Recent Development in Technology Transactions

Digital payment mechanisms and processes, of course, lie at the heart of almost all e-commerce. It follows that there is a great deal of interest in what policy-makers are going to make of products like electronic wallets and mobile payments.

Unfortunately, Canada's federal government has been late to the chase, to the point where payment infrastructure and regulatory schemes are seriously outdated. Indeed, the regulatory environment is so uncertain that some lawyers report that their US clients have elected not to proceed with certain payment mechanism initiatives because of the uncertain regulatory environment.

It was only in June 2010 that Minister of Finance Jim Flaherty announced the launch of the Task Force for the Payments System Review to help guide the evolution of the payments system in Canada.

The Task Force's mandate was to review the safety, soundness and efficiency of the system; to determine whether there is sufficient innovation in the system; to review the competitive landscape; to determine whether business and consumers are well-served by payments system providers; and whether current payments system oversight mechanisms are still appropriate.

In the summer of 2011, the Task Force released a discussion paper that made the key points that Canada is falling behind in mobile payments and electronic invoicing and payments; the ongoing reliance on cheques is problematic as cheques are a slow way to pay, create delays that impact negatively on productivity, and create missed opportunities; and that even online bill payments are hindered by legacy payments system designed for paper, so much so that Canadian banks still use batch-based processing for online payments, a system that requires more than 24 hours to clear a payment.

The Task Force identified four challenges: increasing fairness in credit and debit card networks; updating the regulatory and governance structure of these networks; improving online authentication, security and privacy; and transition to a digital economy. The Task Force will also have to deal with the many legal issues surrounding the payments system, such as: who's holding your money when you buy a pre-loaded credit card from a retailer; what happens if there's an insolvency or fraud; what constitutes a deposit under provincial law; how safe are the funds advanced; and to what extent if any are these funds insured?

As it turns out, the answers to all these questions engage a common theme permeating the future of digital payments system regulation: How do we strike the right balance between consumer protection and facilitating new entrants into the marketplace from both a technical and corporate perspective?

To deal with these challenges, the discussion paper outlined an initial proposal whose four components included payment-specific legislation; creation of an industry self-governing organization; infrastructure upgrade aimed at reducing concentration of ownership and control of payments network, providing secure clearing and settlement of payments and competition among payment service providers; and creating an independent payments regulator reporting to the Minister of Finance.

The Task Force's report was due at the end of 2011, but at press time in March 2012 had not yet been released. Information about when the report would be released was not forthcoming.

When they are made public, the Task Force's recommendations will have implications for a broad range of players in the payments industry, including financial institutions; debit and credit card providers; the Canadian Payments Association; and issuers of gift cards, prepaid cards (e.g., Starbucks), digital wallets (PayPal), and eWallets (Zoompass).

In a related development, in December 2011, the federal government released a consultation paper related to the strengthening of anti-money laundering laws — likely in response to international criticism that Canada was lagging behind in its regulation of digital money movement. If the consultation paper is any indication, it appears that the government is inclined to introduce similar rules for small-money cards that it has for the financial sector generally.

By way of example, it appears that a review of prepaid access products is in the offing. The upshot is that Canada may be looking at new know-your-client rules in this sector that will make it more difficult for stakeholders to introduce new kinds of payment products.