The Canadian government has taken steps to recognize digital payments as a gateway to greater economic growth — paving a path for prepaid to make a larger impact in the evolution of the digital payments market.
In April, Deputy Prime Minister and Minister of Finance Chrystia Freeland introduced the 2021-22 Federal Budget. The 700-page document, entitled “A Recovery Plan For Jobs, Growth, And Resilience”, came over two years since the last federal Budget. The federal plan included actions on multiple fronts related to payments and set the stages for further developments that are relevant for the prepaid community. For fintechs involved in the prepaid space, these discussions are becoming increasingly relevant.
The federal plan included actions on multiple fronts related to payments, including new legislation to enact the long-awaited Retail Payments Oversight Framework (RPOF), which is designed to ensure that the interests of Canadian consumers who use the services of fintechs are protected. It also includes proposed measures related to credit card interchange.
Where Prepaid Fits into Regulatory Discussions
Through the Budget implementation process the government has taken the steps to advance RPOF through the inclusion of the Retail Payments Activities Act (RPAA) in Bill C-30. The RPAA clears a path for fintechs to participate in Canada’s ecosystem as regulated entities – under the oversight of the Bank of Canada.
For fintechs involved in the prepaid space the RPAA and its associated regulatory framework, there will bring added viability and credibility to the market. It will provide consumers new market access and it will give assurance that products are being regulated. This includes the safeguarding of user funds that will now be regulated more like a bank. This gives consumers the confidence that prepaid fintech products are safe, efficient and secure.
These latest budget and regulatory moves also clear the path for new market entrants to become members of Payments Canada, which is in the midst of a modernization effort that includes the creation of Real-Time Rail (RTR) for small sum transactions.
Over time, the government envisions expanding membership of Payments Canada to non-financial institutions like fintech and payment service providers to access their retail payments infrastructure. This would offer new areas of innovation, and new modes that prepaid providers could issue funds through.
Bowing to pressure from merchant groups affected by the pandemic, it was also announced as part of budget discussions a commitment to seek overall reductions in the cost of interchange and to ensure that cost reductions benefit small businesses (as opposed to larger retailers). The government has set a timeline for action, indicating that it will move forward with regulation in the 2021 Fall Economic Statement if no progress is made on bilateral negotiations with card networks in the interim.
The current voluntary interchange reduction framework that was brokered in 2018 only captures consumer credit cards, and therefore excludes prepaid products, however the current commitment could see this arrangement evolve as the discussions continue.
How Prepaid Can Help Streamline Digital Payment Adoption — and Clear Regulatory Hurdles
The shift toward digital in response to the pandemic is compelling governments to examine the regulation of electronic payments given their increasing vitality to the functioning of the economy. This also includes exploring how prepaid digital payment models can help innovate and streamline the adoption of digital payment methods through secure and efficient payment models.
While Canada’s debit market continues to lag for e-commerce payments solutions, causing a volume shift toward credit cards — prepaid is serving a different segment of the market. As a financial tool, prepaid fills an important market segment in Canada to consumers who need an alternative to a payment solution tied to a bank account or credit card that can provide them the same ubiquitous payments experience. Prepaid also streamlines regulatory hurdles to help digital payments programs up and running quicker.
Prepaid cards, for example, are issued by federally-regulated entities are also regulated under the Bank Act or Trust and Loan Companies Act (as applicable) and governed by the Payment Card Network Rules. This means funds are not permitted to expire, and there are restrictions on the fees that can be charged to cardholders. Federally-regulated issuers are also overseen by OSFI, FinTrac and the FCAC.
Because prepaid solutions look and function like traditional credit and debit cards with the benefit of allowing citizens to access funds immediately. Open-loop prepaid products provide consumers, businesses and government with an efficient, secure and flexible online payment option that does not have to be tied to a bank account (improving financial inclusion) and is far less expensive and more secure than a cheque.
The CPPO recently released a white paper, Modernizing Canadian Government Benefits and Tax Refund Delivery, which highlights why prepaid solutions are needed to offer modernized, digital-first government payments to Canadians.
The government recognized as Canadians’ preference for digital payments continue to increase, methods of paying or reimbursing Canadians must also adapt. As such the government created a request for information process to examine using alternative, digital payment solutions to eliminate paper cheques.
Prepaid disbursements provide a high degree of security, flexibility and functionality while enhancing the timeliness of payments delivery, which is increasingly being recognized across the payments ecosystem. As Canadian government agencies work to modernize payment delivery, the CPPO will continue to provide data-based education on the benefits of prepaid to support wider financial access to all Canadians.