Long gone are the days when you had to carry cash to complete most retail transactions, as more retailers accept electronic payments. With the increased prevalence of credit and debit cards and the emergence of new ways to pay, including wireless payments, peer-to-peer payments, and cryptocurrencies, retail payment systems are more complicated than ever, and the Department of Finance Canada is stepping in to make sure it protects both consumers and retailers as technologies advance.
The Growth of Electronic Payments
From 2008 to 2015, the use of debit cards increased by 40 percent, and credit card transactions increased by 70 percent. Canadians also continue to embrace new technologies, such as P2P payments and smartphone e-wallets, and these types of transactions increased by over 1,000 percent during the same period. The Department of Finance projects that noncash transactions may grow to as high as $1 trillion by 2020 with as much as 15 percent coming from mobile payments. This demand creates an enormous opportunity for retailers to grow and innovate, but the increasing complexity and volume present new risks the Department seeks to guard against.
Three Tiers of Payment Systems
The Department groups payment systems into three types of systems: systemically important systems, prominent payment systems, and retail payments. Based on the type of system, the Department decides how to weigh the need for safety, soundness, and user protections. A systemically important system includes large and sensitive payments, such as bank-to-bank transfers, that are critical to the health of Canada’s financial system. The Bank of Canada oversees these types of transactions, and the Department considers the safety and soundness of these systems to be of utmost importance.
On the other end of the spectrum, the Department groups together retail payments, which include card and mobile phone payments. Because of their relatively smaller transaction amounts and a large number of alternatives for consumers and businesses to choose from, the government considers user protections to be the most important consideration for oversight. Between the two are prominent payment systems, which handle transactions such as cheques and direct deposits, and the government takes a more balanced approach when weighing user protections and safety/soundness for these types of transactions.
Types of Risk
The Department’s goal is to ensure payment systems avoid various kinds of risk. These can range from the types of efficiency risk that slow down the system and stifle innovation to more extreme threats to Canada’s financial stability, such as laundering money and financing terrorists. Other types of risks the Department seeks to minimize include operational risks from failures in internal controls and financial risks that arise from insufficient liquidity or safeguarding of funds. To protect consumers, the Department also recognizes consumer-unfriendly behavior as a risk. This market conduct risk can include unfair business practices, such as misleading information and hidden fees.
The Department’s development of an oversight framework to manage these risks is ongoing, and is likely to continue as new technologies and challenges emerge. As of 2017, it has issued a framework for its proposed oversight and opened the matter to public comments. As the Department has yet to create any regulations, designate specific oversight or propose legislation, your clients can consider any upcoming oversight system to be a ways off. Still, it’s helpful to inform your clients about the areas of potential oversight, so they can make informed decisions when investing in and updating their retail payment systems.