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Submission by the Commissioner of Competition to Payments Canada

Modernization Target State

February 23, 2018

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  1. The Commissioner of Competition (Commissioner) is pleased to make this submission in response to Payments Canada’s public consultation on its “Modernization Target State” paper (the consultation paper).
  2. The Commissioner supports Payments Canada’s efforts to modernize Canadian payment systems. This initiative will help to shape the future of the payments industry in Canada.
  3. In December 2017, the Competition Bureau (Bureau) concluded a significant market study of technology-led innovation in the Canadian financial services sector (FinTech Market Study). This submission builds on the Bureau’s FinTech Market Study Report, and the Commissioner is pleased to contribute to the continued dialogue on the important issue of competition and innovation in retail payments.


  1. The retail payments sector in Canada has seen a wave of new players offering innovative and technology-based products and services. The introduction of alternative payment products and services is an opportunity to introduce greater competition in the sector. Increased competition and innovation drives lower prices, higher quality, and greater choice for Canadians.
  2. By way of illustration, some incumbent payment service providers (PSPs) have responded to this wave of new payment services by introducing their own innovative products and services, most notably in the area of mobile paymentsFootnote 1. This is an excellent example of competition delivering increased value for consumers.
  3. The Bureau makes this submission to highlight the important link between open access and competition. The current restrictions on access to Canada’s core payment systems—used by many incumbents to deliver payment services—have reduced the ability of new players to compete on an equal footing with incumbents. When new, innovative models face significant barriers, this can result in lower levels of innovation and less consumer choice—to the detriment of consumers and businesses, and the Canadian economy.

Supporting competition and innovation through open access

Open Access is Essential for Competition

  1. The delivery of open access models should be addressed as a priority outcome of the modernization project. Doing so will allow a number of new entrants who are currently hindered by their lack of access to any core payment system to deliver the benefits of increased competition.
  2. One of the most important issues for competition in Canada’s payments marketplace continues to be access to the payment systems operated by Payments Canada. Access to payment systems is critical to enabling 1) effective competition between PSPs; and 2) the development of innovative payment services.
  3. However, throughout the Bureau’s FinTech Market Study, industry participants noted their lack of access to Payments Canada systems as the largest barrier to entry into the retail payments marketplace. Access restrictions currently limit most firms from gaining access to Canada’s core payment systems to exchange, clear, and settle retail payments. The Bureau’s FinTech Market Study Report outlines this barrier in detail, and makes a number of recommendations on how to improve access to the Payments Canada systems (see the report at pages 32-37 and 40-41). The Bureau is greatly encouraged by the steps described in Payments Canada’s consultation paper to develop new access models that are built on the principle of “open, risk-based access.”
  4. The consultation paper also outlines some of the necessary steps to realizing open, risk-based access, including changes to the Canadian Payments Act and introducing an oversight regime for retail payment services. The Bureau recognizes the importance of these changes to driving competition and innovation in the retail payments marketplace.
    1. In 2017, the Bureau made a submission to the Department of Finance Canada’s consultation on an oversight framework for retail payments. In this submission, we recognize that regulatory oversight is an important first step to broader access. While participation restrictions exist to ensure the safety and soundness of the Canadian payments system, bringing retail PSPs under the regulatory umbrella should address the risks associated with extending direct access to core payment systems to new players and new business models.
    2. Both the Bureau’s 2017 submission to the Department of Finance Canada as well as the Bureau’s FinTech Market Study Report support broadening Payments Canada’s membership base in order to enable more open access. The public policy objectives outlined in the Canadian Payments Act include promoting the efficiency of the Payments Canada systems and taking into account the interests of payment service users. Broadening Payments Canada’s membership base will drive competition in the retail payments industry and encourage the development of new and innovative payment services for Canadian consumers and businesses.
    3. With a view to allowing the broadest scope for competition and market forces, the Bureau supports membership criteria that are flexible and inclusive of potential new entrants, regardless of their business model. Moving away from institution-based membership criteria, and towards a function- or activity-based approach, can also help facilitate competition in the payments industry. As the lines between institutions continue to blur—for example, as several “non-bank” firms have entered the market for payment services—and technology continues to drive change in the financial services sector, new entrants with innovative business models may look to gain access to the Payments Canada systems. The ability to directly access the payments system could benefit new entrants and support a more level playing field between traditional and innovative business models.
  5. Notwithstanding the necessary steps outlined above, the consultation paper details the potential access models for both the Settlement Optimization Engine (SOE) and the Real-Time Rail (RTR)—the two systems that will comprise Canada’s retail payment systems after the modernization project is complete.
  6. The Bureau is encouraged by many of the proposed features of these models, including unbundling the exchange of payments from their clearing and settlement, facilitating indirect connectivity services, and unbundling direct participation in the exchange of payments by payment stream.
  7. The Bureau recognizes that any change in access criteria will require careful consideration of the implications to the safety and soundness of the payments system. Having said that, from a competition perspective, the Bureau recommends allowing the highest level of access to each system by permitting all Payments Canada members equitable access to the exchange, clearing, and settlement functions. This will allow firms to grow without having to rely on the services of their direct competitors. Broader direct access to these systems will allow smaller PSPs to compete on a more level playing field with incumbents by providing the flexibility to deliver innovative and competitive payment services to Canadians.

