Submission to Finance Canada: Review of the Canadian Payments Act

July 24, 2018

On this page:


  1. The Interim Commissioner of Competition (Interim Commissioner) is pleased to make this submission in response to the Department of Finance Canada’s (Finance Canada) paper, “Consultation on the Review of the Canadian Payments Act” (Consultation Paper).
  2. The Competition Bureau (Bureau), under the direction of the Commissioner of Competition, administers and enforces the Competition Act (Act), and is responsible for ensuring that Canadian consumers and businesses prosper in a competitive and innovative marketplace. Section 125 of the Act gives the Commissioner the authority to make representations in respect of competition to federal boards, commissions, or other tribunals. It is in this context that the Interim Commissioner makes this submission.
  3. In December 2017, the Bureau concluded a significant market study of technology-led innovation in the Canadian financial services sector (FinTech Market Study). This submission builds on the findings of the Bureau’s FinTech Market Study Report and recent related submissions, including submissions to Payments Canada’s public consultation on its “Modernization Target State”, as well as Finance Canada’s consultations on a new retail payments oversight framework, and potential policy measures to update Canada’s federal financial sector legislative framework.
  4. The Interim Commissioner applauds the 2015 introduction of a legislative review period for Canada’s Payments Act (CPA) and Finance Canada’s comprehensive consideration of proposals to facilitate transparency and diversity of input as part of this review. Technological advancement, such as new payment platforms and applications, introduce new consumer experiences and put competitive pressure on the status quo. The financial services marketplace is both complex and dynamic. Regular reviews limit the potential for unintended consequences to impede innovation and diverse engagement enables balance between competition and other important policy objectives.
  5. The Bureau is pleased to contribute to the ongoing dialogue on the important issue of competition and innovation in Canada’s payments system and the financial services sector, more broadly.


  1. New payment products and services can introduce greater competition into the financial services sector. Increased competition drives lower prices, higher quality, and greater choice for Canadians.
  2. The Consultation Paper seeks views on the extent to which the changes implemented in 2015 have been successful in better enabling Payments Canada to achieve its public policy objectives, namely, end-user interestsFootnote 1, efficiency, and safety and soundness of Canada’s financial system. In addition, Finance Canada is seeking input on proposals to change the governance of and membership in (including access to) Canada’s payments infrastructure.
  3. The Bureau’s FinTech Market Study examined many issues related to competition in retail payments. Industry participants noted that access to Payments Canada’s systems is the largest barrier to entry into the retail payments space. The Bureau is encouraged by the direction of the proposals in the Consultation Paper to broaden access to core payment systems and infrastructure. As elaborated below, the Bureau submits that: (1) greater independence in governance would mitigate strategic action that could delay (or foreclose) access; and (2) open, risk-based access to all core payments infrastructure would better align incentives and prevent unintended barriers to entry and innovation.

Bureau’s FinTech Market Study

  1. As noted in the Consultation Paper and the FinTech Market Study Report, Canada, like many jurisdictions, is in the midst of rapid change in its retail payments ecosystem. Firms are developing innovative new business models that at times result in retail payment services providers (PSPs) falling outside regulatory purview, which raises new potential risks and concerns for regulators, consumers and payment providers. At the same time, there is significant work to modernize the core payments infrastructure and oversight, including replacing Canada’s Automated Clearing and Settlement System (ACSS) with a more efficient Settlement Optimization Engine (SOE) and introducing a new real-time rail system (“real-time rail” or RTR) to provide a platform for innovation.
  2. Key findings of the FinTech Market Study highlight the importance of open access to safeguard against incentives for strategic behaviour on the part of incumbents that could foreclose new entry. Access restrictions currently limit most firms from gaining access to Canada’s core payment systems—used by many incumbents to deliver payment services—to exchange, clear and settle retail payments. This has in turn reduced the ability of new players to compete on an equal footing with incumbents. Additional findings include:
    1. Perceived lack of competition between ACSS clearing agents;
    2. Potential competitive disadvantage faced by indirect clearers as a result of strategic actions by direct clearers in an uncollateralized payment system and the likelihood that such actions could increase with a pre-funded real-time settlement model, such as that envisioned for the real-time rail; and,
    3. An increasing focus by new entrants on providing services that are to some degree a substitute for incumbent direct clearers’ own payment services.
  1. When new, innovative models face significant barriers this can result in lower levels of choice—to the detriment of consumers and businesses, and the Canadian economy.
  2. To make Canada’s payments ecosystem more accessible and competitive, with more flexibility for direct participation by financial institutions and PSPs, the Bureau recommends allowing the broadest levels of access to the payments infrastructure, with a view to encouraging significant competition between new entrants, incumbents and future providers.

