“I’m going to miss out on this stock again,” a young woman sighed to her friend in a video ad on Royal Bank of Canada’s YouTube channel. Apparently, her problem is that she doesn’t use RBC’s stock trading app. She may use a financial technology (fintech) app like as Wealthsimple.* With fintech apps, you can’t instantly move money into your investment account to buy stocks. Moving money can take days. By the time the money arrives, the opportunity is gone. Her friend responded: “I can move as much money as I need to my RBC direct investing account – instantly!”
There’s nothing wrong with RBC pointing this out, but there is something wrong with no competition. Currently, there’s no competitive market in financial services because there’s no competitive market in how money moves. Instead, there is a government-created organization that governs the movement of money in Canada between financial institutions. The major financial institutions control it and use their privileged positions to keep the competition out.
When banks first captured public infrastructure
There’s a little-known organization in Ottawa that runs the payment systems powering the Canadian economy. Whenever you pay or get paid for something, your financial institutions use these systems to move money between and among them. Last year, these systems were responsible for clearing and settling upwards of $100 trillion.
Payments Canada is a little-known organization with a long history.
In 1980, the federal government created it as the Canadian Payments Association. It did this to wrestle control away from Canada’s banking lobby, the Canadian Bankers Association (CBA). The CBA had been controlling the payment systems – much to the detriment of their competitors, such as credit unions. Under the Canadian Payments Act of 1985, the federal government gave the Canadian Payments Association the mandate to run the systems and plan their evolution to everyone’s benefit – not just to that of Canada’s biggest banks.
That ought to have been the end of the story, but it’s far from it.
Open banking is an opportunity, not a threat
The Canadian Payments Association was created to be a not-for-profit member association. Any federally regulated financial institution could be a member and use the systems. But there was a catch: the bigger the member, the more power the member had.
For example, the bigger you were, the more voting power you had over the association’s spending and, thereby, everything it did. Canada’s Big Five banks have long dominated the Canadian market, and so the Canadian Payments Association effectively became the Big Five’s private club.
In retrospect, the federal government had wrestled control of the payment systems away from big banks only to give it right back.
The cracks in the Canadian Payments Association soon started to show. The association’s rules – over which the big banks had disproportionate influence – didn’t allow smaller financial institutions or credit unions to use the payment systems to move money. To the extent they could use the systems, they had to go through big banks to do it. And the big banks charged them for their access. It’s hard to compete with your competitor when they’re charging you to compete with them.
In the early 2000s, the federal government convened a task force to review what had gone wrong. The findings? Canada’s payment systems were still “controlled by Canada’s major banks and other key institutions,” whose “interests are best-served by keeping at bay new entrants to the system‚ the very entrants who would bring the innovations that Canadians need.”
Once you’re captured, it’s hard to escape
When the task force did its review, the newest entrants on the block were fintechs – the ones that would launch apps to rival RBC’s and the other big banks’ apps. They had as good a reason as any to use the payment systems to move money around. But they were prohibited from doing so.
Calling for “a payments system overhaul,” the task force recommended doing something familiar: wrestling control of the payment systems away from Canada’s major banks.
In came another round of changes. The federal government made the Canadian Payments Association more independent of the big banks. The power to vote on how the association spent its money was taken away from the members.
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The board also became a majority independent board. The Canadian Payments Association was also rebranded as Payments Canada to signal its independence of the big banks.
This let Payments Canada announce its big plan, which the big banks had been blocking before the government’s last round of changes. Canada would do what other advanced economies such as the United Kingdom and Australia had done before it. It would build a real-time payment system that fintechs could use to instantly use to move money around.
That ought to have been the end of the story, but it’s far from it.
After Payments Canada suggested its program would make the market more competitive, things took a peculiar turn. Payments Canada then gave the contract to build the new payment system to Interac. This is the very Interac that’s owned by the big banks, which the government’s task force said had been controlling Canada’s payment systems and keeping the competition out for decades.
Since then, payments modernization has gone off the rails. In-depth reporting from The Logic, a website which bills itself as Canada’s tech and innovation newsroom, recently uncovered telltale signs of regulatory capture. According to the report, there has been a revolving door between Payments Canada and the big banks.
Big banks have also been using their muscle to delay the delivery of Payments Canada’s new real-time payment system. Meanwhile, they’ve been upgrading their own real-time payment product—Interac e-transfer—so that it will be better than Payments Canada’s when it finally launches.
As before, the federal government wrestled control of the payment systems from Canada’s big banks only to give it right back.
Don’t disrupt the banks – disrupt the distributional coalitions
Decades ago, American economist and political scientist Mancur Olson argued that the longer a country is stable, the more “distributional coalitions” it will have. Distributional coalitions are interest groups. They lobby the government to protect them from competition, muting the forces of creative destruction and slowing down the rate of economic growth.
Canada’s problem is not that it doesn’t have a competitive payment system. The problem is that it has old and powerful distributional coalitions that stand between sclerosis and dynamism. Canada is predicted to be the slowest-growing OECD economy over the next decade. Although regulatory capture isn’t the only reason why, it’s one of them.
Old and powerful distributional coalitions need to be disrupted, beginning with the oldest one at the centre of the Canadian economy: the financial sector, which has a distribution coalition that predates 1867. “Improving the financial services sector’s productivity would not only boost its performance,” according to a recent report from the C.D. Howe Institute, “but also that of Canada’s economy as a whole.”
This should start with the Liberal government amending the Canadian Payments Act, which doesn’t let fintech companies become members of Payments Canada and use the payment systems.
Giving fintechs the ability to move money instantly empowers them to compete with big banks for market share. Moreover, as the fintechs get bigger, so will their distributional coalition, which also empowers them to compete with big banks.
In addition to letting new distributional coalitions get stronger, Canada should also prevent the old distributional coalitions from maintaining their dominance by anti-competitively merging with or acquiring their competitors. The Competition Act is up for review. The Liberal government should give the Competition Bureau the resources and legal room to do its job better.
Or we could do the opposite. We could wrestle power away from Canada’s biggest interests only to give it right back, as the federal government has done time and time again. If I were writing a guide for how to entrench market power, I’d write about the past several decades in payments all over again.
- Note to readers: An earlier version of this article said Questrade users cannot instantly move money into investment accounts. In fact, Questrade users can transfer up to $3,500 instantly (or up to the transaction limit of users’ banks).
This article is part of the Canada’s Competition Law is Overdue for an Overhaul special feature series.