The Bureau’s FinTech Market Study

  1. The Bureau’s FinTech Market Study examined many issues related to competition, including the perceived lack of competition between Automated Clearing and Settlement System (ACSS)Footnote 2 clearing agents. Greater direct participation in the SOE and the RTR could facilitate greater competition through the entry of one or more new clearing agentsFootnote 3. Competition between clearing agents is critical to ensuring those Payments Canada members who choose to remain indirect clearers have a competitive choice of clearing agent and the ability to switch between clearing agents.
  2. The Bureau’s FinTech Market Study Report also discussed the potential competitive disadvantage faced by indirect clearers as a result of strategic actions by direct clearers in an uncollateralized payment system, such as the ACSSFootnote 4. A change from the current settlement model used by the ACSS—to a cover-all or pre-funded real-time settlement model for the RTR, for example—may affect the credit exposure between clearing agents and indirect clearers, which in turn may increase the chance of strategic action by a clearing agentFootnote 5.
  3. One finding of the Bureau’s FinTech Market Study is that new entrants are increasingly focused on providing services that are to some degree a substitute for incumbent direct clearers’ own payment services. At the same time, strategic actions by clearing agents are more likely when they compete with an indirect clearer in the retail marketplace. Open access should safeguard against the risk of such behaviour by allowing regulated PSPs the option to access the system directly, including for clearing and settlement.
  4. In order for open access to truly translate into a more level playing field between competitors, it is important to also consider the conditions of access, and ensure that they do not favour certain competitors over others.

Enabling the Growth of New Entrants and New Payment Services

  1. Improving access criteria is important for increasing competition and innovation not only from current participants, but also from potential new entrants. Most new entrants are currently fully restricted from access to the core payment system, which has likely limited the ability of many of these firms to exert significant competitive pressure on incumbents.
  2. The Bureau considers it likely that, when access to these systems is opened, demand for the different forms of direct access—exchange, clearing, and settlement—will continue to grow.
  3. Non-bank PSPs have become a significant competitive force in the UK payments marketplace, so much so that the Bank of England has extended access to settlement accounts for non-bank PSPs—a key criteria for becoming a direct participant in the UK’s high value payment systemFootnote 6. The Bank of England includes increasing competition and innovation as a reason for this decisionFootnote 7. The Bureau recommends further study of similar policies for Canada in the context of reviewing the access model for the high-value Lynx system.
  4. Any significant change to the access or settlement models of the core systems will also likely affect individual firms’ decision to access the system directly or indirectly.
    1. A change from the current settlement model used by the ACSS, as discussed above, will favour greater scope for market forces, by removing the existing volume-based restriction. Instead, new entrants would likely face liquidity and collateral costs proportionate to their payment volume. This may create the added incentive for smaller players to seek out direct participation, and encourage their growth. Should such a settlement model be implemented, in order to realize these benefits, all Payments Canada members should have similar access to the Bank of Canada’s settlement facilities.
    2. The use of improved technology will likely reduce the cost to connect to a system, for example through Application Programming Interfaces or a Connection Service Provider on the RTR, or through a centralized exchange model on the SOE. As a result, currently restricted indirect clearers and other PSPs may face a total cost of direct participation—including clearing and settlement—that would favour greater levels of direct participation by PSPs.
  5. The broadest levels of access should be adopted now, with a view to encouraging significant competition between new entrants, incumbents and potential new entrants. This is consistent with the view outlined in the consultation paper, namely that, beyond the modernization project, Canada’s payments ecosystem will become more accessible and competitive, with more flexible options for direct participation by financial institutions and PSPs.


  1. Payments Canada’s modernization project is one that will deliver numerous benefits to Canadians, as outlined in the consultation paper. Based on the findings of its recent FinTech Market Study, the Bureau continues to advocate for competition and innovation in the retail payments marketplace by encouraging open access to Payments Canada’s core systems.
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