Retail payments oversight framework: what PayTechs need to know

Doug Kreviazuk, Executive Director, Fintechs Canada, June 11, 2020

In mid 2017, the Department of Finance released “A New Retail Payments Oversight Framework” in response to mounting pressure to modernize retail payments regulations and the rapid emergence of new, unregulated participants in the broader payment’s ecosystem.  Driven by a need to better safeguard the payments system from these new risks; and enhance the transparency of the system, the new Retail Payments Oversight Framework was conceived and under the direct oversight authority of the Bank of Canada, most Payments Service Providers “PSPs” that are viewed as either unregulated or under-regulated will now be included under this new regulatory umbrella.

Will PayTechs be Regulated?  Yes.  For the most part, PayTech should be considered analogous to a PSP and if they are engaged in one or more of the following activities will be required to comply with the new oversight framework.  These activities include:

  • Operating a Payment Account: Providing and maintaining a payment account in the name of end user(s) for purposes of making electronic fund transfers/payments;
  • Payment Initiation: Enabling the initiation of a payment on the instructions of an end-user client;
  • Authorization or Transmission: Providing services for the approval of a payment transaction or enabling the transmission of payment messages;
  • Holding of Funds: Enabling an end-user to hold funds in an account with a PayTech until the funds are withdrawn/transferred to a third party through an Electronic Funds Transfer “EFT”; or
  • Clearing and Settlement: Enabling the process of exchanging and reconciling the payments items (i.e., “clearing”) that result in an adjustment of financial positions (i.e., “settlement”).

As such, the new regulatory oversight framework will apply to a wide range of transactions, including credit/debit card transactions, online payments, direct deposits, pre-authorized debits and peer to peer money transfers.

What will be the Added Responsibilities for PayTech Firms?

  • Formal Registration: All applicable PayTechs must register with a new Registration Authority, upon coming into force of the new legislation or prior to the commencement of the payment service.   The registering PayTech must supply a range of corporate disclosures and complete details of the payment’s services being offered.    
  • Operational standards: Operating in the retail payments system gives rise to operational risks which need to be controlled for the benefit of users and participants.  PayTechs will be required to establish a robust operational risk management plan for their business activities and maintain an ongoing review of each of these elements of that framework, including roles, responsibilities, reliability objectives, system audits, testing and up to date business continuity plans.  The PayTech will be obligated to identify a lead-person to be responsible for regulatory compliance.
  • Safeguarding of Funds: To ensure the safety of and accessibility to customer funds held by a PayTech, it will be required that all “customer” funds are maintained a one or more segregated accounts at a deposit-taking financial institution, where the deposits are covered by CDIC or comparable provincial insurance program; in the name of the PayTech; clearly identified as a trust account; and where contributions to the account may only be end-user funds and any withdrawals from the account require the PayTechs authorization.
  • End-user Protections: PayTechs who are involved in a direct PayTech/end user relationship will be required to provide enhanced levels of customer disclosures that are both timely and in clear simple language and make available a formal process for addressing customer complaints and preparing annual reports to the regulator on the disposition of complaints received.

Expected Benefit/Implications for PayTech firms:

The passage of this regulation will establish the necessary legal foundation to formally recognize the contribution of a broad range of PayTechs in the payments system and give rise to the much needed “trust” factor demanded of system users.  On its own, the proposed legislation does not provide added authorities for PayTechs.  Rather, it creates an oversight framework with new and clear responsibilities for PayTechs.  However, the passage of the new Retail Payments Oversight Framework is first and critical step in securing meaningful access to Canada’s payments system for Paytech firms in Canada.    

Expected Date of Regulation:

The effect of the current pandemic has delayed the consultation, approval and implementation of this new legislation and the supporting regulations.  Optimistically, passage of this new framework might be possible by the end of 2022, but may unfortunately be pushed off until Q1/23.12

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