The future of payments in Canada: are we finally making progress?

 
In December 2011, the Task Force for the Payments System Review found that “unless Canada develops a modern digital payments system, Canadians will be unable to fully engage in the digital economy of the 21^st Century, leading to a lower standard of living across Canada and a loss of international competitiveness”. This report spurred several initiatives to do just that—modernize Canada’s digital payments system.

Of these initiatives, a few, such as the launch of Lynx (Canada’s new high-value payment system), have been implemented, while others, such as the introduction of the Retail Payment Activities Act, are progressing well. Additionally, last November, the federal government announced, in its 2023 Fall Economic Statement, its intention to proceed with two important and long-anticipated initiatives: the introduction of legislation in the 2024 Budget to establish a “consumer-driven banking” (open banking) framework and amendments to the Canadian Payments Act to expand membership eligibility in Payments Canada. The implementation of these and other payments modernization initiatives has been met with numerous challenges and delays, and questions remain as to how and when these developments will be operational.

In this article, we examine several of these initiatives and what still needs to be in place to establish a modern digital payments system.

The Canadian open banking plan

Open banking (also referred to as consumer-driven banking) has been at the forefront of conversations around payments in Canada since the Advisory Committee on Open Banking was appointed in 2018. Open banking frameworks—which allow financial data to be shared between banks and third parties (such as other banks and fintechs) using secure application program interfaces (APIs)—are already in place in several jurisdictions, including the UK and Australia. The Policy Statement on Consumer-Driven Banking (the Policy Statement) released with the Fall Economic Statement provided some insights on the Government’s most recent plans to implement the proposed open banking framework in Canada.

Of note was the Government’s intention, set out in the Policy Statement, to pass legislation that will establish a Government-led entity to supervise and enforce the open banking framework. This was a surprising announcement as the Government had previously seemed reluctant to take on a supervisory role.

This decision may stem from lessons learned in the UK and the U.S., where the industry’s control over an open banking framework did not yield the expected results and eventually led to the respective governments taking a more active role. In the UK, the Open Banking Implementation Entity, which had been set up in 2017 by the nine largest retail banks to implement open banking, was replaced by a Joint Regulatory Oversight Committee following an investigation that found a lack of appropriate corporate governance. The UK government intends to eventually establish a long-term regulatory framework that will set out the respective roles of the regulators. In the U.S., the Consumer Financial Protection Bureau recently proposed a rule that activates a dormant provision of a law enacted more than a decade ago to accelerate the shift to open banking by forbidding financial institutions from hoarding a person’s data and requiring companies to share data at a person’s direction with other companies.

The road ahead for open banking

Recognizing that Canada is falling behind other jurisdictions, the Government announced in the Policy Statement that they expect to have Canada’s open banking framework fully implemented by 2025. This ambitious plan was applauded but met with skepticism, particularly when considering past delays and the many pieces that still need to fall into place to have an effective and successful open banking framework.

The issue of data portability

One such piece is the establishment of a formal data portability right under federal privacy law. Bill C-2, the Government’s privacy and AI reform legislation, would provide a limited data portability right to consumers. The right would allow an individual to direct a business to transfer their data quickly and directly to a different business of the individual’s choice, subject to two important caveats. First, the right only applies to businesses that are subject to a “data mobility framework”, which would have to be set out in regulations or other legislation. Second, in its current draft, this right does not capture information derived from or created by organizations based on that personal information.

The Policy Statement indicates that the 2024 Budget legislation will build on the foundation of data portability provided in Bill C-27. The legislation will likely construct the data mobility framework required to engage individuals’ data portability rights. The Policy Statement also indicates that the legislation will enact additional rules unique to financial data-sharing, including data protection standards and requirements for obtaining, maintaining and revoking consent.

The missing pieces of a modernized payments infrastructure

An effective open banking framework also requires a modernized payments infrastructure. In 2016, Payments Canada embarked on a multi-year project to modernize Canada’s payment systems, and although some progress has been made, three key pieces are still outstanding.

1. The first is the coming into force of the Retail Payment Activities Act (the RPAA), which introduces a new retail payment supervisory regime for payment service providers (PSPs), such as payment processors and digital wallets. PSPs will be required to register with the Bank of Canada and will be subject to requirements, such as obligations to comply with standards for operational risk management, to safeguard end-user (payor or payee) funds and to fulfil various reporting requirements. The registration requirements will come into force on November 1, 2024, and the requirements to establish risk management and funds safeguarding frameworks will come into force on September 8, 2025.
2. The second piece is the expansion of Payments Canada’s membership eligibility to PSPs subject to the RPAA, credit union locals who are members of a credit union central, and operators of designated clearing houses. The Government has moved quickly on this promise by introducing in the Fall Economic Statement Implementation Act, 2023 amendments to the Canadian Payments Act, extending the scope of membership and clarifying the composition of Payments Canada’s Stakeholders Advisory Council. Details as to eligibility and requirements for participants still need to be finalized before we see membership broadened.
3. The third critical piece for a successful open banking framework is the establishment of a Real-Time Rail (RTR). The RTR, Canada’s first real-time payment system that supports instant, data-rich payments, was initially set to be operational in 2022 and subsequently delayed to mid-2023. However, as this time has passed, Canadians are still waiting for an update from Payments Canada and Interac on an implementation date (although IS020022 messages have been available for the RTR since 2022).

An interconnective approach needed for implementation

Each of these payments modernization initiatives is a piece of a larger puzzle, and we must not ignore their interconnectedness. A meaningful open banking framework requires RTR, as a precursor, to be in place, as well as an established data portability right. Conversely, a data portability right may not achieve its full potential without a functional open banking framework and RTR. Having the RPAA framework fully operational before open banking has launched is ideal, as it may provide customers with increased confidence in using fintechs for their financial services, given the RPAA’s end-user funds safeguarding requirements. Lastly, the expansion of Payments Canada membership to PSPs and others has the potential to enhance competition that will be realizable with the implementation of open banking and RTR. Delays in one aspect of payments modernization can have a domino effect on others, creating stagnation in an economy that is ripe for innovation, as well as jeopardizing the ability of Canadians to digitally engage in the 21^st century.