It is well known that Canada is struggling to advance dual commitments to realize an overdue open banking system and modernize the payments system (often referred to as “PayMod” as an industry shorthand). Proponents of these innovations frequently remind regulators of the benefits these advancements promise to both citizens and innovative firms. Canadians need and deserve choice, as well as robust digital architecture that facilitates the services for their various banking needs.
A laser focus on the potential of these policy developments misses a glaring gap: the financial sector has inconsistent consumer protection across the provinces and territories. In a world in which only licensed banks provided all financial or bank-like activity, regulation in this space would be more straightforward and we could simply amend the Bank Act. But because there are so many complementary players and new ones constantly emerging, we will have to do more.
Consider Interac’s e-transfer liability — which is different from the standard followed by Visa and Mastercard, as well as in point-of-sale Interac purchases. When someone sends money with Interac, they are agreeing that Interac is not responsible for any losses or damages they may suffer as a result of the transaction. Thus, the transfer is not governed by “zero liability” protection rules. With credit cards, the merchant, not the consumer, eats the financial cost of fraud.
These inconsistent protections across the country — arguably a failure of federalism — is another instance of private actors writing the rules for a marketplace. A comprehensive federal retail payments oversight framework would have market conduct and consumer protection requirements, as the government presented in an old consultation paper. That proposal is overdue for more substantive attention from policy makers.
Over the past five years, the gap has become more problematic, not only because the average consumer needs to unnecessarily fight for themselves against larger institutions, but because cybercrime has become so much more sophisticated. By leveraging familiarity through the creation and application of synthetic media that convincingly mimics the voice or writing of people we trust, digital scams have become extremely convincing. The result? More people independently trying to recover funds that they may have sent through Interac.
This gap persists because consumer protection legislation, which is handled by the provinces and territories, extends to many non-bank players in payments. As for why the Retail Payment Activities Act doesn’t include explicit consumer protection clauses, it may be that the federal government doesn’t want to step on the provinces’ toes. As a result, there is no common framework that protects consumers with financial activities. Instead, the governance framework is a mishmash of commercial contracts and laws that seem unintentionally split across governments.
This framework is vulnerable. We are still early in the various, concurrent efforts to improve Canada’s financial systems and don’t yet know the magnitude of the challenges that arise from the persistent consumer protection gap. But magnitude should not be the metric that prompts remediation. The foundation of our financial system is weak and uneven, and we cannot continue to build on it without its reinforcement. We also need to do more to actually capture transparent information about instances of fraud and scams related to money so that we can continue to improve cybersecurity, public education, and other amendments that protect everyday people and the integrity of financial systems.
The financial reform agenda should not be viewed in isolation, either — there is a strong link between digital payments and platform governance.
As we look ahead to the ways we can modernize our banking system — launching an open banking framework, improving the payment system and realizing a digital currency — we must also correct for the dangerous consumer protection gap that persists.
This article first appeared in the Financial Post.
