Canadian fintechs face uphill battle as launch of national payments system grapples with delays
Delays and limited access to the system at launch could complicate fintechs’ efforts to build payment products that rival Interac
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MONTREAL — The Real-Time Rail, one of the most highly awaited upgrades to Canada’s payments system in recent years, is expected to make it possible for tech companies to build a wide variety of services around peer-to-peer payments. The big question: will they be able to convince anyone to use them?
Some in the payments industry fear that limited access to the system at launch will hamper tech companies’ efforts to build competitive services by giving Interac e-Transfer, by far the most popular peer-to-peer payment service in Canada, more time to maintain its dominant position. Compounding the issue for tech companies is the fact that some important features might not launch with the first version of the Real-Time Rail next fall, putting new entrants to payments at a disadvantage.
Talking Point
Delays for some Real-Time Rail features and limited access to the system at launch could complicate fintechs’ efforts to build payment products that rival Interac e-Transfer.
“If the Real-Time Rail had come out this year or last year, there’d be a pretty big gap between what the Real-Time Rail can do and what Interac can do,” said Justin Ferrabee, a former chief operating officer at Payments Canada who now advises a paytechs lobbying group. “There’d be a lot of market share that would go to the new, because the old is not very functional.”
Instead, the Real-Time Rail, an alternative to Canada’s primary payment-settlement system, is only expected to launch in September 2022, said a person familiar with the matter, whom The Logic agreed not to name because the target date is not public. The long-awaited system will connect all bank accounts in the country, potentially allowing companies of all stripes to move money through its network.
When Payments Canada unveiled its vision for a real-time payments system in December 2016, the tech industry welcomed the initiative, saying it would allow firms outside of financial services to develop payment products that rival Interac e-Transfer, developed through a partnership of Canada’s largest financial institutions.
As it stands, however, tech companies aren’t actually allowed to access the system. Granting that will require amending the Canadian Payments Act, a 1985 law that created the organization that would later become Payments Canada, and outlines which companies can use the centralized clearing and settlement system. The federal government hasn’t yet announced a timeframe for introducing legislation to amend the act.
Making matters worse for tech companies, Payments Canada, which oversees the development of the Real-Time Rail, has been considering stripping away some features from the initial version of the system in order to meet deadlines for a fall 2022 launch, the person familiar with the matter said.
One of the features that could be cut from the initial version is the ability to request a payment from another person through the system, this person said, adding that discussions about the system’s features were ongoing as of late spring.
The additional functions like “request to pay” would instead be released as part of subsequent upgrades to the systems — a process that could take up to a year, the person said. In the meantime, Interac would have more time to maintain its market share, including by launching products that go beyond what other companies would be able to offer through the Real-Time Rail.
“We are continuing to progress on the design phase of what is a complex program and we will have information to share in due course,” said Victoria McMullen, director of marketing and communications at Payments Canada.
The future of consumer finance is not about who the next big bank will be, it’s about who will hold that primary financial relationship
Wealthsimple's Brett Huneycutt
The Bank of Canada, which has been involved in the project’s design, didn’t comment on specific features that would be included in the first version of the Real-Time Rail. The Department of Finance also didn’t comment on the project’s features. “A public consultation will be launched in due course,” Finance spokesperson Marie-France Faucher said.
Whatever the Real-Time Rail looks like at launch, tech companies hoping to build on it may struggle to dislodge Interac e-Transfer, with its powerful network effect.
Launched in 2003, e-Transfer is by far the most popular online money-transfer service in Canada, with around three-quarters of Canadians using the service every month, according to Interac. In 2020, the network facilitated more than 760 million transactions, amounting to more than 20 transactions for every Canadian. After seeing a jump in online e-Transfer transactions during the pandemic, the Bank of Canada designated the network a prominent payment system last summer, subject to additional government oversight, reflecting its importance to the country’s payments landscape.
Some believe that e-Transfer is so ingrained in Canadians’ financial lives that it will be hard for new entrants to chip away its market share, even after the launch of the Real-Time Rail. Mike Bradley, founder and CEO of Clik2pay, a company that offers bill payments through e-Transfer, said that in payments, people will naturally default to the service to which they have grown accustomed.
“One thing we know for sure about payments is it’s all about the habits that people are in,” Bradley said. “As long as innovation continues to grow on top of e-Transfer, I don’t really see a structural reason why it’s not going to be the dominant way people pay one another in Canada.”
Interac is working on product upgrades to e-Transfer that would make it easier for businesses to use the system to accept payments, including higher transfer limits, said Anurag Kar, AVP of money movement at Interac. The organization is also working on giving users the ability to customize their transactions with greetings and scheduled delivery times, Kar said.
Still, some Canadian companies are undeterred by e-Transfer’s head start in payments. Vancouver-based Mogo is planning a peer-to-peer payment product, and Wealthsimple launched its own payment service this year, although for now its customers can only transact with others who have downloaded the app, called Wealthsimple Cash.
“The future of consumer finance is not about who the next big bank will be, it’s about who will hold that primary financial relationship,” said Brett Huneycutt, Wealthsimple’s co-founder, chief operating officer and head of Wealthsimple Cash, in a statement. “Up until now, for most people it’s been their bank—but that’s going to change.”
Other major payments companies with global operations have so far held off on going after the Canadian market. Earlier this year, U.K.-based Revolut pulled out of Canada completely after a brief pilot program, saying that it didn’t have the resources to offer all of its products in the country.
Revolut spokesperson Lesley Smith said the company remains committed to Canada “in the medium term,” but doesn’t have a timeframe for when it expects to return. In April, the company said it planned to relaunch in Canada next year.
Similarly, a spokesperson for Square, which operates the popular peer-to-peer payment service Cash App in the U.S., said it had no Canadian expansion plans to share.
Editor’s note: An earlier version of this story said the Trudeau government announced the Real-Time Rail as part of the 2021 federal budget. In fact, Payments Canada unveiled its vision for a real-time payments system in December 2016.
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