Growing the prepaid market

By Peter Read

We all know prepaid solutions as innovative tools that encourage financial inclusion, help combat consumer debt, replace costly cheques and tackle hassles in business payment systems. But what may have begun as a niche set of products that fills a gap in the current payments system has quickly emerged into a core capability in payment and financial technologies.

Today, prepaid solutions support many high growth initiatives around the world. Moreover, they have the ability to build the next generation of disruptive financial and payment technology services. A few of the recent financial innovation leaders utilizing prepaid accounts at their cores include Koho, Stack and Revolut.

However, prepaid technology needs to be empowered further in Canada to grow in various areas so that it can catch up with global developments. With innovative technologies making strides to transform the way consumers, businesses and institutions transfer and settle payments, finding the right balance in terms of oversight and consumer protection and privacy remains key going forward.

Here are the two scales that the industry and regulators are weighing in on for prepaid solutions.

1. Balancing innovation enablement with oversight. The regulatory environment of Canada’s FinTech industry is multifaceted and tends to overlap between federal and provincial governments, which has led some FinTechs to view this framework as a barrier to entry and development. But ongoing stakeholder initiatives, including reviewing the national retail payments and financial sector frameworks by the Department of Finance and Payments Canada are intended to accommodate and avoid overregulating the PayTech and FinTech evolutions¹.

One main area of focus that will continue throughout 2019 is seamless and frictionless real-time payments for consumer purchases and peer-to-peer money movement, as well as business transaction innovations. Real-time payments for consumers and businesses are set to expand with PayTechs and FinTechs expecting to be granted direct integrations to the new Payments Canada real-time payment rails (RTR). With the clearing and settlement system also anticipated to open up to financial institutions beyond the major banking institutions the stage will be set to facilitate new financial technology development.

Traditional open-loop prepaid products run on the existing payment credit card network systems. They, along with their regulated financial institution members, have brought about a foundation of security and robustness. New technologies utilize traditional prepaid accounts to build on to eliminate reliance on cheques and manual processes and improve cost management and convenience to offer consumers and businesses a step into the evolving world of electronic payments. Coupled with the pending launch of the RTR, prepaid products will benefit from enhanced movement of funds to and from prepaid accounts beyond the traditional merchant transactions.

2. Balancing innovation with regulation. Given that the efficiency and attraction of many PayTech and FinTech solutions are based on non-face-to-face identity verification (IDV), the know-your-customer (KYC) requirements that protect against money laundering and criminal activity remain fundamental. This is especially true as the “bad guys” are exceedingly sophisticated and constantly working to steal or synthesize IDs for use in an increasingly non-face-to-face marketplace.

As bank account replacements, reloadable prepaid cards are required by law to utilize KYC, which is on the verge of becoming far more frictionless in the near future. Enhanced ID verification and user authentication are two advancing areas of technology that will help prepaid leap ahead by winning people’s trust and driving product demand through frictionless interactions. As the regulators work to cautiously accept new IDV technologies, it is clear to many that digital and artificial intelligence (AI) technologies are not only better than face-to-face KYC, but they are essential to adopt if Canada is to remain competitive on the world stage.

The countless stakeholder and global consultations by the legislators confirm their ongoing efforts to carefully research and craft legislation that enables the leading technology and innovation that Canada has always been known for. We expect to see more strategic collaboration by public and private sector members of the Digital ID and Authentication Council of Canada (DIACC), a centralized body that provides a framework for secure and privacy-enhancing digital verification and authentication. In addition, understanding regulation and the requirement for prior express consent for the use of personal information for purposes beyond IDV, will be key for FinTechs in tackling privacy issues. This includes educating consumers as to how anonymized aggregated data can be used without compromising personal data security and disclosure in clear and simple language.

As PayTech continues to evolve, so will prepaid solutions. The $3.8 billion² prepaid industry in Canada, while substantial and one on the rise, has a lot of room for growth especially when compared to the $320 billion industry³ in the U.S.. The difference in population doesn’t account for the discrepancy alone. While educating consumers and businesses about the benefits of prepaid continues to be one aspect of it, balancing innovation with oversight, consumer protection and privacy will ensure that prepaid is ready to take advantage of growth potential.

Peter Read is chair of the Canadian Prepaid Providers Organization (www.cppo.ca).

1 Ana Badour, Shane C. D’Souza, Laure Fouin, Heidi Gordon, Shauvik Shah and Eriq Yu, “Fintech Regulatory Developments: 2017 Year in Review”, McCarthy Tetrault, article, December 29, 2017.

2 Canadian Prepaid Providers Organization, “Study: Canadian Open-Loop Prepaid Market Grows 27 Percent Over Three Years”, press release, May 22, 2018.

3 C. Sue Brown, “15th Annual U.S. Open-Loop Prepaid Cards Market Forecasts, 2017-2021”, report, Mercator Advisory Group, September 19, 2018.