Canada is well on its way to introducing its Real-Time Rails (RTR) network in 2022 as a part of the overall payments modernization efforts. Given this timing, questions are being raised, including this opinion piece in Financial Post, about the access that Canadian fintechs should have to the new payment networks.
Should entry be restricted to chartered financial institutions that can selectively sponsor fintechs to have access as it is done in the U.S., or should fintechs have direct access more akin to the European model?
This article lays out the argument for direct access:
Payment system modernization wasn’t just going to be a technology upgrade. It was also supposed to make the financial sector more competitive, putting fintechs that hold and move Canadians’ money on a more level playing field with Canada’s biggest banks.
The Canadian Payments Act prohibits fintechs from accessing the system themselves, so they access it through banks. The problem with indirect access is obvious. Imagine having no choice but to do business with your competitor in order to compete with them.
Since banks resell their access to the payment systems to fintechs, many fintechs are at an unfair disadvantage when it comes to cost and service levels. The high price of indirect access makes it difficult for them to offer their tried-and-true services, let alone experiment with more innovative offerings. That they’re forced to go through banks brings more complexity and slower payments.
That’s if you can find a bank willing to partner with you. Some banks will outright refuse to, depending on your business model. Then you can either become a bank or leave the Canadian market. Becoming a bank under the more than 800-page Bank Act is just not feasible for many fintechs, who often start off doing only a fraction of what a bank does. So exit becomes the only option.
This really gets at the struggle to balance building an environment for inventive new products vs ensuring the security of the national payment networks. Here in the U.S. we have taken the “go through a bank or get your own charter” approach. This approach or perhaps better stated, in spite of this approach, the U.S. has achieved a vibrant environment for fintechs that are giving traditional business models a run for their money.
Overview by Sarah Grotta, Director, Debit and Alternative Products Advisory Service at Mercator Advisory Group