Some members of Canada’s fintech and payments sector are worried the federal government’s proposed approach to governing the industry will stifle innovation by placing too heavy a regulatory burden on smaller startups.

The Department of Finance published draft regulations last month under the Retail Payment Activities Act (RPAA), legislation the government passed in 2021 to establish rules for Canada’s burgeoning payments sector. Among other things, the act made the Bank of Canada responsible for overseeing the roughly 2,000 payment service providers operating in the country, a number that will likely include domestic players like Neo Financial, Koho, and Wealthsimple, as well as large foreign firms that handle payments for Canadian consumers. The draft regulations lay out for the first time what those companies would have to do to comply with the RPAA and show they’re safely managing customers’ funds, as well as their personal and financial information, and what penalties they’ll face if they break the rules.

Multiple sources in and around the payments sector told The Logic they were concerned about how prescriptive the regulations were, and worried they would be costly and burdensome to smaller payments companies. 

“We’d long been hearing that this was going to be principles-based, risk-based, and so when the regulations dropped they turned some heads,” said Alex Vronces, executive director of Fintechs Canada, an industry lobby group. 

With a principles-based approach, the Bank of Canada would have more discretion on how it regulates payment service providers, Vronces said. Large payment service providers that serve as the backbone of Canadian commerce with thousands of employees would have more onerous requirements, while small payment service providers with a few employers and customers would have less onerous requirements. 

“This discretion is important when you’re trying to promote responsible innovation,” Vronces wrote in an email to The Logic. “If you’re the opposite of principles-based, if you’re prescriptive, you lock in ways of doing things. You become one-size-fits-all, when one size can’t fit all. One size is either going to be too lax, promoting innovation but letting some irresponsible innovation squeak by, or it’s going to be too strict, stamping out innovation that would have otherwise been responsible had the requirements been tailor-made.” 

Amber Scott, founder and CEO of consulting firm Outlier Compliance Group, said the proposed Canadian regulations differ from those in countries like the U.K. and Singapore, where businesses under a certain size are exempt from some rules. 

“For a relatively small business that’s captured under the RPAA, they would need to comply with everything,” she said.

One concern for smaller payments companies is the internal and third-party review triggers for areas like risk management, incident response and safeguarding funds, Vronces said. If you’re a startup whose only clients are family and friends and you’re trying to see if your product fits in the market, the cost to engage an auditor to review your risk-management framework or to hire someone to produce reports each year is “not insignificant.”

If a payments company fails to comply with the regulations, not only are there significant fines, but the RPAA can stop them from operating, said Laurence Cooke, CEO and founder of Nanopay, a payments software company that will likely fall under the RPAA. Banks are given a certain degree of freedom once they’re up and running, and aren’t told to stop operating if they make a compliance error, he said. “So, in some ways, the RPAA is holding these small little fintech companies to a higher standard than banks, which I don’t think is fair.”

In a statement to The Logic, Department of Finance spokesperson Benoit Mayrand noted that the government is currently consulting on the proposed regulations—a consultation that runs until March 28—“and welcomes submissions from all stakeholders.”

Bank of Canada spokesperson Paul Badertscher said the Department of Finance is proposing a principles-based approach to the regulations for the operational risk requirements and that the central bank “will take a risk-based approach to supervision so that the burden of compliance to the regulations should be lesser for smaller [payment service providers] who pose less of a risk than larger, global [payment service providers].” The Bank will offer more details on how it will carry out its supervisory role once the regulations are finalized, he said.

He also said the bank will offer details about its cost recovery process, meaning how it will establish and collect user fees, once the regulations are finalized. “To be clear, smaller firms will have a smaller cost-recovery burden, while larger firms will pay more of the cost.”

As regulations near, companies will need to learn how to adapt. 

Brigitte Goulard, co-head of the consumer protection practice and fintech group at law firm Torys, said these regulations are just “the tip of the iceberg” for payments companies, with further compliance requirements coming for those eligible for the Real-Time Rail and open banking. Payment service providers may need to establish their own compliance department or partner with a compliance management entity, another payment service provider or even a bank that can help, she said. 

“Instead of having independent businesses, you’re going to have businesses being [overseen] by the bigger players,” said Joseph Iuso, executive director of the Canadian MSB Association, an industry group for money-service businesses.  

If the regulations prove too onerous for Canadian payments startups, “one consequence could be that they do like LeBron and take their talents to South Beach,” Vronces said, citing NBA player LeBron James’s 2010 announcement that he was leaving the Cleveland Cavaliers and his home state of Ohio to join the Miami Heat. 

“For many payment service providers, Canada is already something of an afterthought. It’s something you do after you’ve seen some success in other markets, even if you’re run by Canadian founders,” Vronces said. “I’ve lost track of how many Canadian entrepreneurs have told me they’re focusing on getting a foothold in the U.S. market before they come back here.”