F. Third Party Payment Systems (3PPS)

• Author: M.H. Ogilvie
• Profession: LSM, B.A., LL.B., M.A., D.Phil., D.D., F.R.S.C. Of the Bars of Ontario and Nova Scotia Chancellor's Professor and Professor of Law, Carleton University
• Pages: 363-369

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The rapidly changing payments environment since the beginning of the twenty-first century suggests that payment by cards may be overtaken by direct electronic payment in business-to-business, person-to-business, and person-to-person transactions. Moreover, banks and other financial institutions will not necessarily play the intermediation role they have played in the payments chain for the last five to six hundred years. Not only have newer payment means come onto the market, but new, non-financial institutions have done so as well, some in direct competition with the banks; some in cooperation with the banks, which have outsourced their services; and some by piggy-backing onto the banking system as a means of access to the clearing and settlement system.

These new players and payment methods are completely unregulated: no legislation, no case law, no regulations, and no regulators. Regulatory bodies such as OSFI, CDIC and the CPA, as well as the

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Department of Finance, and the financial institutions themselves, are aware of the dangers that third party payment systems potentially pose to the safety, security, and efficiency of the existing payment, clearing, and settlement systems in Canada, and they are currently studying and watching the situation closely. This is also true in other countries worldwide with mature banking systems, not only in relation to their own domestic networks, but also in relation to international payment transactions, which computerization facilitates.

Given how recent and fast changing the situation is, it is impossible to describe in other than a fragmentary and fleeting manner. Some broad observations will be made here and some better-known systems will be described, as will some of the legal and regulatory issues raised. There are no major studies of this burgeoning situation over the past two or three years, and an introductory text with a consumer focus can do little else than alert consumers of banking services of the rapid changes, their unregulated nature, and the need to exercise caution in their use.

The earliest of these new payment systems evolved in the business-to-business payment context with electronic data interchange (EDI), which has been in use for over a decade. EDI is the use of direct electronic communications systems between businesses to exchange information relating to their business operations. The best known use of EDI is for inventory control in the retail sector: bar code scanners at cash registers are used to reorder merchandise being sold and to submit invoices for goods being sold as between retailer and supplier. Another example is in the manufacturing sector, where component suppliers supply parts as ordered electronically by manufacturers shortly before manufacture. In both instances, no large amounts of inventory need be stored, and an accurate record of demand is kept and supplied. In addition, payment is automatically authorized and effected through credit transfers over the ACSS and carried out under ACSS Rule E3.

The payment is initiated by the customer sending an electronic message to its bank to make the payment from the customer’s account. The message will include the payee’s payment information and will be transmitted as a credit transfer to the payee’s bank by no later than 5:00 p.m. on the day on which value is given to the payee. The payee’s bank acknowledges receipt and makes a record of each EDI payment item received from each direct clearer and prepares a single debit entry for the sum of all the items it accepts the preceding day for entry into the ACSS electronic network. All EDI debits are netted with all the other credits and debits in the ACSS to calculate the net obligations among direct clearers for settlement at the Bank of Canada.

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Person-to-business...