Publication date: August 21, 2024
The following fictional case scenarios provide examples to help providers identify whether they perform the payment function of holding funds.
These examples build off each other. We recommend reading them in the order they appear.
These examples are intended to demonstrate when a payment service provider (PSP) is performing the payment function of “holding funds on behalf of an end user until they are withdrawn by the end user or transferred to another individual or entity” (“holding funds”). Certain requirements under the Retail Payment Activities Act (RPAA) relate only to PSPs that hold end-user funds, such as the requirement to safeguard those funds in accordance with section 20 of the RPAA. For information on the requirement to safeguard end-user funds, please consult the Bank’s guideline: Safeguarding end-user funds.
Note that even if an entity is not holding funds, it may still perform other payment functions as defined in the RPAA and need to register with the Bank of Canada, assuming it meets the other registration criteria.
Case scenario: Electronic money wallet and holding funds
Company A is a payment service provider (PSP) offering an electronic wallet (“e-wallet”) that its customers can use to load and store funds using an online application. Once this is done, the customer can use the e-wallet to make purchases at online retailers that accept the e-wallet as a means of payment. Customers can also transfer funds to other individuals that use Company A’s e-wallet.
Customers can load funds into their Company A e-wallet, for example, by using a debit card or by linking a bank account with the e-wallet application. In these instances, customers load their e-wallets by transferring funds from their bank accounts into Company A’s bank account at its financial institution, and Company A then credits the funds balance on the e-wallet application.
In this example, Company A is considered to be holding funds as defined in the RPAA, because it offers e-wallets that enable customers to keep funds at rest in Company A’s possession and control. The funds remain available to the customer until they request a future transfer or withdrawal.
Company A begins holding funds as soon as it receives them from an end user. It stops holding funds on behalf of that end user when it receives an instruction to transfer all of these held funds to one or more end users. Even though the funds may be held in a bank account at Company A’s financial institution, the account is in Company A’s name and it is Company A that is indebted to its customers for those funds. As a result, it is Company A, not its financial institution, that performs the payment function of holding funds.
Accordingly, Company A must comply with the end-user funds safeguarding requirements in the RPAA, as described in the Bank’s Safeguarding end-user funds guideline.
Case scenario: Money transfer business and holding funds
Company B is a PSP that specializes in making domestic and cross-border funds transfers for individuals and businesses. Company B permits its customers to make only immediate transfers and does not allow customers to maintain a balance to fund future transfers.
When carrying out a cross-border transfer, Company B must complete several steps, including regulatory and compliance checks (e.g., for fraud or anti-money laundering purposes), and coordinate with its partners in the country where the funds are being transferred. These steps are necessary for payees to receive funds in their local currency deposited directly into their bank accounts. Given differing time zones and the number of parties involved in this process, once Company B receives funds from a customer, it typically takes 48 to 72 hours before those funds become available in the payee’s account abroad.
In this example, Company B is not holding funds as defined in the RPAA. To be holding funds, the funds must be at rest with the PSP and available for future transfer or withdrawal. In this case, Company B may be in possession of end-user funds for multiple days while it processes a transfer; however, the funds are not available for a separate transfer or withdrawal. Rather, the funds are subject to an instruction for immediate transfer for the entire time they are in Company B’s possession.
Case scenario: Money transfer business and holding funds before a transfer
Company B has launched a new product, which introduces the ability for customers to pre-fund their planned money transfers. In effect, Company B customers can opt to have an account that maintains a balance and allows them to schedule transfers at a future date. As such, instead of funds transfers taking place immediately, a customer can now, for example, instruct Company B to transfer the funds 10 days in the future. These transfers can be modified until the date the transfer is scheduled to take place, and customers have the option to retrieve their funds if they decide the transfer should not proceed. To make the transfer, the customer credits Company B with the funds using a debit card, along with the transfer instruction.
In this example, Company B is holding funds as defined in the RPAA. When transfers are future-dated the funds are at rest and can be transferred or withdrawn by the customer until the time of the future-dated transfer. Company B begins holding funds as soon as it receives the funds. The holding of funds continues until the date of the transfer, as the funds are not in transit until Company B begins processing the transfer.
Accordingly, Company B must comply with the end-user funds safeguarding requirements in the RPAA, as described in the Bank’s Safeguarding end-user funds guideline.
Case scenario: Intermediary PSP and holding funds
A Company B customer wishes to send money to a friend in Country X. The customer goes on Company B’s website and requests an immediate transfer of funds to be sent to their friend. However, Company B does not itself have the presence nor the payment infrastructure to send funds to Country X. To fill this gap, Company B has a business relationship with PSP C to be able to offer services to users that need to send funds to Country X.
Upon receipt of the transfer request and the corresponding funds from their customer, Company B instructs PSP C to take the next steps required to move forward with the international money transfer. In particular, PSP C must ensure it has sufficient funds available in the local currency of the foreign jurisdiction. In addition, it needs to exchange payment instructions with PSP D, a PSP located in Country X with which the recipient has an existing account, so the funds can be credited to the recipient. While those steps are automated, they involve some processing time, and the funds ultimately take three days after the date of the transfer request to reach the recipient account.
In this example, Company B is not holding funds on behalf of its customer by virtue of the immediate transfer. The funds are not held at rest with Company B since they are immediately processed for transfer by instructing PSP C to carry out the international transfer.
Similarly, the funds are not at rest and available for future transfer or withdrawal while in PSP C’s possession. Additionally, PSP C in this example is an intermediary party whose only role in the transaction is to support the flow of funds from one PSP to another. Consequently, PSP C could not be considered to be holding funds for the end user, such as Company A’s client, as it does not have any contractual relationship with them to hold their funds on their behalf. In this example, PSP C has a contractual relationship with only Company B and does not have a direct relationship with the payer or payee to hold funds on their behalf.
As a result, neither Company B nor PSP C hold funds in this example.
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.