Publication date: October 2, 2024
The following fictional case scenarios provide examples of payment functions that are, and are not, incidental to a marketplace. These include the provision and maintenance of an account; the holding of funds on behalf of an end user; and authorization of an electronic funds transfer and the transmission, facilitation or reception of an instruction in relation to an electronic funds transfer.
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: Marketplace with third-party payment service provider
Company A is a retailer that operates through both brick-and-mortar stores and e-commerce. On its online marketplace, Company A sells its in-store selection of products, but also allows third-party sellers like Merchant B to sell their products. Company A charges third-party sellers a percentage fee on all sales made through its e-commerce platform, and, in exchange for the fee, Company A provides Merchant B with various services and supports, such as exposure to a broader customer base and assistance with payment processing through Company C, which is a payment service provider (PSP). Accordingly, when a merchant signs up to sell goods through Company A’s marketplace, the merchant is also onboarded by Company C, which collects the necessary financial information from the merchant to process future payments for them.
When purchasing an item sold by Merchant B through Company A’s marketplace, the customer goes through the same sequence of steps that they would when purchasing an item sold by Company A directly. Once the customer is done adding items to their cart and wishes to check out, they click on a check-out button and are then redirected to a website operated by Company C, which is a payment service provider that acts as Company A’s payment gateway and processor. Once they have provided their financial information and the payment is complete, customers are directed back to Company A’s website, which provides the customer with the confirmation that the order has been completed.
After clearing the transaction, Company C calculates and deducts the fee due to Company A from the purchase price and makes the remaining amount available in a merchant account that it maintains for Merchant B. Merchant B can set either a threshold amount of money or duration of time for the funds to be transferred by Company C from the merchant account that it maintains into Merchant B’s bank account. When returns involving Merchant B’s items are made on Company A’s marketplace, Company C deducts the return amount from Merchant B’s merchant account, provided there is a sufficient balance available.
In this example, Company A does not perform any payment functions, as every aspect of the payment process for merchants is handled by Company C, including the storage of financial information concerning the merchant. Assuming that Company A does not offer any other payment-related services, it is not a PSP and does not need to register with the Bank of Canada.
Meanwhile, Company C is a PSP under the Retail Payment Activities Act (RPAA) and needs to register with the Bank of Canada, assuming it meets the other registration criteria.
Case scenario: Marketplace with integrated payouts
Assume now that Company A decides to internalize certain processes relating to its relationships with third-party sellers. One such process that it has internalized relates to how third-party sellers are paid for their sales.
Like before, when a customer purchases an item from Merchant B, they are directed to a webpage managed by Company C at checkout where they complete their payment before being directed back to Company A’s webpage to view their order confirmation. However, instead of calculating Company A’s fee and placing the remaining amount into an account for Merchant B, Company C no longer differentiates between Company A’s direct and third-party sales, and instead passes all proceeds from sales on Company A’s e-commerce website to Company A’s bank account.
As third-party sellers make sales on Company A’s e-commerce platform, Company A tracks each seller’s sales volume and makes a dashboard available for sellers such as Merchant B to view their sales history, balance, and upcoming disbursements of funds. According to a fixed schedule, Company A uses the financial information about Merchant B that it stores on its servers to make a push payment of the total sales amount, less its corresponding fee from its own bank account, to Merchant B’s bank account. Since Company A now also facilitates the flow of funds on behalf of its merchant clients, Company A charges a higher overall fee to merchants selling goods on its marketplace.
As a result of its expanded offering, Company A now performs the following payment functions: provision and maintenance of an account; holding of funds on behalf of an end user; and transmission, facilitation or reception of an instruction in relation to an electronic funds transfer.
The Bank’s indicators for whether activities are incidental, as set out in the Criteria for registering payment service providers, should be considered to determine if a marketplace’s services support its non-payment activities, or if they are a separate business activity. In the present case, Company A’s marketplace generates revenues from its payment services offered to third-party merchants, merchants understand that they receive payment-related services from Company A, and Company A advertises its marketplace to sellers in part through promoting its integrated payment capabilities. Each of these factors support the fact that Company A’s activities are not incidental.
Therefore, Company A is a PSP under the RPAA and needs to register with the Bank of Canada, assuming it meets 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.