The need for laws governing electronic payments in Canada
The Consumers Council of Canada is working to represent Canadian consumers, alone and in concert with the Canadian Consumer Initiative, concerning electronic payments and electronic funds transfer, a rapidly changing area of service to consumers. The Council is active in representing consumers within the Canadian Payments Association and is seeking to obtain adequate consumer representation before the currently active Payments System Review Task Force, established by the federal government. The Council is concerned that consumer perspective representation and research form part of the work of the task force. To that end, the Council has sought to obtain the necessary resources to do the research it requires to support a fact-based approach to the subject.
The Council has developed a joint statement of principles with other members of the Canadian Consumer Initiative to help guide its representation of consumers:
Electronic payments are now used more often by Canadian consumers than notes and coins. Direct debit transactions are commonplace, even for trifling sums. Credit card operations are almost always electronic, and are increasingly performed without the need to physically present the card. Cheque imaging is around the corner (or part of some existing consumer services). New services, such as stored-value cards or facilities offered by a provider such as PayPal, are being experimented or are actually gaining popularity.
These developments are associated with a multiplication of actors. There are now deposit-taking institutions, card issuers, transaction acquirers, networks, switch operators and other intermediaries involved in the processing of run-of-the-mill payments. Some operate outside Canada. And while paying seems simple to the consumer, the systems in place in fact require complex technology which those processors choose, deploy and manage, and which most users do not understand.
Numerous issues therefore arise. They obviously have to do with risk allocation, security or redress. But they also have to do with matters such as currency and legal tender, freedom of choice, evidence or prudential regulation of payment processors. Yet there is currently no clear, adequate legal framework for electronic payments in Canada. In that area, we lag behind the United States, which adopted its first Electronic Fund Transfer Act in 1978, or the European Union, which has begun to regulate some electronic payment providers. In Canada, consumers, merchants and other parties must make do with an obsolete legislative framework, codes of conduct or rules which are too often observed in the breach and contractual provisions dictated by the strongest parties.
Electronic payments can make the economy more efficient. But consumer confidence is vital to their success, and to the economy in general. There is a risk that an inadequate legal framework for the most common electronic payment mechanisms will come to erode confidence in such systems. It is therefore important for Canada to act now, in order to ensure the implementation of a fair set of rules governing electronic payments.
Principles for a reform
The design of a legal framework for electronic payments in Canada should be based on a small number of fundamental principles:
- universality: the broadest range of payment technologies should be regulated;
- neutrality: all technologies should be regulated by similar rules;
- accountability: risk should be supported by the party which creates it;
- security: payment technologies should be secure;
- transparency: rules, roles and prices should be transparent to all parties;
- liberty: payors should be allowed to choose the payment technology they prefer;
- enforceability: all should be able to ensure the framework is effectively enforced.
Of course, it is to be expected that all principles will not be fully applicable in all cases. For instance, a consumer would not be able to compel a merchant to accept a credit card payment if that merchant does not participate in a credit card network. That consumer, however, should not be compelled to pay through one specific process, to the exclusion of all others, as happens now with businesses that will take only pre-authorized debits to the exclusion of cash or cheques, for example.
The design of a legal framework for electronic payments in Canada will also need to take into account the distribution of powers between Parliament and the provinces and territories.
Some overarching issues
There are a number of important issues currently arising with electronic payments. Here is a description of some of them with indications as to how they should be solved.
- Effectiveness of payments Consumers need to be able to make payments in ways that are consonant with modern practices and that also effectively liberate them from their obligations. In order to be a legal tender, an offer of payment currently has to be made in coins or notes as determined under s. 8 of the Currency Act. This antiquated regime should be replaced by one where an electronic payment offering adequate guarantees should also be deemed a legal tender. In addition, new rules should establish when an electronic payment becomes irrevocable, with exceptions as described below. These solutions flow from the principles of universality, neutrality, transparency and liberty.
- Choice of payment solutions Consumers need to be able to opt for the payment mechanism that they consider the most appropriate in terms of effectiveness and cost.The current rule is that the creditor can determine how he will be paid, notwithstanding the ability of the consumer to use such means or the cost and risk incurred by the consumer. Improving on s. 1564 of the Québec Civil Code, the ability to choose should rather be provided to the payor. A new regime should also ensure that the consumer will be made aware of the costs and rules applying to a payment mechanism, so that he can make an enlightened choice. These solutions flow from the principles of universality, neutrality, transparency and liberty.
- Fund accessibility Consumers need to be able to access their funds in an expedited manner, and not to have their savings appropriated without warning by their financial institution. There are currently no rules governing fund availability and deposit-taking institutions can establish the “fund freezing” periods they wish, as long as they post their policies. Deposit-taking institutions can also set off account balances against debts owed them or combine accounts without any warning to the consumer. A new regime should follow the example provided in the United States by the 1987 Expedited Funds Availability Act and establish mandatory fund availability rules; it should also provide a limitative framework for set-off, including prior notice. These solutions flow from the principles of universality, neutrality, transparency and enforceability.
- Risk allocation Consumers need to be able to trust payment mechanisms and providers and they must not shoulder risk that they do not generate. Consumers should be made aware of risks specific to various payment methods. Payment mechanisms currently deployed, such as those using magnetic stripes on cards and personal identification numbers, are not very secure from a technological and practical standpoint. Stored-value cards raise issues such as the solvency of the issuer. Such risks are routinely passed on consumers through contractual agreements or other mechanisms, even though consumers have not created them and are not equipped to understand or manage them adequately. There are currently no rules preventing payment providers in effect to use their customers as insurance for risks they have created. A new regime should limit consumer liability, following the example set in the United States in 1978 through the Electronic Fund Transfer Act. Such a solution flows from the principles of universality, neutrality, accountability, security and transparency.
- Risk mitigation and recourse Consumers need to be able to obtain effective redress when payments are mishandled or payment facilities are abused. While there are currently redress mechanisms associated with some electronic payments, such as the 90-day recourse regarding pre-authorized debits under CPA Rule H-1 or charge-back policies implemented by credit card issuers, such mechanisms vary widely in scope, are not well-known and often remain dependent on the will of service providers. A new regime should establish mandatory, uniform rules governing redress. Such a solution flows from the principles of universality, neutrality, accountability, transparency and enforceability.
Those are only some of the issues that must be tackled. Others include the admissibility of the proof of payments, transborder flows of payment data, payment provider control and liability over transactions a consumer can do, escheat, counterfeiting, authentication, prudential regulation and pricing.
Current solutions are inadequate. Legislation is archaic. CPA rules can only cover some of the issues. Codes of practice do not work. Uncertainty prevails and doubts are fed by each headline describing card cloning or identity theft. If electronic payments are to take their legitimate place in the economy, consumer confidence needs to be nurtured.
Establishing a coherent, modern framework is in the interest not only of consumers, but also of merchants and payment service providers. Canada has an opportunity not only to bring its regulatory regime to parity with its international partners, but to become a world leader in one of the most vital dimensions of life in the 21st century.