Technology Transactions

Digital payment mechanisms and processes, of course, lie at the heart of almost all e-commerce. It follows that there is a great deal of interest in what policy makers are going to make of products like electronic wallets and mobile payments. Unfortunately, Canada’s federal government has been late to the chase, to the point where payment infrastructure and regulatory schemes are seriously outdated. Indeed, the regulatory environment is so uncertain that some lawyers report that their US clients have elected not to proceed with certain payment-mechanism initiatives because of the uncertain regulatory environment.

Back in June 2010, the then Minister of Finance Jim Flaherty announced the launch of the Task Force for the Payments System Review to help guide the evolution of the payments system in Canada. The Task Force’s mandate was to review the safety, soundness, and efficiency of the system; to determine whether there is sufficient innovation in the systems; to review the competitive landscape; to determine whether business and consumers are well-served by payments system providers; and whether current payments system oversight mechanisms are still appropriate.

In the summer of 2011, the Task Force released a discussion paper that made the following key points: Canada is falling behind in mobile payments and electronic invoicing and payments; the ongoing reliance on cheques is problematic as cheques are a slow way to pay, create delays that impact negatively on productivity, and create missed opportunities; and that even online bill payments are hindered by legacy payments systems designed for paper, so much so that Canadian banks still use batch-based processing for online payments, a system that requires more than 24 hours to clear a payment. The Task Force identified four challenges: increasing fairness in credit and debit card networks; updating the regulatory and governance structure of these networks; improving online authentication, security, and privacy; and transition to a digital economy.

The upshot is that the Task Force had to deal with the many legal issues surrounding the payments system, such as who’s holding your money when you buy a pre-loaded credit card from a retailer, what happens if there’s an insolvency or fraud, what constitutes a deposit under provincial law, how safe are the funds advanced, and to what extent if any are these funds insured? As it turns out, the answers to all these questions engage a common theme permeating the future of digital payment systems regulation: how do we strike the right balance between consumer protection and facilitating new entrants into the marketplace from both a technical and corporate perspective?

To deal with these challenges, the discussion paper outlined an initial proposal with four components: payment-specific legislation; creation of an industry self-governing organization; infrastructure upgrade aimed at reducing concentration of ownership and control of payments network, providing secure clearing and settlement of payments and competition among payment service providers; and creation of an independent payments regulator reporting to the Minister of Finance. When the Task Force’s final report was released in March 2012, expectations for reform were high. However, the government’s reaction to the report disappointed many observers, who noted that the government had committed to further discussion and forward movement but had offered no concrete acceptance of any recommendations.

The report lays out a proposed regulatory framework for the payments industry, including a self-governing organization and public oversight body. The radically new system would maintain the Canadian Payments Association as a core infrastructure entity. From a substantive perspective, the most significant of these recommendations was that payment industry participants such as processors, software and hardware manufacturers, acquirers, loyalty point program operators, and ATM operators that were not previously subject to specific payments legislation would now be swept up in the definition of “payments system providers” and subjected to the new proposed payments governance regime.

No surprise, then, that the industry was not necessarily unhappy, to say the least, with the government’s lack of enthusiasm for the recommendations. Quite apart from government and industry reaction, constitutional issues may delay or even thwart implementation of the recommendations. The Task Force noted that full implementation of its recommendations would require constructive interaction with provincial legislation and expressed confidence that the provinces would cooperate.

Since then, a new Liberal Party of Canada government was elected, amendments were made to the Canadian Payments Act, and in 2018, a new review of the Act was initiated.


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