2021: Out with the old, in with the new, or more of the same?

By: Doug Kreviazuk, Executive Director, Fintechs Canada 

Clearly 2020 has been a tumultuous year for consumers, businesses, and the overall economy.  Unfortunately, there have been many business casualties linked directly to the Covid-19 epidemic which translate into further issues and challenges for the average Canadian.

As reported by Statistics Canada (November 2020), the largest impact from Covid-19 has been felt by Canada’s small business sector.  This shouldn’t be too surprising given that 99.8% of all Canadian businesses identify as small to medium-sized firms.  Moreover, this class of business is the most vulnerable as they are unable to assume any greater debt loads and are the most susceptible to a dwindling customer base.  Their future survival is largely dependent on there being greater opportunity to reduce cost, increase customer reach and boost on-line sales.    

While we can easily identify the adverse consequences of Covid-19 on the range of businesses engaged in sports or entertainment, restaurants, personal care, or the transportation industry, among others, as they tend to gain attention.  However, there seems to be a lesser priority given to the other nationally critical industries or infrastructures that drive our economy, like the payments industry.

At a time when it is critical to invest in our infrastructure and spur on economic growth, there appears to be little activity in generating new and sustainable opportunities that have a strong potential to boost growth.  Instead, these types of discussions continue to revert to base arguments of power, risk and control.  And as we muse over these largely philosophical questions, the opportunities that lie before us in the payments system, are gradually lost.  

There is little dispute that virtually all Canadian consumers and businesses are increasingly utilizing technology to better their lives, businesses, and financial affairs.  This phenomenon is recognized the world over.  In fact, a growing number of countries are employing new payment and payment-related technologies to speed up and improve customer authorizations; to make the sales/check out process more efficient; and provide a broader menu of payment options for buyers and sellers, all in an attempt to make the payments experience safer, faster and ultimately cheaper for all.  

However, in Canada progress to introduce new enabling payments infrastructures and technologies has been, by comparison, incredibly slow.  Canada’s laws and regulations that are intended to promote a dynamic financial services marketplace and introduce competitive forces to drive innovation and place downward pressure on prices, is outdated and ineffective.  The result is competition in the financial services sector is constrained.  There are far too many obstacles that prevent the introduction of new and innovative financial services.  Given this reality, there is little incentive for the incumbent banks to invest and innovate across the entirety of Canada’s payments ecosystem and bring about the opportunities to enhance consumer and economic welfare in Canada.        

The national payments system operator is legally mandated to promote the public interest, a responsibility that is shared with the federal government and central bank; yet many of the longstanding issues relating to payments risk, data processing inefficiencies and lack of price competition, remain.  As 2020 draws to a close, financial reports from Canada’s largest financial institutions are somewhat surprising, with many reaching record profits.  At the TD Bank, third quarter profits rose to $5.1 billion, up almost 100 percent over the previous year.  Similarly, during this same three-month period, the Bank of Montreal posted a $1.6 billion profit and Scotia Bank, $1.9 billion, while others are yet to report.  

The payments system is not a private system that operates at the pleasure of the incumbent banks.  It is a national, public utility that is expected to service the needs of Canadians in the most efficient way possible. 

Clearly, Canada must continue to apply pressure on this “foundational” industry to ensure it operates well.  By comparison, if our arterial system isn’t working properly, it must be assessed and corrected quickly, otherwise our bodies fail.  The national payments system is Canada’s circulatory system and our economic well-being is critically dependent upon it working efficiently and for the benefit of all Canadians. 

One clear example of possible opportunities lost is the current effort to design and implement an open banking framework.  The current review is constrained to “read” access only; meaning those that will be able to retrieve customer financial data are unable to take the next step and act on their instructions to transfer funds or initiate a payment that is due.  This limitation only perpetuates the current inefficiencies of the payment system and denies the ability of highly innovative PayTech firms to introduce and make available new payment options for users.  

At the very core of the issue is direct access to the payments system for service providers.  The continued denial of access from these emerging players impedes the marketplace and the ability of consumers to utilize an ever-growing number of new payment services at truly competitive prices. 

With an increasingly stagnating economy, creating the right incentives to improve the flow of commerce and introduce customized financial services to meet the constantly changing demands of users is necessary.  

The recent announcement by Michael Sabia as the new Deputy Minister of Finance, is encouraging news for the financial services sector.   For many years, Mr. Sabia has supported innovative thinking and, arising out of the financial crisis the previous decade, suggested that “governments need to begin thinking now about a new generation of infrastructure and spending on education” … recognizing “that small business is still the engine of jobs in our economy” (G&M, December 7, 2020).  “The world needs sustainable growth anchored in economic productivity” (The Canadian Press, December 12, 2020).

Canada now more than ever needs to adopt the cures from our global counterparts, modernize its traditional views about the financial services sector, and drive positive and sustainable change to the financial services sector for Canada.

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