The push to modernize Canada’s payments system hit two important milestones last week, marking progress for those who believe it will level the playing field between banks and a crop of financial technology companies offering new services, and cut fees and delays for consumers. 

In last Tuesday’s fall economic statement, Finance Minister Chrystia Freeland announced the government’s plans to amend the Canadian Payments Act—the legislation that sets out the roles and responsibilities for Payments Canada, a non-profit organization in charge of Canada’s payment infrastructure. The changes would let organizations beyond Canada’s big banks—namely regulated payment service providers, credit unions, and clearing and settlement operators—access the country’s payments system, and eventually the Real-Time Rail, the long-delayed update to the country’s payments technology that will let money move between parties almost instantly. 

A day later, the federal government published its final regulations for the Retail Payments Activities Act (RPAA), establishing rules for the country’s burgeoning payments sector, which includes high-profile domestic startups such as Neo Financial, Koho and Wealthsimple, as well as larger foreign companies that handle payments for Canadian consumers.

Tracey Black, president and CEO of Payments Canada, said she applauded the initiatives.

“The legislative changes means that work can begin to broaden access to Payments Canada’s systems in a way that lays the foundation for important benefits for Canadians and Canadian businesses across the country,” she wrote in an email to The Logic this week. “The RPAA, under the purview of the Bank of Canada, will protect consumers through the regulation of payment service providers to safeguard funds and to protect the financial system by defining operational risk requirements.”

Black also spoke with The Logic in the run-up to the fall economic statement. In that interview, she answered Payments Canada’s critics, and talked about her hopes for the Real-Time Rail.

This interview has been edited for clarity and length.

I want to start off by asking about Payments Canada’s governance structure. Many fintechs think Payments Canada is controlled in some way by the big banks. On the other hand, I’ve heard that banks think Payments Canada has gone rogue. What do critics get right about Payments Canada’s governance and what do they get wrong?

I’ll give a few facts that maybe will help with this. Payments Canada is a special-purpose corporation. We own and operate core infrastructure on behalf of the Bank of Canada and we report in to the Department of Finance. Our board is a majority independent board and this governance was changed in 2015. So our board consists of some of the large domestic banks, a minimum of two, often three, of our board seats are filled by domestically important banks like Royal or TD. They are typically direct participants in our system. And then we have representation from indirect participants in our systems and that often will include a smaller bank or a global bank.

How do you respond to criticism that banks have too much sway?

The banks are our customers. We operate monopoly systems. If you want to clear and settle payments in Canada, it’s Payments Canada that processes those transactions. We do earn our revenue primarily through transaction fees. Our fee schedule is not tiered, so if you’re a small participant or larger direct participant, you pay the same if you’re a direct participant in the system, regardless of the volume that you may put through there. But obviously the largest users of our systems are our largest customers and so I think that’s where that translates into the belief that the largest banks have the largest say. From a governance perspective, they do not. They occupy one seat with our member advisory council. 

The reality is that we have a banking arrangement in Canada where we have a small number of large players. And that’s true broadly across the ecosystem. 

Why is expanding your membership a priority right now?

The membership in Payments Canada was last reviewed in 2001. So you can imagine how much life has changed in more than 20 years. In 2001, it was a much smaller group of players than what we have available to us today. So, as you say, amendments to this act would allow credit unions, regulated payment service providers, designated financial market infrastructures that meet requirements to become our members. What that would mean is that once they are members of Payments Canada, if they meet the participation requirements for our payments systems, they can be direct participants. And, our view is that broader participation in our payments systems will result in the introduction of more innovative products and services for Canadians.

If fintechs, referring to payment service providers here, are granted membership to Payments Canada, would that mean they’ll get board representation within the organization?

There have been some calls from some areas from the market for us to have a look at our governance. I think you captured the sentiment accurately in your opening remarks. It’s our interest that the seats that we have on our board be representative of our membership. That board is an important part of what happens in our systems and we’ll do everything we can to ensure the right voices are heard.

