Payments Canada membership expansion: Providing better payment services for Canadians

When Payments Canada was created in 1980, it had two objects: 1) to establish and operate a national clearings and settlements system and 2) to plan the evolution of the national payment system⁴. Over time, the objects of the organization have changed to coincide with ecosystem changes. Today, Payments Canada’s objects are to:

• establish and operate national clearing and settlement systems
• facilitate the interaction of its systems with others involved in the exchange, clearing or settlement of payments
• facilitate the development of new payment methods and trends

In pursuing these objects, Payments Canada has a duty to promote the efficiency, safety and soundness of its systems and take into account the interests of users.

The current Canadian financial landscape

Canada is renowned for the safety, stability and security of its financial system.

Canadian financial sector regulatory landscape

The federal and provincial governments oversee various aspects of the financial services industry.

At the federal level, the Bank of Canada is responsible for monetary policy interest rates, currency, foreign exchange reserves and the administration of public debt. Banks are federally regulated under the Bank Act and are prudentially supervised by the Office of the Superintendent of Financial Institutions (OSFI). Through this supervision, financial institutions must meet stringent capital and liquidity requirements, as well as risk management protocols.

The Financial Transactions and Reports Analysis Centre (FINTRAC) analyzes information collected from financial entities for patterns of suspected money laundering and terrorist financing. In reporting to FINTRAC, financial institutions must have anti-money laundering and counter-terrorist financing measures implemented.

The Financial Consumer Agency of Canada is responsible for protecting the rights and interests of consumers of financial products and services and the oversight of market conduct for federally regulated financial entities.

At the provincial level, deposit-taking financial institutions are regulated by their respective provincial regulators, which include both prudential regulation and market conduct.

The emergence of new players in the Canadian payment ecosystem

The payment industry has come a long way since the first online payment was made in 1997.⁵ Advancements in technology over the past couple of decades have led to an increase in the digitization of payments, with consumer behaviors trending towards the broad adoption of digital payments. Banks are playing a pivotal role in the evolution of the payment ecosystem, but regulatory requirements and legacy systems may hinder the speed of adoption and deployment of new technologies and solutions for consumers.

This has opened the door for fintech companies, payment service providers and smaller financial institutions to leverage technology to offer more agile, customer-centric solutions. These new entrants, without the same regulatory demand and infrastructure, are able to deliver more personalized, faster and often lower-cost alternative services to address some of the frictions experienced in financial services. New regulatory regimes are being developed and implemented to better capture these new players and their services. As a result, Canada’s financial sector is witnessing increased innovation, more choices for consumers and elevated competition between established and emerging players.

However, access to core payment infrastructure continues to be a challenge for new entrants and innovators in the payment space. Expanding membership to Payments Canada is one area that can help foster competition and innovation in the payment space. As such, amendments to the CP Act are an important step to reach this goal.

The evolution of Payments Canada membership

Amendments to the CP Act to expand membership have occurred before. Previous membership changes date back to amendments contained in Bill C-8, which received royal assent in June 2001. The legislation expanded the scope of eligible entities for membership to three new classes: life insurance companies, securities dealers and money market mutual funds. These changes sought to promote greater competition, improve service delivery and encourage innovation within the payment ecosystem. The provisions within the legislation were completed and implemented in 2002.⁶

Following many years of advocacy and lobbying, the Canadian Federal Government announced its intention to amend Payments Canada’s governing legislation, the CP Act, in the 2023 Fall Economic Statement. Amendments, contained in Bill C-59, will expand entitled membership eligibility to include PSPs, credit union locals and clearing houses.

What are payment service providers?

PSPs are individuals or entities that perform payment functions as a service or business activity that is not incidental to another service or business activity.⁷ Under the RPAA, an individual or entity that performs at least one of the following payment functions may be considered a PSP and is required to register with and be subject to supervision by the Bank of Canada (with some stated exceptions):

• Provision or maintenance of an account that is held on behalf of one end user or more
• Holding funds on behalf of an end-user
• Initiation of an electronic funds transfer at the request of an end user
• Authorization of an electronic funds transfer or transmission, reception or facilitation of an instruction in relation to an electronic funds transfer
• Provision of clearing or settlement services.

Currently, PSPs are not eligible to be members of Payments Canada and, therefore, cannot directly participate in the national payment infrastructure. As such, PSPs access Payments Canada’s systems indirectly through a Payments Canada member approved as a system participant.

What are credit unions?

Credit unions are prudentially-regulated cooperative financial institutions that provide services to their members (i.e. individuals who use the credit union for financial services) similar to banks, such as receiving deposits, making loans, and providing other services. As financial cooperatives, credit unions are owned by their members, not shareholders, and operate within a cooperative framework.⁹ Provincial credit unions (referred to as locals in the CP Act) are restricted to operating within their provincial jurisdiction and are regulated under their provincial legislation.

