Are changes required to encourage greater competition and innovation in the sector?
  2. The FinTech market study focuses on innovations that affect the way Canadian consumers and small and medium sized businesses commonly encounter financial products and services. One of the three broad service categories that the Bureau is focusing on is payments and payment systems, including retail payment services (such as mobile wallets), as well as the infrastructure that supports these services (clearing and settlement systems).
  3. The Bureau encourages Finance Canada to consult the Bureau’s upcoming FinTech market study report, which will be released for public consultation in November 2017. Additionally, the Bureau held a FinTech workshop in February 2017 and recommends that Finance Canada consult the summary report.
  4. During the course of the FinTech market study, the Bureau consulted with industry and government stakeholders to gain a better understanding of innovation and competition in the financial sector. This submission draws heavily from the research conducted in the context of the FinTech market study.

Finance Canada’s consultation paper

  1. The Bureau supports Finance Canada’s proposed framework, as regulatory uncertainty creates a barrier to entry for many new firms seeking to provide innovative payment services. The guiding principles of the proposed framework should allow market forces and competition to drive innovation and market outcomes.
  2. The Consultation Paper asks, “Would the framework sufficiently promote innovation and competition?” In short, it may; ultimately, market forces will determine the level of innovation.
  3. To help drive that innovation, new entrants, including non‑financial institutions need to be able to access national clearing and settlement systems, provided that they meet the regulatory obligations. The Bureau recognizes that access to these systems can be at varied levels, and that broader access can potentially increase risk, resulting in a need for increased regulatory oversight. Nonetheless, to truly drive innovation, competitive pressures must be applied, and this can be achieved by ensuring broader access to core payments infrastructure while at the same time controlling for new risks that emerge.

Barriers to entry and consumer switching

  1. The current regulatory framework for retail payments presents a barrier to entry for many new “non‑bank” firms. As Finance Canada notes, non‑traditional payment service providers (PSP) are not subject to any specific regulatory requirements to address operational, financial and market conduct risk. Rather, the current oversight focuses on incumbent and traditional PSPs, such as national retail payment systems, deposit‑taking institutions, and payment card networks. This approach to regulation has created regulatory uncertainty for new entrants and widened regulatory gaps between new and existing PSPs.
  2. Regulatory uncertainty increases the sunk costs and time of entry, as well as the risk of entry for new firms, in turn reducing the likelihood of effective competitive entry. The Bureau supports the introduction of an “advisory service” to help new firms planning to enter the market navigate the regulatory framework. This will reduce the immediate sunk costs of entry for new firms, and as a result reduce barriers to entry.
  3. Regulation also plays an important role in facilitating the entry of new PSPs by promoting public confidence in non‑traditional payment services.Footnote1 Since many issues pertaining to retail payments are unaddressed by any existing regulation, there is significant reliance on contractual agreements between end‑users and PSPs for important policy objectives, such as consumer protection. Industry participants expressed that consumers and business are less likely to switch to a new PSP when they are uncertain or lack adequate information on the regulatory obligations of a new PSP.
  4. Many new entrants also find themselves competing in a mature market with established and well‑trusted incumbents, amplifying the competitive effect of regulatory barriers to entry.
  5. The lack of regulatory oversight increases the difficulty new PSPs face in obtaining services from financial institutions, including banking services. Financial institutions may be unwilling to provide banking services to new PSPs for whom the financial institutions must assume a certain degree of risk. Industry participants suggest that clearly defined liabilities and responsibilities for both parties would ease this barrier to entry, allowing new PSPs access to services that are crucial for entering the marketplace, like banking, on a reliable basis. Ensuring that registered PSPs meet their obligations under the proposed framework will allow financial institutions to provide these services without assuming the risk themselves.
  6. Accordingly, the Bureau supports extending regulatory oversight to those PSPs defined in the Consultation Paper. Clear disclosures and adequate dispute resolution mechanisms will help customers make informed decisions about the costs and benefits of switching, allowing new entrants to increase competitive pressure in the marketplace for retail payment services.
  7. The Bureau would also support a clear delineation of responsibility and liability between PSPs and financial institutions providing banking services, similar to section 5.2.5 of the Consultation Paper, which determines liability between retail PSPs and their customers.

Balancing competition

  1. While regulation can reduce some barriers to entry by instilling confidence and bridging the trust gap, it can also erect other barriers to entry for new firms and inadvertently inhibit competition and innovation.
  2. During the Bureau’s FinTech market study, some incumbent PSPs cited the current regulatory framework as a barrier to effective competition, arguing that new entrants were not subject to the same regulatory oversight despite performing materially similar services in certain cases. Incumbent PSPs suggested that this gave new entrants the ability to innovate outside regulatory purview, putting regulated PSPs at a competitive disadvantage—in terms of innovation—and customers at greater risk.
  3. Many industry participants—both new entrants and incumbents—suggest that regulation should be based on the function a firm carries out, rather than entity performing that function as defined in regulation. Function‑based regulation can help ensure fair competition by mitigating confusion in the applicability of regulation for new entrants and subjecting all firms to similar regulatory oversight. Accordingly, the Bureau applauds Finance Canada’s work to outline the regulatory functions in the Consultation Paper.
  4. Firms performing similar functions may not pose the same level of systemic risk, however. Prudential requirements, for example, that apply equally to all firms can create a barrier to entry for new and innovative firms who are often smaller in terms of customers, as well as the value and volume of payments they process, but also in terms of capital resources. The Bureau welcomes the consideration of a tiered approach to regulatory measures as outlined in the Consultation Paper and views that industry participants are well positioned to inform the setting of specific requirement tiers.

Access to systems operated by Payments Canada

  1. One of the main barriers to entry and expansion for new players in the retail payments market is access to the core clearing and settlement infrastructure operated by Payments Canada. In particular, the Automated Clearing Settlement System (ACSS). Restrictions on participation exist at:
    1. the level of membership into Payments Canada and
    2. the “direct clearer” level in the ACSS.
  2. During its FinTech market study, the Bureau explored how these restrictions act as a barrier to entry and effective competition from new entrants. Broader access to national payments infrastructure, specifically for the purposes of exchanging payment items, for a range of entities, including non‑financial institutions, can alleviate this barrier.
  3. Regulatory oversight of PSPs, who are currently unable to access the ACSS directly, is a step toward achieving this target. Once in the regulatory umbrella, opening access to regulated PSPs to the ACSS (either directly or indirectly) can improve competition and encourage innovation while maintaining the safety and soundness of Canada’s payments system.
  4. This will require a careful consideration of current participation rules, including relaxing the requirement to be a Payments Canada member (or to extend membership to new types of regulated PSPs) and ensuring that direct clearers do not harm competition by denying, restricting, or otherwise inhibiting competitors from indirectly accessing the ACSS.Footnote2


  1. The Bureau supports the work being undertaken by Finance Canada and believes it will improve competition and innovation in the retail payments marketplace. Regulatory oversight can lower barriers to entry and improve the ability of customers to switch easily between suppliers. The Bureau is encouraged by Finance Canada’s attention to competition and innovation in its proposed framework.
  2. In order for Canadians to fully benefit from entry by new PSPs, however, PSPs complying with the regulatory requirements outlined in the Consultation Paper should be able to access national payments infrastructure.
  3. The Bureau and its staff remain open to collaborating further with Finance Canada as it continues its work on retail payments oversight.