Could you speak to how the Real-Time Rail (RTR) is expected to change the payments industry?

There are more than 70 countries around the globe now that have implemented RTR payment systems. The value of money moving in real time is significant. Let’s take a bill payment. If you go to your financial institution provider you’ll probably see when you pay a bill that payments after 10 p.m. or 11 p.m., depending on when you’re located, will not be processed until the next business day. That’s the way the batch system works. And, if you pay the bill at 11 p.m. on a Friday of a long weekend, the money won’t be received until Tuesday at 9 a.m. It takes that long because our systems are not open 24/7, 365. If you paid that bill on the RTR, it would be received by your biller in seconds.

Another example of a pain point that would be addressed by the RTR is holds on cheques. I don’t know if you’ve put a nice big cheque into the bank machine and they say you can have $100 of that right now. So, if the payment was initiated using the RTR, the funds are good. They’re guaranteed, irrevocable funds. And so when the payment was sent to you and you said, ‘Yes, I’d like that,’ it’s all available to you. Every last penny of it. So it’s a much more efficient way to move money around and for small businesses where cash flow is an issue, there are significant benefits in being able to manage your cash flow more efficiently both outbound and inbound.

Does the RTR have any potential drawbacks? For instance, could it increase chances of fraud?

One of the challenges with offering payments in real time is that you do create an opportunity for real-time fraud and we’ve seen that in other jurisdictions. We have been working with our industry and also with our regulator, the Bank of Canada, to ensure that as we go live with real-time payments in Canada, that we are also really thinking about what the fraud implications are. 

There are a couple of things we’ve seen other jurisdictions introduce. Having a centralized fraud capability where you can monitor the activity from all of the participants in the system is helpful. You can see things in the centre that you can’t see if you’re a single participant or even a group of participants on the system. We’re in discussions about how to ensure that we have a centralized fraud capability in the RTR. There’s also consumer education around helping them understand what fraudulent phishing emails look like. 

The other thing that we’re starting to see other countries require is not only authentication of the initiator of the payment, but also the receiver of the payment. That’s confirmation of payee. If you’re initiating a payment through your financial services provider and it’s someone that you’ve never paid before—so say you’re paying me—confirmation of payee would return a message to you to say: “Do you mean Tracey Black that lives in Toronto? Does this align with who you think should be receiving this payment?” It gives you an opportunity to validate that the recipient of the payment is who you think it is, and to cancel that payment if it’s not right.

The RTR was originally expected to go live in mid-2019. After a series of delays it was most recently scheduled for launch in June. But that month, Payments Canada announced that it would be further delayed. What’s been causing these delays?

We’re in the process of completing a risk review and I think it’s important to point out that this modernization journey has consisted of multiple modifications and enhancements of payment infrastructure in Canada. The RTR is the last piece of this modernization program that we identified as being part of a broader modernization initiative. To create a new payments system is a challenge and you can appreciate that we’re very, very focused on making sure that we’re launching a safe and efficient system. And we’ll be publishing our annual roadmap in January of next year. We will be providing an update.

And by update, you mean the timeline for delivery?

We will provide you with an update and we’ll give you as much information as we can at that time. 

The delivery roadmap in January will be as comprehensive as we can provide. 

How is the RTR funded?

I think that’s something that we discussed with our members and with our regulators, and I think that’s probably as far as this conversation should go.

Part of your mandate is to facilitate the development of new payment methods and technologies. Are there any payment methods that you expect will see greater adoption in the year ahead?

I imagine what we’ll probably see is not so much significant evolution in the actual payment itself, but more evolution in the experience that proceeds that payment, and that’s where things like authentication come in, like the confirmation of payee capability. That would be something that would happen before the payment itself was initiated. So, I would expect that we see enhanced capabilities introduced to provide or support consumer confidence and to enhance that overall payments experience.