Why registering under Canada’s Retail Payments Activities Act has a multitude of benefits

Registering under the Retail Payments Activities Act (RPAA) will allow payments services providers (PSPs) operating in Canada to bolster the safety and reliability of their retail services, while also protecting end users from specific risks. By November 2024, registration will be mandatory because of the importance of secure and effective movement of funds for the national economy, while providing the perfect foundation for evolving technologies to be leveraged.

Finextra spoke to Bank of Canada’s Ron Morrow and Helcim’s Stephanie Davis about innovating to keep pace with the exponential growth of digital services and how Canada’s payments infrastructure must become a conduit through which speed, efficiency and competitiveness is delivered. Lynx, Canada’s high-value payment system, and ACSS, which clears a high volume of smaller-value payments, are owned and operated by Payments Canada. But, development of the Real-Time Rail (RTR), the country’s first real-time, potentially cross-border, payment system, remains stagnant. This is why registering under the RPAA has short, medium and long term benefits.

What is the Retail Payments Activities Act?

Reliance on batch payments systems persists and while this form of infrastructure has evolved to clear electronic items such as pre-authorised debits, it is in dire need of modernisation. Retail payments supervision is a way forward, with a priority on safeguarding consumers. The Bank of Canada’s oversight of PSPs in Canada will offer Canadians confidence in the reliability of these companies, and with membership being mandatory, competition will increase, as well as innovation.

When asked to define the RPAA, Morrow highlighted the motivation behind the act. “Every day, millions of Canadians either tap their card on a payment terminal or make a purchase online. Largely unbeknownst to them, every time they do that, there are probably three, or sometimes as many as four, five or six PSPs that help to move the money out of their account and into the account of the merchant. The motivation behind the Act is to ensure that Canadians can have confidence in the PSPs they use and the Act achieves that by ensuring that the PSPs register with the Bank of Canada and have the framework in place to manage operational risk.”

With the RPAA, as Morrow explained, if a PSP holds end user funds, the Act allows those funds to be returned to the customer if the PSP goes bankrupt – therefore, confidence was a key motivation for enacting the RPAA. He went on to say that those PSPs that are overseen by the Bank of Canada may be eligible to become Payments Canada members and able to join Canada’s national payments infrastructure after the government enacts some required legislation, and if they meet Payments Canada requirements. Morrow said: “They’ll be able to become direct participants in Canada’s real-time payment system that’s being developed and that will allow them to deliver their services to their customers at a lower cost, creating another source of competition in the payment space in Canada.”

What is the timeline for PSPs to comply?

According to the Bank of Canada, the RPAA was approved by the Canadian Parliament on 29^th June 2021 and it took over two years for the legislation to be drafted, approved, published, reviewed and republished. The final version was published in the Canada Gazette on 23 November 2023. Months later, in February 2024, industry experts and stakeholders were consulted and their feedback on guidelines covering operational risk, incident response, safeguarding funds, and reporting were considered.

• Registration to the RPAA will open on 1^st November 2024.
• Individuals and entities must submit their registration application by 15^th November 2024.
• Requirements to establish risk management and funds safeguarding frameworks will come into effect on 8^th September 2025.

Morrow believes that the two week window during which the registration window is open will see over 3000 PSPs operating within Canada apply. “It will take us some time to go through all those applications. And as the legislation lays out, we have until early September to go through those applications, at which point we’ll announce the registry.”

Why is modernising Canada’s digital payment ecosystem important?

If PSPs fail to take advantage of technology, financial ecosystems risk remaining heterogeneous, customer needs will remain unfulfilled, and gaps could form in the infrastructure for criminals to infiltrate. PSPs should look to leverage applications to formulate a holistic strategy, which considers the speed, cost and efficiency of payments. One such way to ensure PSPs are on the right track is by central banks or regulators establishing mechanisms like the RPAA to deliver desired results for the customer, financial players and the economy.

In conversation with Davis, she explained: “Consumers and businesses want access to the latest payments technology to ensure payments are fast and secure. In order to compete within the global economy, Canada must continue investing in its payment ecosystem to operate on par with other countries and offer a cohesive experience to all users in the system. While banks and other financial institutions are already highly regulated in Canada, there has been a gap in oversight over other payment technology providers. The RPAA seeks to fill that gap, with an aim to balance providing greater confidence in the security of the system while encouraging innovation.”

Morrow added that the Act will allow for “greater competition by bringing PSPs into the regulated space and permit them to join the infrastructure. It’s our open expectation that delivers results in terms of lower costs for payments.” He went on to say that although consumers may only reap the efficiency and speed benefits, sending money cross-border could be cheaper due to PSPs looking to offer competitive pricing.

Davis doubled down on this point and said that “any service provider deemed to be providing retail payment services to Canadian consumers, or within Canada, is required to comply with the new law, including organisations based outside of Canada. This does impose new compliance burdens on providers, which could increase their operating costs; however, the downstream impact on consumers should be a net benefit, as the goal of the framework is to provide greater data security and reliability, and safety of end user funds.”

What impact will this have on the development of the RTR and how will real-time payments factor in the RPAA?

Canada’s oft-delayed RTR payments system is now slated to not launch until at least 2026 despite recent renewed momentum. Once live, it will allow Canadians to initiate payments and receive irrevocable funds in seconds, 24/7/365. It will also leverage ISO 20022 to support payment information moving with every payment. The exchange is complete, but the real-time clearing and settlement is yet to tested. But how will the RTR impact the RPAA, or vice versa?

Morrow’s view is that with the RPAA, “PSPs will be able to join the RTR directly and will not need a bank in the middle of the [transaction] where they’re moving the transaction. The RTR itself will facilitate the increase in speed and within seconds, there should be finality in terms of transfer of funds from sender to receiver. Hopefully that combination of faster underlying infrastructure as well as the ability of PSPs to connect directly will take some costs out.”

Davis agreed and commented that “increased oversight is beneficial in that it takes the guesswork out of how to operationalise best practices for our industry. It also increases the confidence end users will have in engaging our services, as they will have another standard to reference which speaks to the legitimacy and sophistication of a PSP.”