Canada's fintechs may be left out of real-time payments launch

Canadian financial institutions are preparing for the introduction of real-time payments, but fintechs are uncertain about how they will benefit, as under current regulations, they won’t have direct access to the new rail.

Payments Canada, Canada's clearing and settlement systems operator, plans to launch the Real-Time Rail toward the end of 2022. But until regulatory reforms are introduced, nonbanks won’t have direct access to the RTR, a situation that risks stifling innovation.

The U.K. saw significant growth in fintech services following the 2017 decision by the Bank of England to allow non-bank payment companies direct access to U.K. payment systems including the Faster Payments instant payment scheme. Fintechs such as Wise (formerly TransferWise), payments-as-a-service provider Modulr and Starling Bank have been able to innovate because of their access to Faster Payments.

“The government promised these changes in 2019, but it’s 2021 and we’re still waiting," said Alex Vronces, executive director of non-profit association Paytechs of Canada. Fintechs are frustrated by the delay in legislative reforms which were supposed to level the playing field with banks, Vronces said.

Under the terms of the Canadian Payments Act, only deposit-taking FIs can be Payments Canada members, and nonbank payment companies can access Payments Canada’s retail payment systems only through its members.

The Department of Finance proposes creating an associate member class for Payments Canada, which would widen access for non-bank fintechs to its retail payment systems. In a 2019 report on revising the Canadian Payments Act, the Department of Finance said associate members should be able to directly exchange payment messages over the RTR and the non-real-time Automated Clearing Settlement System without having direct access to clearing and settlement. As part of its modernization plans, Payments Canada plans to replace the ACSS with the ISO 20022-based Settlement Optimization Engine.

The Department of Finance also proposes creating a Retail Payments Oversight Framework to manage the risks posed by real-time payments. To be overseen by the Bank of Canada, the Framework would provide a risk-based approach to regulating PSPs to facilitate greater participation in, and access to, Canada’s retail payment systems.

Fintechs haven’t been provided with the information they need about the RTR to start planning for real-time payments, Vronces said.

“It’s hard to find good information about the RTR,” he said. “We still don’t really know how the RTR will work, and how much it will cost to use, although it’s supposed to be launched in 2022. This is problematic, as this is precisely the information paytechs need to build for the RTR-enabled future.”

Because it will take considerable time for the necessary legislation to be tabled in Parliament and then to come into force and be administered, the RTR will likely go live before fintechs can access it, Vronces said.

This month, Payments Canada selected domestic debit scheme operator Interac to provide the RTR’s payments messaging exchange capability, with clearing and settlement provided by Mastercard’s Vocalink subsidiary.

The RTR will leverage Interac’s existing Interac e-Transfer near-real-time system, which is connected to nearly 300 Canadian FIs. Interac’s exchange technology will allow Payments Canada members participating in the RTR to send and receive RTR payment messages and will interface with Mastercard’s clearing and settlement system.

“The benefit of working with Interac is that we’ll be able to use Interac e-Transfer’s infrastructure for the RTR,” said Janet Lalonde, Payments Canada’s senior director for its Real-Time Rail.

Interac is majority-owned by Canada’s FIs. Its e-Transfer service, which accounts for 90% of online transfers in Canada according to Payments Canada data, can be accessed only by Interac member financial institutions, giving them a head start over fintechs. The service, which uses email addresses and phone numbers as aliases for bank account details, enables payees to receive their funds within 30 minutes, with settlement occurring the following day.

Payments Canada will facilitate the integration of nonbank members once the legislation is in effect, Lalonde said.

“We agree that broader access to the RTR will enable greater competition and innovation and enable new services," Lalonde said. "We envisage a robust ecosystem with third parties that leverage the RTR to offer value-added services in partnership with FI participants.”

Operated by Payments Canada and regulated by the Bank of Canada, the RTR will allow Canadians to initiate payments and receive irrevocable funds in seconds. The system will use the ISO 20022 standard to enable information such as invoice or remittance data to accompany payments.

The new rail will enable a range of services including Request to Pay for businesses or individuals to send electronic requests for payments; government agencies distributing emergency funds instantly into individuals’ bank accounts with remittance information accompanying deposits; businesses paying workers immediately after their shift ends; and instant disbursement of insurance payments to cover repairs.

“Request to Pay will be enabled after the RTR goes live,” Lalonde said. “It will be a key driver for innovation, as it will introduce a flexible way to manage and settle bill payments between businesses and individuals.”

Commercial payments will be an important use case for the RTR, according to Kirkland Morris, Interac’s vice president of enterprise initiatives and external affairs.

“Instant money movement will be important to businesses, as will be the ability to know with certainty and finality that funds have been received,” he said. “The ability to attach ISO 20022 data to payments messages will enable businesses to automate the reconciliation process that is currently done manually in the back office.”

Currently, the majority of e-Transfer transactions are made by consumers, although business use is growing, with payments to businesses accounting for 10.47% of the C$246.3 billion total e-Transfer transactions in 2020.

As well as expanding business usage of digital payments, the RTR is expected to reduce the volume of checks written by Canadian businesses. In 2019, checks comprised over 40% of total commercial payment transaction value in Canada, according to Payments Canada data.

To drive business adoption of the RTR, Payments Canada plans to allow significantly higher daily transfer amounts for real-time payments than the C$3,000 daily limit for e-Transfer transactions. RTR participants will also be able to set higher daily limits for corporate users than for consumers. The reason for the e-Transfer limit is the fact that, until funds are settled, financial institutions have to guarantee the amounts received by payees. By contrast, with RTR settlement is immediate.

“We haven’t set the initial limit for the RTR yet, but we’re definitely considering business use cases when determining it,” said Lalonde.

The RTR exchange system will route payments on the basis of bank account numbers.

“Competitive overlay services using the RTR could use a database of email and cellphone number aliases provided that an alias is connected to an account number before it comes into the RTR for exchange,” said Lalonde.

Interac plans to offer e-Transfer as an overlay service on the RTR.

“When the RTR goes live, all e-Transfer transactions will clear and settle via the RTR’s clearing and settlement function,” said Morris. “We will also use the RTR for our new offering for commercial customers, which will offer flexible routing options.”