How to Modernize Payments in Canada

As it stands today, Canada is lagging behind when it comes to innovating on payments. Countries around the world have started to modernize finance policy and payment infrastructure, widely adopt fintech innovation and open banking, and generally move towards a more robust financial sector that encourages competition between service providers, typically leading to more choices for consumers. 

With that said, Canada has made significant progress in several areas that will eventually enable the country to go from a laggard to a leader. 

There are four clear policy initiatives currently underway, each of which presents its own opportunities and challenges. However, once they are fully implemented, consumers will benefit from faster, cheaper, and more convenient payments. 

What to Expect from Current Efforts to Modernize Payments

1. Implementation of instant payments through the Real-Time Rail (RTR) system

Canadians deserve faster payments. More than 60 countries now have RTR systems, which ensure payments are processed within seconds rather than several minutes to hours. Canada is inching closer to launching RTR, but because of recent delays due to the validation of the system’s components and end-to-end integration, the launch has no definitive timeline in sight.  

“Canadians deserve faster payments. More than 60 countries now have RTR systems, which ensure payments are processed within seconds rather than several minutes to hours.”

The launch of RTR was first rescheduled from 2022 to mid-2023, and now there is no revised timeline as Payments Canada continues to consult the industry in parallel with finalizing features and the policy framework that will come alongside it. 

Once in practice, instant payments will revolutionize how consumers experience the movement of money. In a cost-of-living crisis, receiving your salary instantly and getting bills sent on the same day can make a world of difference for Canadians on a budget.

A failure to deliver on this promise would be a huge setback to helping Canadian businesses access instant liquidity and giving Canadian consumers the peace of mind that a payment has settled.

2. Establishment of a modern licensing framework in the Retail Payments Activities Act (RPAA)

After establishing a new payments license under the RPAA in 2021 and publishing subsequent regulations after consulting the industry in 2023, the Bank of Canada is now the primary regulator for payment companies. However, there is still much to be done for the new licensing framework to be active and in play. Payment companies have yet to be registered and the Bank is pulling together their payments supervision teams. 

The UK and EU already have similar regimes in place and functioning, and their frameworks are even referenced in the RPAA. 

“By laying out clear rules, Canada will usher in new innovation, while protecting consumers who are increasingly using fintechs and not only banks to manage their finances.”

The new rules will establish a level playing field within the financial sector, and unlock more innovative products and services for Canadian consumers and businesses: think budgeting tools, as well as faster and more convenient ways to pay digitally. Importantly, the RPAA also ensures consumer money is safeguarded, and ensures the risk management and operational workings of payment companies. By laying out clear rules, Canada will usher in new innovation, while protecting consumers who are increasingly using fintechs and not only banks to manage their finances. 

3. Amendments to the Canadian Payments Act which will enable non-bank access to the payments system

Amendments to the Canadian Payments Act are necessary for non-bank access to the payments system. Once these amendments are made and Bank of Canada’s RPAA supervision begins, so-called ‘direct access’ will be made available to a broader group of financial service providers (non-banks). However, this will likely not be in practice until at least 2024 or even 2025.

“Eventually, fintechs will become members of Payments Canada and directly clear and settle payments, unlocking lower-cost payments, increasing the speed of payments, and reducing the reliance on bank partners.”

This means that eventually, fintechs will become members of Payments Canada and directly clear and settle payments, unlocking lower-cost payments, increasing the speed of payments, and reducing the reliance on bank partners. With recent bank failures making headlines, reliance on only a few points for access to the payments system becomes worrisome. If most of Canada’s fintechs rely on one or two banks to do payments, and one of those banks wobbles, this would affect not only that bank’s customers but all fintech customers as well. Democratizing access to payments by allowing fintechs, alongside banks, to access the system, can help ensure that risks are diversified.

This is in line with global momentum toward expanded access to payment systems. Governments in  Australia, Brazil, Hungary, Singapore, and the UK have already moved in this direction and the EU has introduced a proposal to do the same in its review of the Payment Services Directive 2. 

4. Widespread rollout and adoption of open banking

Open banking as a way to pay provides consumers with a cheaper alternative to traditional payment methods such as credit and debit cards, delivering more competition among payment providers and driving overall costs down. 

From a data perspective, open banking, also known as Consumer Directed Finance, provides consumers with more rights to their own financial data to make better informed financial decisions while accessing newer innovative products. 

With Abraham Tachjian now in charge as Canada’s open banking lead and the development of the open banking framework underway, there lies a real opportunity ahead for Canada to advance its adoption of open banking and the widespread fintech innovation that comes along with it. 

The federal government is now consulting with the industry, regulators, and consumer representatives through four distinct working groups. The objective of these consultations is to design and implement the key elements of an open banking framework, an exciting step toward bringing more affordable and convenient financial services to Canada. 

The open banking lead and the secretariat will now transition their focus to a period of internal policy work. Working group meetings that took place through 2022 will again resume this year. 

Canada Must Act Now to Modernize Payments

At Wise, we have already demonstrated the benefits of a modern financial system that has implemented instant payments, a modern license, expanded access, and open banking.  

Wise was the first non-bank to directly connect with the Bank of England’s Faster Payments Service (FPS) in 2018. Once granted, we immediately lowered fees for those customers by 20% and increased the average payment speed from 15 minutes to less than 20 seconds. The UK’s FPS is a great example of RTR and non-bank access working together in practice. When access was granted more broadly, the total number of FPS participants went from primarily banks (18) to several fintechs (33). It resulted in increased competition, consumer adoption, and lower costs.

“The Canadian market has long been dominated by an oligopoly of its big six banks that has a stronghold on the movement of money.”

Canada can act now to advance each of these four policy initiatives to enable widespread fintech innovation and adoption. The Canadian market has long been dominated by an oligopoly of its big six banks that has a stronghold on the movement of money. Even with the emergence of other financial institutions such as credit unions and neobanks, as well as the growing number of fintechs, the big six remain the middleman for processing payments. 

To fully modernize payments and enable open banking, Canada can mirror the successes of others such as the UK and other parts of the world by enabling innovation, growth, and competition in the market. Canada must go from a laggard to a leader.