Publication date: October 2, 2024
The following fictional case scenarios provide more details about the performance of payment functions under the Retail Payment Activities Act by providers of acquiring services, including in respect of the holding funds payment function.
The examples provided are not a replacement for the Criteria for registering payment service providers supervisory policy, but rather they are meant to complement the policy. They should be read in conjunction with the policy.
These examples build off each other. We recommend reading them in the order they appear.
Case scenario: Acquirer not holding funds
Company A offers merchant accounts which consist of acquiring services offered to merchants such as Merchant 1. When opening a merchant account, Company A collects different information on the merchants and their activities, and conducts various due diligence processes such as “Know-Your-Customer” checks and payment risks underwriting assessments.
Whenever a consumer makes a purchase with Merchant 1, Company A is in charge of routing Merchant 1’s transaction requests to the appropriate payment network, and passing on the authorisation response to Merchant 1. Company A keeps track of all transactions, and submits a clearing message to the payment network every evening. At the same time, Company A advances funds to Merchant 1, it sends an amount corresponding to all the approved payment transactions from Merchant 1 it has processed during the cycle from its own bank account to Merchant A’s bank account. It then later recovers the funds when settlement occurs. Fees are collected on a monthly basis, based on the volumes processed.
Through these activities Company A performs the payment functions: provision and maintenance of an account; authorisation of an electronic funds transfer (EFT) and transmission, reception or facilitation of an instruction in relation to an EFT; provision of clearing or settlement services.
Company A is not holding funds on behalf of an end user. Under the Retail Payment Activities Act (RPAA), holding funds requires that funds be at rest with the payment service provider (PSP) and available for future transfer or withdrawal. In this case, Company A never holds funds at rest on behalf of Merchant 1. Instead, Company A advances money to Merchant 1 from its own working capital before it receives the proceeds of the sale intended for the merchant from the card issuers.
Overall, Company A meets the definition of a PSP under the RPAA and needs to register with the Bank of Canada, assuming it meets the other registration criteria.
Case scenario: Acquirer holding funds
Let’s now assume that Company A offers a new payout option to its merchant clients. Instead of the daily processing from the previous example, merchants can now decide to receive, for a discount, the sum of their earnings on either on a fixed day, weekly or monthly basis.
This means that, when merchants choose this new option, Company A keep funds at rest in these accounts on behalf of merchants for days or even weeks awaiting the date when they will be transferred to the merchant’s business bank account. More specifically, Company A begins holding funds when it receives in its bank account funds from card issuers that are payable to the merchant. It stops holding funds on the day the payout is made from its bank account to the merchant’s business bank account.
As a result, Company A now performs the payment function of holding funds on behalf of an end user. Accordingly, Company A must also comply with the end-user funds safeguarding requirements in the RPAA, as described in the Bank’s guideline.
Case scenario: Payment facilitator
Company B uses its own merchant account with Company A to provide sub-merchant accounts to other merchants and processes their payments for a fee.
In this situation, Company B performs KYC checks and stores identification information about Merchant 1, as well as Merchant 1’s bank account number. Company B also processes transactions on behalf of Merchant 1 with the relevant networks. Company B transmits funds to merchants immediately as it receives them. More specifically, once it receives settlement funds from Company A (who is Company B’s acquirer), Company B immediately pays out the sum corresponding to Merchant 1’s approved transactions, minus a fee, using the payment information for Merchant 1 that it stores in its systems.
On the other hand, Company A stores information on Company B, but has no access to the information of Company B’s clients, such as Merchant 1. Company A clears the transactions for its clients including Company B and sends Company B an amount corresponding to all the approved payment transactions processed on Company B’s behalf during the cycle.
Given the above, both Company A and Company B perform the following payment functions under the RPAA: provision and maintenance of an account; authorization of an EFT and transmission, reception or facilitation of an instruction in relation to an EFT; and provision of clearing or settlement services. Though Company A may hold funds for its other clients, as described in the previous case scenario, since funds are immediately transmitted to Merchant 1 once received by Company B, there is no holding of funds by Company A or Company B under this scenario.
Both Company A and Company B meet the definition of a PSP under the RPAA and need to register with the Bank of Canada, assuming they meet the other registration criteria.
Disclaimer
The case scenarios are illustrative examples reflecting the Bank of Canada’s interpretation of certain requirements set out in the Retail Payment Activities Act (RPAA). All names, facts and descriptions in these scenarios are entirely fictitious and do not reflect any real or actual individuals or entities.
Additionally, they do not represent legal advice and should not be used as a replacement for seeking such advice if an individual or entity is unsure about whether they are required to register with the Bank of Canada as a payment service provider. The nature of the products and services offered by each individual or entity will vary, as will the circumstances around offering these products and services. Therefore, any individual or entity that may be subject to the RPAA should assess their own situation on a case-by-case basis according to their own facts and circumstances. Any entity or individual that may be subject to the RPAA is ultimately responsible for determining whether they are required to register with the Bank.
The examples provided are not a replacement for the Criteria for registering payment service providers supervisory policy, but rather they are meant to complement the policy. They should be read in conjunction with the policy.