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Banking Law
McGill Faculty of Law
Lemieux, Marc

Banking Law


Fall 2013

A) The Evolution of Payments: Historical and Emerging Payment Methods

Forms of Payments


· Currency, Precious Metals, Bartering, Cheque, Bills of Exchange 9think of them as cheques)

· Letters of credit


· Wire Transfers: Agreements among 2 banks in the form of telegraph for clients based on prior agreement between the banks


· Currency-Bank of Canada: All currency before 1933 were issued by private banks. Ex) Molson bank

· Bills of Exchange: can be used over time (deferred payments). Example, by way of monthly installments.

o A Factor (person) will give you immediate cash for (postdated) promissory notes.


· Credit Cards-Diners Club: First use was to facilitate meals at restaurants

o Fraud ensued. So the magnetic strip was created, that safety didn’t last long. Now we have the chip which is very secure. What is not secure is the machine.

· Swift: World wide telegraph system. Banks are issued keys which makes it secure. Functions in the same way as the 1900 wire transfer, it’s just safer.


· Pre-authorized debit: Any pre-authorized payment. Authorization to electronically pull money from your account. Example: Car payments.


· Debit Cards (Interac): Initially only to pull money out of your account from your own bank. Interact changed this and allowed you to pull out money from other banks. Only starting becoming available for point of sale in 90’s.


· Internet: Online marketplace.

· Paypal: Secure the use of your credit card online. Paypal now functions like a bank account.

· LVTS (large value transfer system): Form of electronic transfer of money that is immediate in the form of same day real time transfer. Mandatory for payments above 25 million, no minimum amount.


· Prepaid cards: Good way for under banked areas to do business.

· Mobile phones-Starbucks payment

· Interact E-transfers: he’s got a problem that it’s limited to $1000

àForms of payment are continuously expanding. Each form works differently. Like children outgrowing clothes, the payment activity changes at a faster pace than lawmakers can regulate.

B) The payment ecosystem: users and providers of forms of payment

Task force appointed in summer of 2010 by minister of Justice. Recommendations scared the minister of finance because their suggestions were so far reaching. First time anyone ever went out and spoke to users.

Task Force on Payment Reform: “Canadian Payments Landscape”

Focuses on retail payments: Those which are under $25 million


Payment is the transfer of value between two parties (commercial definition)

Payment the extinction of an obligation to pay (legal definition)

· Payments may be used for a variety of purposes, including to purchase goods and services, to settle a legal obligation or to transfer funds between parties/locations

· Payments encompass a wide range of activities, Examples include (but are not limited to):

o Paying with cash − Writing a cheque − Wiring money overseas − Paying for inventory via EDI

· “Payments ecosystem”, “payments landscape” and “payments industry” all refer to the collection of consumers, businesses, merchants, financial institutions, payments networks, regulators, processors, new entrants and service providers that play a role in initiating, processing and regulating payments transactions and redefining boundaries

o Person to business, government, school paymentsྠof volume transactions

o Business to business payments (food industry)

o Government to persons/business payments


· Annual volume 24 billion transfers, annual value 44 trillion dollars from payment instruments.

· 90% of value transactions are handled by LVTS

· In consumer area you have a large number of transactions with low value.


The Canadian payments landscape features a multitude of payments options including:

Cash, Cheques, Debit Cards (Point-of-Sale), Debit Cards (Cash Dispensing), Credit Cards, AFT Debits, AFT Credits, EDI/Electronic Remittances, Proprietary/Closed Loop Prepaid Cards, Large Value Transfer System (LVTS), SWIFT Transfers, International Remittances, Rewards & Loyalty, eWallets, Person-to-Person Electronic Transfers, Mobile Network Payments


The providers-those who make payment available

Issuers § Acquirers § Payment Networks § Clearers & Settlers § Payment Service Providers § Payday Loan Providers § FOREX Providers § ABM White Label Operators § Closed Loop Prepaid Providers § Loyalty and Rewards Programs § eWallet Providers § Alternate Payment Vehicle Providers

Ways to fund payments of consumer products

The creditor expecting payment can always chose the form of payment. Credit and debit cards come with a guarantee from the network. A cheque on the other hand can be revoked.

· When you pay with a debit card you fund the payment with your money

o A debit card has a fixed fee, for example 13 cents

· When you pay with a credit card you fund the payment with the credit card company’s money

o The cost of a credit card is shared between consumers and merchants. Merchants pay more when a credit card is used. A discount of 1.5-3% is withdrawn for purchase price. 3% discount on $400 purchase. The merchant will only receive $388.

· Another option is the prepaid card (fast growing)

*US debit card interchange fee debate: They have a large fee that we don’t have because interac was always run on a not-for-profit basis. Post financial crisis federal government (federal reserve) was able to limit the debit interchange fee. Bank of America president came out and said we will raise other fees.

Task Force on Payment Reform: “Users and their discontent”

Users of the Canadian payments system are discontented. Whether they are consumers, merchants, small and medium enterprises (SMEs), or large corporate or government organizations, they rely on the transmission and receipt of payments every day but are not getting what they need or expect from the payments system.

Who are the users


Users need a payments system that is faster, richer in information, more secure in managing online transactions, clearer about rules, more accessible to everyone everywhere, and less expensive.

· 1/3 purchases still made with cash, minimal rights

· A number of stakeholders emphasized to the Task Force the importance of a fair, consistent and clearly explained set of rules for digital payments.

· One million households have $400

ails starting with a comparatively small volume. Moreover, the new service typically displaces an existing one, even though the expenditures associated with the existing service may not have been fully recovered

· A second challenge is that the payments industry is an inherently network‐based business. This means that to achieve the volumes critical to making any payments systems efficient and profitable, providers must work together to ensure interoperability

Change is therefore demanding and often costly for established providers, yet returns, at least in the short run and viewed narrowly, are limited. The incentive to innovate is not strong

Why don’t other providers offer solutions?

· New entrants require the cooperation of existing providers to offer their services. Moreover, they may find making inroads into payments markets difficult, given that incumbents can create cost or more subtle barriers that protect existing offerings

· It is also difficult for new entrants to have direct access to the clearing system, the eligibility requirements to become a direct clearer, which include having at least 0.5% of the total payments business in Canada, may present an insuperable barrier, at least in the initial stages of a new service.

· New entrants are discouraged by an uncertain regulatory situation. Given the complex patterns of legislation and oversight that exist today, they cannot be sure that their product offerings will be supported by the existing infrastructure or subject to new legislation.

Clearing and Settling System

· Behind each payment transaction there are always two bank accounts: Payer and payee. Two banks (think broader than a bank: paypal, credit union) will always be involved. Payer’s bank and payee bank.

· Cheques involve a collection process where one bank must collect from the other on their order to pay

· Example:

o BMO receives customer cheques for 250 million: 50 million come from NBC, 200 million come from RBC.

o NBC receives customer cheques 300 million: 100 million from BMO, 200 million come from RBC

o RBC receives 400 million: 150 million from BMO, 250 million come NBC

o At the end of the day there is a net amount owed between the banks (cashed and drawn). This system is called clearing, coming to an amount. The net amount being paid is called settling. This system is regulated by the Payment Clearing and Settling Act

· Clearing: The process of exchanging and reconciling payment items that result in a transfer of funds from one financial institution (FI) to another.

· Settlement: means the process of adjusting financial positions of individual FIs to reflect the net amounts due to and from them as a result of the inter-member exchange of payment items.