Governance and access

  1. The 2015 amendments, guided by the Task Force on the Payments System Review in 2012, sought to bring about a greater independence in decision-making, innovative payments platforms and competition for the benefit of Canadians. The changes (e.g., introduction of the stakeholder and member advisory councils) allow for greater diversity of input regarding payment systems operations. However, since that time, other jurisdictions (Europe and Asia) have advanced further in their core payments infrastructure, with many integrating new PSPs directly into the core payments system.


  1. In Canada, there remains a risk of strategic action on the part of member financial institutions, for example, through delays in investment in the infrastructure necessary to support any new product or service. Innovation that increases the prospect of competitive pressure from new entry also creates an incentive for incumbent members to maintain the status quo, including control over the payments system. Independence in governance (e.g., fully independent board of directors) would reduce the potential for any one stakeholder (or group of stakeholders) to act strategically to the detriment of all other participants, including PSPs. This model would support building confidence in new payment products and systems and allow new entrant PSPs and end-users to provide input via other fora (e.g., FinTech/PSP advisory council), facilitating operationalization of new payment technologies.


  1. The Bureau encourages consideration be given to establishing metrics that could be published (for example, via Payments Canada’s five-year business plan, subject to Ministerial review) to better support the broad public policy objectives of safety, soundness and efficiency (e.g., competitive market conditions, innovation). Legislative reviews are important to ensure rules remain relevant, however, there may be an opportunity to leverage Canada’s payments governance structure to strengthen confidence in Canada’s new payments systems and the growing diversity of players through increased transparency and accountability.


  1. With a view to allowing the broadest scope for competition and market forces, the Bureau supports membership criteria that are flexible and inclusive of potential new entrants, regardless of their business model. Moving away from institution-based membership criteria, and towards a function- or activity-based approach, can help facilitate competition in the payments industry. As the lines between institutions continue to blur—for example, as several “non-bank” firms have entered the market for payment services—and technology continues to drive change, new entrants may look for access to these systems. Having the ability to directly access the payments system could benefit new entrants and support a more level playing field between traditional and innovative business models.

Associate membership versus risk-based approach

  1. The Bureau is encouraged by Finance Canada considering broader access to core infrastructure via the RTR and through the introduction of an associate membership class. The exact nature of the roles and responsibilities of this class are not fully explored in the Consultation Paper, however, it is anticipated that this new membership class would have different access opportunities relative to traditional members. While broader access is desirable, the creation of a new class may in fact create barriers for those eligible for associate membership by codifying access rights. The payments industry is dynamic and it is critical that the regulatory framework provide the flexibility to keep pace with innovation.
  2. Moreover, the broadening of access is limited to the RTR with no opportunity for PSPs to participate in the SOE or Lynx. Innovators (PSPs) would have no opportunity to be on parity with the current members even if they were to implement appropriate risk-mitigation strategies, such as collateralization or transparency of information. In many jurisdictions, access is determined according to the activity or function within a payment process or stream. This approach enables flexibility in the evolution of business models with participation conditional upon meeting regulatory requirements commensurate to the risks of the activity.
  3. Non-bank PSPs are competitive players in the UK payments marketplace, so much so that the Bank of England has extended access to settlement accounts for non-bank PSPs—a key criteria for becoming a direct participant in the UK’s high value payment systemFootnote 2. TransferWise became the first non-bank to obtain direct access to the UK’s Real-Time Gross Settlement and Faster Payment schemes with Mark Carney, Governor of the Bank of England noting “by stimulating competition and innovation, we anticipate increased diversity and risk-reducing payment technologies will reinforce financial stability while enhancing customer service.” New entrants may have less incentive to become associate members in Canada if doing so limits the scope of services firms can provide, particularly relative to a wider scope of opportunity in Canada’s peer jurisdictions. Establishing objective, risk-based criteria according to the activity or function operated by Payments Canada best sets the stage for secure payment alternatives to emerge, grow and shape the future of an innovative payments ecosystem in Canada.

Conditions of access

  1. In order for open access to truly translate into a more level playing field between competitors, it is important to consider the conditions of access, and ensure that they do not favour certain competitors over another. The Bureau agrees with the principle (as proposed in the Consultation Paper) that prospective firms be subject to regulation as a pre-condition for participation. Over the course of the FinTech Market Study, a common barrier identified by new entrants in the financial services sector was perceived (and real) regulatory uncertainty and the challenge of establishing sufficient trust to encourage consumers to explore and adopt alternative products and services. Industry participants expressed a desire to be clearly brought under regulatory purview. A comprehensive regulatory framework can give rise to trust, providing clarity and transparency to existing and new participants alike.


  1. The Bureau recognizes that any change in access requires careful consideration of the implications to the safety and soundness of the payments system. Having said that, from a competition perspective, the Bureau recommends that access be open, risk-based and timely to encourage competition in retail payments and, more broadly, Canada’s financial services sector.