Bank of Canada urges fintech companies to prepare for retail payments regulation

The Bank of Canada is urging fintech companies to start preparing for a new regulatory regime that will soon cover businesses that provide services such as digital wallets and electronic payment systems.

In the spring of 2021, the federal government tasked the central bank with overseeing the retail payments industry. This includes “fintech” and “paytech” companies, from small startups to large firms such as Moneris and PayPal PYPL-Q – but not banks, credit unions or insurance companies, which are already overseen by regulators.

While the new regulatory regime is not expected to come into effect until 2025, the central bank encourages companies to assess the rules before they are finalised.

There are at least 2,500 digital payment service providers operating in Canada, Ron Morrow, the bank’s executive director of retail payment oversight, said in an interview Wednesday.

“I’m not sure how many of them know that this regime exists and is coming,” he added.

“Now is the time to start paying attention, because now is the opportunity to shape what’s to come. If you don’t pay attention, and you don’t speak out about any problems you see with this regime, you will bear the consequences when it comes to life.”

The bank spent a year consulting a committee consisting of representatives from 22 payment companies. It has sent recommendations to the federal government, and Mr. Morrow expects draft regulations to be posted online for comment in the near future. The aim is to start registering companies in the supervision system in 2024, and for supervision to start the following year.

The new regime is a response to the growing use of digital payments among consumers and small businesses. The increase has been going on for years, and it has accelerated during the COVID-19 pandemic.

The use of physical cash has dropped significantly, Mr. Morrow said. And around 85 percent of sellers now accept electronic payments, up from 60 percent in 2018.

“This industry is growing rapidly, both in terms of the number of companies involved and the amount of capital invested,” Morrow said in a speech to the Canadian Innovation Exchange Summit in Toronto on Wednesday.

“As the infamous BIG so aptly said: It’s like that the more money we come across, the more problems we see. There are new ways to pay and an abundance of new players in payments. As money changes hands electronically in these new and different ways, we all need to ensure that consumers and the payments ecosystem are protected.”

While exact details are still being hammered out, the Retail Payment Activities Act, passed in 2021, sets out the broad requirements for the new regulatory system. Payment providers will have to register with the central bank, submit risk management plans and follow rules for the safekeeping of customers’ money, with the aim of preventing losses in the event of insolvency.

The Bank of Canada will have the ability to impose fines of up to $10 million for breaches of the law, although Mr. Morrow told the summit that fines of this size would only be handed out in extreme situations.

He told The Globe and Mail that the bank takes a risk-based approach. Larger, more systemically important businesses will have a greater regulatory burden. Smaller companies will get off relatively easily.

From the smaller players, he said, “All we want to know is, are you aware of the risks you face? And do you have plans to manage them?”

Alex Vronces, executive director of PayTechs of Canada, a trade organization, said many of his members already have experience dealing with regulators, such as the Financial Transactions and Reports Analysis Center of Canada. They should have no problem adapting to the new rules, and many of them are eager to see them come into force, he said.

“One stereotype is that the industry doesn’t want to be regulated,” Mr. Vronces said. “But many fintech companies have asked to be regulated, because they need regulatory clarity and certainty to be able to innovate. We don’t build video games, we operate in the financial sector. Canadians need to have confidence in that.”

The Bank of Canada has around 40 employees now working on the project. Mr. Morrow eventually expects to have more than 100 people working on retail payments oversight.