With an appeal to businesses, consumers and governments, open-loop prepaid solutions can be used to drive financial inclusion, providing an initial point of access to financial systems to those who are currently underserved by traditional products. That’s how prepaid has carved a niche for itself in Canada’s financial services sector due to its ability to displace cheques — a key theme of a recent CGE Radio podcast about digitizing government payments and boosting financial inclusion.
Robert Hyde, CEO of Payment Source – a CPPO member — and Jennifer Tramontana, executive director of the CPPO, shared their insights on the podcast, including how prepaid can help the Canadian government modernize its payments and disbursements programs in a way that benefits everyone.
“For the unbanked and underbanked, we really believe innovation is the key to providing more access to more useful, accessible and convenient financial products and services. We should all be working toward that to have truly inclusive financial inclusion in Canada. We think prepaid is a key component of that,” Tramontana said.
“Open-loop prepaid solutions have grown and changed quite a bit over the past 10-15 years,” she added. They look and function like traditional credit and debit cards — either actual plastic cards, or accounts in a digital wallet. But they don’t require the recipient to have a credit score or a bank account. And they offer immediate access to funds. That means the products truly have universal access for Canadians. There is a real ease of use and a form that everyone is familiar with. It provides a gateway to the digital economy or digital payment options that has really driven their popularity as an alternative payment methods, and now to a bank account as well.”
Prepaid cards, which can be physical plastic cards or used via digital methods on mobile devices, are issued by federally-regulated entities under the Bank Act or Trust and Loan Companies Act (as applicable). Prepaid is also governed by the Payment Card Network Rules and subject to regulation by OSFI, FinTrac and the FCAC. The prepaid industry is estimated to be an $8.7 billion market and includes an extensive value chain including the networks, regulated banks and financial institutions, challenger banks and program managers.
“As consumers move toward a more convenient, cashless, contactless payment method, prepaid is really providing both those incumbent banking organizations, as well as those new fintech entrants a way to introduce new products and services — while still adhering to our stringent regulatory requirements here in Canada,” Tramontana said.
Prepaid solutions are issued by the major card networks (Visa, Mastercard) and run on the existing payment rails. Not only does prepaid maintain the same fraud and loss protection in accordance with the Zero Liability protections of the payment networks, but the funds also don’t expire and there are fee restrictions on what can be charged to cardholders. Prepaid also adheres to all applicable consumer protection, AML and privacy requirements, and solutions can be tailored to government programs, such as social assistance, tax refunds, employment insurance, pension and other program disbursements.
From a regulatory standpoint, financial institutions treat reloadable prepaid cards the same as opening an account, which means compliance measures are accounted for through KYC and AML requirements. Prepaid funds can be delivered in real-time and deposited to citizens’ accounts in seconds — with a government confirmation that payment has been received and deposited. For the consumer’s benefit, funds are loaded electronically on a reloadable card (or smartphone) without reliance on the mail.
“Our purpose is to provide inclusive choice and convenience to Canadians on how they pay and get paid. We believe there are significant gaps in the Canadian payments ecosystem, and our goal is to really find and close those gaps. In particular, government payments have some of the largest gaps in that ecosystem. …There is often a lag of innovation around payments in government,” Hyde said.
“When you look at governments and how they are trying to optimize it’s really about providing access and ways of getting money into the government,” he added. “Prepaid can play a role in that disbursements and distribution of money. Ultimately the government wants two thing: They want to improve access and reduce costs. The prepaid industry is a great option for disbursing funds to citizens. But I think they also need to be thinking about how are they reducing the costs of processing payments that are coming in.”
In May, CPPO published a whitepaper, “Modernizing Canadian Government Benefits and Tax Refund Delivery”, that highlights why prepaid solutions are needed to offer modernized, digital-first government payments to Canadians.
The whitepaper was distributed to key government stakeholders to maintain momentum on the government’s RFI on alternate payment methods which was launched in Fall 2020. The CPPO is re-engaging key federal government stakeholders following the federal election to advocate for the adoption of prepaid as a government disbursement tool.
The CPPO has also met with policy advisors in the Office of the Minister of Digital Government and the Office of the Minister of Public Services and Procurement, which has allowed the CPPO to continue to make the case for a political mandate for prepaid adoption. The meetings will also enable the CPPO to continue engagement with government officials. The CPPO is continuing research efforts to better understand and identify gaps with the federal government’s continued use of paper-based cheques to deliver benefits.
“Canada has lagged the rest of world in terms of adopting prepaid solutions to deliver government relief payments, but we’re seeing that turn the corner in a number of ways,” Tramontana said.
Future discussions are expected around where cloud solutions in financial services fit into the above issues. The pandemic has accelerated the conversations to modernize government payment mechanisms through innovative methods that are cost-effective and provides greater access for all consumers. This has a direct impact on prepaid industry as there is the potential for prepaid to play a larger role in providing an equitable platform to innovative government departments.
“The pandemic has really opened eyes in terms of needing to change. And needing to find some other approaches. You’re going to see embracing of new payments methods and finding alternatives to what has traditionally been out there in order to really find out how to really drive down that cheque volume,” Hyde said.
The Canadian government has taken the initiative to take steps towards modernizing its payment delivery mechanism, which the CPPO believes is a major step in the right direction. The CPPO believes that by following in the footsteps of international markets – and working closely with governments and embracing prepaid solutions, we believe prepaid solutions can quickly, securely and equitably serve all Canadians.
For example, the U.S. and the UK have shown prime examples of how to leverage prepaid cards to disperse government payments, but also to disperse welfare and other benefits. Meanwhile in Canada, despite the government’s impressive speed and diligence in executing on Emergency Response Benefits (CERB), relief delivery has only taken the form of paper cheques and direct deposits.
“What we’ve seen in the data is it is clear consumers are adopting prepaid as a form of payment that they are comfortable with and see value in. As a government you want to make sure you are providing the best payment solutions for consumers in ways that that they can consume and want to receive their money,” Tramontana said. “Prepaid has become a really core offering for Canadian challenger banks to support their banking models to bring new, accessible payment models to consumers. That’s driving more adoption, which really promotes financial inclusion to everyday consumers. The Government taking a look at this as a tool for a payment method is really a win-win for the government and consumers.”