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All along the watchtower: seeking the future of Canada’s payments system

Executive Summary

Confusion is impairing the evolution of Canada’s payments system. The Task Force for the Payments System Review’s decision to initiate broad consultations is therefore welcome. Part of its challenge will be to listen to the voices of consumers, in all their complexity: their responsiveness and vulnerability to changes in the payments environment are conditioned by many factors, including their economic and literacy status, and they cannot all be held to the classic canon of “rationality”.
We suggest that the analysis leading a new framework for our payments environment should include a risk management approach and be principle-based. We suggest eight principles that should be taken into account, including (insofar as possible) technological neutrality.
Innovation in the Canadian payments environment is necessary and desirable, yet Canada lags behind even African countries in some respects. One of the major hurdles slowing down innovation is our competitive structure.
As they hold significant influence on the four major payment networks in the country and control access to most liquid assets, the largest deposit-taking financial institutions are in position to thwart competitors. There is a risk that either a marginal, unregulated payments market will develop at the fringe, or that the largest institutions will simply gobble up competitors. A third, more balanced scenario is unlikely to occur without outside support. An analysis of competitive issues in the payments environment should take into account its peculiar characteristics. The relative failure of the Competition Tribunal order in the Interac case to achieve a properly functioning market should be kept in mind.
Privacy also raises issues for consumers using payment mechanisms. Anonymity is a major concern. The fact that payment data crosses borders on a routine basis should also be of some concern.
The Canadian payments system is not always as efficient as it is said to be, and is certainly not as innovative as it could be. We believe part of the blame should go to an antiquated and inefficient regulatory framework which is too convoluted, sometimes unfair and fairly opaque.
Other jurisdictions, including the United States, the European Union (including the United Kingdom) and Australia have acted in recent years to modernize their regulatory framework and facilitate stakeholder involvement. Their example should inspire Canada.

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