OPEN SESAME: B.C. financial institutions might be primed for less regulation than
Will COVID-19 be the shock that finally shakes up our stodgy (and expensive) payment systems?
If you’re like me, you have a small pile of change on your dresser or bedside table. It’s been making the rounds of your pants and jacket pockets for months. As the COVID-19 pandemic has mandated a shift to contactless payment—the tap of a credit card or scan of a phone app—those coins have become excess baggage.
And the change could be permanent. “You have a whole swath of the population that’s been forced to adopt financial technology,” observes Steve Marshall, CEO of RevoluGroup Canada, a Vancouver-based digital payments startup. “There’s no going back.”
Indeed, Marshall foresees the transition accelerating as early adopters urge their family and friends to download apps for things as simple as chipping in for a colleague’s retirement present. Eventually, he predicts, banks will experience a tipping point like that already felt by travel agencies and photo-finishing shops, when consumers move en masse to a cheaper, easier digital solution.
It’s already happening in Europe, says the globe-trotting Brit, who led a reverse takeover of a mineral exploration company listed on the TSX Venture Exchange in 2016 to create RevoluGroup and pivot to digital payments. Today’s cash-free COVID economy is further pressuring Canada’s government to create a legal framework for so-called open banking.
The concept got its start more than a decade ago in China, where phone apps such as Alipay and WeChat became increasingly popular for day-to-day transactions. Recognizing a viable innovation, Chinese authorities began developing regulations for digital payments.
Not long after, public revulsion at the bailouts of commercial banks following the 2008-09 credit crisis prompted the European Central Bank to explore ways to increase competition in the financial sector, in the hope that, in the future, no institution would be “too big to fail.” One way was to encourage financial technology, or fintech, that could compete with the banks for at least parts of their business.
The first version of PSD (Payment Services Directive) gave banks the exclusive right to take deposits but forced them to give up their data to licensed third parties for payments and other services. Now account holders could authorize a fintech provider to have access to their account information on demand. That meant fintechs could offer ways of transferring funds that were convenient for consumers and less costly for merchants.
PSD2 took that process further by issuing fintechs account codes similar to those of banks that are recognized by financial institutions worldwide. They could now directly issue payment instruments such as credit or debit cards or phone apps to access the accounts that consumers held with banks. On May 21, RevoluGroup became one of only five companies so far—the others include Facebook and Google—to hold a PSD2 licence.
“The first thing we did was create our own Visa card,” Marshall says. Unlike past branded cards, it wasn’t done in partnership with a bank. The company aims to operate in market segments from remittances to real estate to e-gaming.
Marshall uses the example of sending e-cash to a brother who’s lost his wallet while travelling in Thailand: you can send cash from your bank account to his phone that will be accepted wherever a Visa card would be, for a fraction of the cost of a wire transfer. Or, thinking bigger, say you’re buying a property in Arizona; you can transfer the money direct to the seller’s agent or lawyer, all for a more competitive exchange rate and lower fees than any bank would offer.
For now, this service is only available in euros through RevoluGroup’s branch in Barcelona (where the development team is based). But Marshall hopes it will soon be able to operate in Canada, too. Pushed by the ECB to create its own open banking framework, Ottawa created a task force last year to study the issue. Though its report has been delayed by COVID, many still hope for a document making recommendations for legislation this fall.
RevoluGroup is far from the only Canadian fintech eagerly awaiting the advent of regulated open banking in Canada. The founders of B.C.-based Clearly Payments, though, are happy to see the federal government take its time and hear from all the stakeholders. They don’t want the country’s banking oligopoly disrupted only to have it replaced by a handful of multinational tech giants.
“Open banking at its core is about building that trust system where data can be easily shared to provide more personalized services, faster services and more security in certain ways,” says Kalle Radage, Clearly Payments director and technology lead. The key tools are so-called application program interfaces (APIs), secure data-sharing channels that enable any service provider of the account holder’s choosing to get in on the payments business. Clearly Payments works with medical and dental offices to embed payment systems into their practice management software, enabling them to circumvent credit-card transactions that might take days to process and cost $2,000 a month in fees.
“If we can access financial data for our merchants through APIs, we can make a financial adjudication decision much quicker, so that allows them to start taking payments much quicker,” says Clearly Payments CEO Chris Farmer. “Also, we get a more holistic story of their financial position that will affect the rates they are paying.”
Even in the absence of a legal framework, COVID-19 is driving adoption of electronic transfers. Since the pandemic hit, “we haven’t had one conversation with our clients that did not include contactless payments,” Farmer says. Further, considering the damage already done to the economy, “open banking can help facilitate a recovery.”