Bank of Canada extends oversight to Interac's e-Transfer service

Service now so essential a breakdown could wound the economy and unnerve companies and consumers, BoC says

Geoff Zochodne
Aug 12, 2020  •  August 13, 2020  •  4 minute read
In the 2019 fiscal year, Interac’s e-Transfer system logged approximately 486 million transactions that were worth around $169 billion.
In the 2019 fiscal year, Interac’s e-Transfer system logged approximately 486 million transactions that were worth around $169 billion. Photo by Jonathan Hayward/The Canadian Press files

Interac Corp.’s e-Transfer service is now so essential that a breakdown of the payment system could wound the economy and unnerve companies and consumers, the Bank of Canada says.

The digital-transaction service has become such a key way of paying for things that the central bank’s governor, Tiff Macklem, decided to use his limited regulatory powers to designate Interac e‑Transfer a “prominent payment system” as of Monday, a notice published in the Canada Gazette said.

The new label means Interac’s e-Transfer system will now be regulated by the Bank of Canada, and highlights the importance of digital payments to both people and businesses, particularly during the coronavirus pandemic. The financial-services firm is owned by Canadian banks, credit unions, payment processors and other shareholders.

“Interac e‑Transfer has become central to the Canadian payments system,” the Bank of Canada said in a news release. “A disruption or failure of the Interac e‑Transfer system could cause a significant adverse effect on economic activity in Canada, potentially leading to a general loss of confidence in the overall Canadian payments system.”

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Interac’s e-Transfer system was launched in 2003, allowing Canadian bank account holders to electronically send and receive payments, the Bank of Canada noted. Financial institutions pay a fee to Interac for the e-transfers, and may recoup that cost by charging customers for sending the payment.

In the 2019 fiscal year, Interac’s e-Transfer system logged approximately 486 million transactions that were worth around $169 billion. Its popularity, the company says, has given it an important role in the payments system.

“This, combined with its potential to grow into new business sectors, makes the platform a critical service in Canada,” Interac said in an email to the Financial Post. “The Bank of Canada is already an important stakeholder for Interac and this designation will increase its oversight and general involvement as we work to ensure Canadians have access to secure and convenient money transfer solutions.”

The central bank’s decision comes as the use of contactless and digital payments increased during the coronavirus pandemic. Interac said April saw 61.3 million transactions — a monthly record for e-transfers. Last year there were about 40.5 million e-transfers per month in 2019, with March of 2020 being the first month in which there were more than 50 million sent, the company said.

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Bank of Canada Governor Tiff Macklem. Photo by Sean Kilpatrick/Pool via Reuters

The rise of contactless and digital payment systems was partly powered by a boom in e-commerce and an increased aversion to handling coins and paper money during the outbreak. The drop-off in cash usage in the early days of the pandemic was so pronounced that the Bank of Canada urged retailers to keep accepting it, saying refusing to do so “will put an undue burden on those who depend on cash and have limited payment options.”

Payments Canada, a non-profit which owns and operates the country’s payment clearing and settlement systems, found 62 per cent of Canadians it surveyed in April were using less cash than they were before the pandemic, while 53 per cent said they were using card or mobile-tap payments more frequently for in-store purchases.

“While we have seen a continued shift towards digital payments over a number of years in Canada, there’s no doubt that the prevailing pandemic has accelerated this shift — and will likely act as a catalyst in transforming the Canadian payment landscape forever,” Payments Canada president and CEO Tracey Black said in a press release.

E-transfers have become increasingly popular among small businesses and “a really important building block of Canada’s payment system,” said Dan Kelly, the head of the Canadian Federation of Independent Business and a member of the federal FinPay Committee, which advises the government on payment-related issues.

Canadians are using less cash than before the pandemic, one survey says.
Canadians are using less cash than before the pandemic, one survey says. Photo by Peter J. Thompson/National Post files

A survey conducted by CFIB in July found 38 per cent of small business owners had decreased their use of cash since the pandemic began, and one in three said they had increased their use of credit cards and e-transfers. E-transfers can allow businesses to move blocks of money around at a low cost, and can provide a cheaper alternative to credit cards, Kelly said.

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Yet any rumours of cash’s demise could be overstated, at least according to the Bank of Canada. A survey by the central bank, Ipsos and Statistics Canada in April found 74 per cent of those who responded had “no plans to go cashless.”

Unlike the U.S. Federal Reserve and other central banks, the Bank of Canada has no direct regulatory power over financial institutions. But in the aftermath of the Great Recession, the Bank of Canada’s oversight duties over payments were expanded to include prominent payment systems. While the central bank says such systems are not “systemically important” — a designation that suggests that failure could trigger a financial crisis — they are still “critical” to the Canadian economy.

Including Interac, the Bank of Canada oversees five systemically important financial market infrastructures and two prominent payment systems. The other payment system is the Automated Clearing Settlement System, owned and operated by Payments Canada, and through which the vast majority of Canadian payments are cleared.

To decide if a payment system is prominent enough to earn the “prominent” tag, the Bank of Canada looks at the value and volume of transactions, among other things. Once a payment service is placed under the Bank of Canada’s watch, it has to abide by the central bank’s rules for managing risks.

“Since payment systems are interconnected, if one institution can’t settle what it owes on time, that could affect the financial strength of other institutions,” Bank of Canada staff wrote in July. “To prevent this, we have controls in place to make sure that all participants meet their payment obligations.”

Financial Post

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