Historically, credit unions that are a member of a provincial central were not eligible to become a member of Payments Canada and not entitled to participate directly on Payments Canada’s systems. Actually, most provincial credit unions are required by provincial legislation to be members of their provincial credit union central (central), and as a result, they indirectly connect to Payments Canada’s systems through their central.

With the upcoming changes to the CP Act, credit unions that are members of a provincial central will be eligible to become a Payments Canada member. The changes to the CP Act will enable greater flexibility in participation options for the credit union sector.

What are clearing houses?

Clearing houses are corporations or legal entities that provide clearing, settlement or payment message exchange services for a designated clearing and settlement system. Clearing and settlement systems are often referred to as financial market infrastructures (FMIs), which are arrangements for the exchange, clearing or settlement of payments, securities, derivatives and foreign exchange transactions.

The Payment Clearing and Settlement Act (PCSA) provides the Bank of Canada with the authority to designate and oversee FMIs that have the potential to pose systemic or payment system risk. FMIs with the potential to pose systemic risk can be designated as systemically important FMIs. Alternatively, FMIs with the potential to pose payment system risk can be designated as prominent payment systems. Clearing houses of designated FMIs and their participants are responsible for understanding and managing risks and must observe the applicable risk-management standards set out by the Bank of Canada.

Clearing houses of designated FMIs currently rely on an intermediary to settle payments in Lynx¹⁰ during dedicated settlement windows. Once CP Act amendments come into force, the clearing houses listed below (other than Payments Canada) will be eligible to apply for membership  and apply to participate on Payments Canada’s systems. This may create efficiencies for these entities by removing the need to utilize an intermediary to settle payments.

What are the impacts of expanded membership for Canadians?

Expanded membership will allow more types of entities to apply to become members of Payments Canada. Members of Payments Canada may be eligible for seats on Payments Canada’s Board of Directors, the Member Advisory Council, other committees and working groups and can have access to a number of payment services, member reports and research.¹¹ Entities that become members will have the opportunity to contribute to discussions about Payments Canada’s systems, initiatives and interact with other major stakeholders in the financial ecosystem. Exposure to and contribution from a diversity of voices can promote a more inclusive payment ecosystem by ensuring committees and working groups are more representative of the Canadian population and the diversity of Payments Canada membership.

Members of Payments Canada are also eligible to apply to participate in Payments Canada’s systems, reducing the need for intermediaries in the exchange, clearing and settlement process. It should be noted that membership is only one eligibility requirement needed to participate in Payments Canada’s systems. Applicants must meet technical, operational and security requirements that are outlined in the system by-laws and rules.¹² Further, a settlement account from the Bank of Canada is required to be a direct participant.

Participation in Payments Canada’s systems can lead to more efficient payments, greater transparency in the movement of funds, and lower costs for participants.

So what does that mean for the Canadian consumer? Expanded membership and system participation could mean more inclusive, accessible and affordable payment options for consumers.

Payments Canada’s upcoming consultation

In connection with membership changes in the CP Act, Payments Canada is developing policy proposals to support potential consequential by-law and rule changes. The objective is to ensure Payments Canada’s by-laws and rules appropriately contemplate membership expansion, including payment system access, in a safe, sound and efficient way.

To inform these potential changes, Payments Canada is currently working on a broad industry consultation paper, which is planned to launch in 2025.

Conclusion

The expansion of Payments Canada’s membership eligibility is a significant step towards fostering greater inclusivity, competition and innovation in Canada’s payment ecosystem. By opening up membership to new entities such as PSPs, credit union locals and clearing houses, Payments Canada can ensure its frameworks contemplate and respond to Canada’s evolving payment landscape. Healthy competition in payments is the catalyst for innovation and will support Canada’s competitiveness globally, leading to improved payment products and services for people and businesses in Canada.

¹ Retail payment activities as defined in section 2 of the Retail Payment Activities Act (RPAA).

² Clearing houses as defined under section 2 of the Payment Clearing and Settlement Act (PCSA).

³ Payments Canada.

⁴ Dingle, J.F. (2003). Planning an Evolution: The Story of the Canadian Payments Association 1980-2002. Bank of Canada Publication.

⁵ Square (2019). History of Money and Payments.

⁶ Dingle, J.F. (2003). Planning an Evolution: The Story of the Canadian Payments Association 1980-2002. Bank of Canada Publication.

⁷ Retail Payment Activities Act, S.C. 2021, c.23, s. 2 (see definition of payment function) and s. 6-10 (which include the exceptions).

⁸ Bank of Canada (2023). Moving Money With Confidence: Canada’s New Regime for Retail Payments Supervision.

⁹ The CP Act defines a local (credit union) as a cooperative credit society incorporated by or under an Act of the legislature of a province whose members consist substantially of individuals, and whose principal purpose is to receive deposits from, and make loans to, its members.

¹⁰ More information on Lynx can be found on the system page of paymets.ca.