Payments Canada recently announced a proposal for a new rule (the Proposed Rule) aimed at increasing the availability of point-of-service (POS) debit card acceptance in Canada. The underlying goal of the Proposed Rule is the transition towards digital payments and decreasing reliance on cash transactions. In conjunction with the Proposed Rule, Payments Canada released a consultation paper on Delayed Authorization POS which is open for feedback until June 23, 2019.
Traditional electronic payments
In a traditional payments system, provision of service is predicated upon a debit or credit card transaction being duly authorized. This requires a cardholder to present the payment card and provide the card’s details (PIN) in the merchant’s checkout system. This system forwards the card’s details to the merchant’s bank who is responsible to obtain the funds for the merchant’s account. This involves using a payment processor to contact the cardholder’s bank, which assesses whether the cardholder has sufficient funds to cover the transaction and reviews the transaction for evidence of fraudulent activity. Once the cardholder’s bank approves the transaction, a communication is sent to the merchant bank who confirms the transaction and deposits the funds in the merchant’s account.
The authorization process is not instantaneous. As a result, transactions which require the provision of services before authorization can take place such as purchases made on board airplanes or transit systems are not well-suited to debit transactions.
Delayed authorization payments
In a Delayed Authorization system, services can be provided before a transaction is fully authorized. For example, a consumer may tap their card and get on a public transit train before their funds transfer has been fully authorized and processed. Delayed Authorization POS payments have already been adopted by Transport for London and piloted by the Australian Payments Network and Vancouver’s public transit system.
While a key driver behind the creation of the Proposed Rule is to accommodate the use of POS debit payments for transit, the rule is designed to enable other use cases as well. Enabling Delayed Authorization POS payments may provide opportunities, which are generally low-value and largely rely on cash or credit cards, such as:
- Payment at parking meters
- Payment for on-board purchases (airline/train/ ferry)
- Payment for vending machine purchases
Consumers will not notice significant difference in a Delayed Authorization environment. The Good Funds Model in which no payment obligation is incurred until a transaction is authorized by a consumer’s bank will continue to apply. Once a consumer’s bank authorizes a transaction, they will be obligated to honour that transaction. However, the merchant may take on additional risk in providing the service before the consumer’s bank has authorized the transaction.
The Proposed Rule
The Proposed Rule relaxes the current requirement that POS transactions be submitted and authorized in real-time. This allows merchants to offer debit payments in situations in which real-time authorization is not feasible and therefore increases the available options for consumers.
- Enables both PIN and PIN-less POS Debit Payment Items, rather than just PIN-less
- While the amount of the transaction must still be accessible to the payer, there is no longer a requirement that the total amount be displayed to the payor prior to authorization. For example, it may not be feasible to display the total amount of a transaction between a customer and a public transit system that charges based on distance because the distance travelled is unknown at the entry of the customer. Under the Proposed Rule, this is feasible as long as the total amount of the transaction is accessible via signage or a price schedule on the merchant’s website.
- The Proposed Rule also changes the requirement for notification to the customer of the disposition of the transaction following authorization or non-authorization. Under a Delayed Authorization system it may not be possible to know in real time if a transaction has been authorized or declined.
- The Proposed Rule also will allow for multiple submissions of a transaction. For example, a consumer making a purchase may have their payment declined and attempt the transaction again. In a Delayed Authorization environment the merchant can resubmit the transaction without a need for the consumer to be physically present. Transactions may be resubmitted up to a maximum of four times within eight days.
- The Proposed Rule would operate as an opt-in system. Financial institutions and merchants are not required to offer Delayed Authorization POS payments but may choose to do so.
Next steps
Consultation on the Proposed Rule will be open until June 23, 2019. Stakeholders should consider how the Proposed Rule will affect them and begin to proactively develop a strategy for dealing with a Delayed Authorization environment for electronic payments in Canada.
McCarthy Tétrault LLP
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