Written By Simon Grant and Frances Wu

This post is a follow-up to  our earlier blog, Upcoming Retail Payment Activities Act Regulation—Updates from the Bank of Canada, where we summarized the four-step test under the Retail Payment Activities Act (RPAA) to determine whether your business qualifies as a payment service provider (PSP) requiring registration with the Bank of Canada (the Bank).

Businesses determined to be a PSP under the RPAA's four-step test were required to register with the Bank via the PSP Connect portal during the registration window from November 1 to November 15, 2024 (the Registration Window) to carry on business as a PSP immediately following the Registration Window. While businesses can still register after this Registration Window, this would technically result in a 60-day period during which the business would not be permitted to operate as a PSP, as businesses are required to submit their registration applications at least 60 days prior to commencing their retail payment activities.

The period between November 1, 2024, and September 7, 2025, is the transition period during which individuals and entities can apply for registration and the Bank will review the applications (the RPAA Transition Period); following this RPAA Transition Period, the Bank will publish a list of all registered PSPs on September 8, 2025.

Still Unsure if Your Business is a PSP After the Four-Step Test?

If uncertainty remains after completing the four-step test on whether a business qualifies as a PSP and is required to register with the Bank, the following questions, which are based on guidance released by the Bank, may assist with the determination to further analyze your PSP status.

A. Yes, you may perform a payment function, but is this payment function incidental to your primary business?

It is clear that if your only service or business activity is to perform retail payment functions (Payment Functions)¹, you are a PSP according to the definition in the RPAA. However, if your business also conducts one or more services or activities which are not Payment Functions (Non-PSP Activities), there is a chance that you are not a PSP.  This stems from the RPAA’s definition of a PSP, which is limited to those persons or entities who perform Payment Functions that are not incidental to Non-PSP Activities.

What is incidental?  If the only purpose of the Payment Function is to directly support a Non-PSP Activity, then the Payment Function may be considered incidental. For example, if the Payment Function is necessary for your Non-PSP Activity and is only performed in order to carry out that Non-PSP Activity, then the Payment Function may be incidental. Similarly, Payment Functions which are only performed to improve the client’s experience with a Non-PSP Activity may also be considered to be incidental.

However, if the Payment Function is also provided as a separate service or activity that does not exclusively support a Non-PSP Activity, it is unlikely to be considered "incidental".

Some helpful questions to ask when assessing whether your Payment Functions are incidental to your Non-PSP Activities:

• Does the Payment Function directly generate revenue or provide commercial advantage, such as a fee or other financial compensation? If so, it is likely not incidental.
• Do your end-users reasonably expect or understand that they are receiving payment services when using or receiving the services you offer? If so, then your Payment Function might not be incidental. 
• Do you market or advertise the Payment Function as a separate service or business activity?  If so, it is likely not incidental. 

The Bank will assess whether a Payment Function is performed as an incidental service or business based on the specific facts and circumstances of each case and has provided several case scenarios to help you assess whether a payment function is incidental. 

B. Yes, you may perform a Payment Function, but are there exclusions that apply to your business?

1. Is your Payment Function an excluded activity?

There are certain retail payment activities that pose limited risk to end users and are therefore excluded from the requirement to register as a PSP. Note that, even if certain activities that you perform are excluded from the RPAA, you may still need to register with the Bank if you perform other non-excluded activities. Two activity-based exclusions are outlined below. The Bank also has a few other specific activity-based exclusions on their guidelines.

(a) Merchant Instrument Exclusions

Two types of merchant instruments are excluded from PSP registration under the RPAA:

• Single Merchant Exclusion: This applies to instruments (physical or electronic) issued by a merchant that can only be used to purchase goods or services from that merchant. An example would be gift card issued by a coffee shop that can only be used at its locations.
• Group of Merchants Exclusion: This applies to instruments to be used to purchase goods or services from a specific group of merchants and issued by an issuer (that is not a PSP) pursuant to an agreement between that issuer and those merchants. An example would be a mall-issued prepaid card that can only be used at stores within that mall.

Both exclusions require that the instrument is restricted to the specified merchant(s). If the instrument allows broader use, the exclusions do not apply.

(b) Prescribed transactions in relation to securities

Retail payment activities are excluded under s.6(b) of the RPAA if they relate to a "prescribed transaction" involving securities. A transaction qualifies as prescribed if it is conducted by an individual or entity regulated or exempt under Canadian securities laws, as defined in National Instrument 14-101. If your business activity is a prescribed transaction, it is likely that you do not need to register with the Bank as a PSP.

2. Are you performing the Payment Function as an agent of a registered PSP or as a third-party provider to a PSP?

If you perform retail payment activities as an agent of a registered PSP, you are not required to register, as RPAA compliance will be the responsibility of the registered PSP. However, if the person or entity for which you act is not a registered PSP—whether or not due to an exemption or exclusion—you would need to register as a PSP. See Bank of Canada case scenarios here.

Accordingly, in your third-party agreement, it is important to confirm the third-party’s status as a registered PSP, whether or not you are acting as their agent, and the scope of your agency. If you perform Payment Functions for a non-registered PSP, or for a registered PSP outside the scope of your agency, you may be considered a third-party service provider requiring PSP registration. 

3. Is your Payment Function performed between affiliated entities?  

Retail payment activities considered to be internal transactions are excluded from the RPAA. Internal transactions are transactions solely between affiliated entities. For example, if the EFT is made between a parent company and a subsidiary, then this payment function is excluded from the RPAA. It is worth noting that if you are an entity that performs retail payment activities as a PSP and you are not otherwise excluded from the RPAA, you must register independently, regardless of whether another affiliated entity is already registered as a PSP.

Conclusion

The RPAA and its new regulatory framework will pose new compliance requirements for registered PSPs. It would be prudent to conduct a detailed analysis to determine whether the RPAA requires registration of your business as a PSP.

Today, the RPAA permits businesses to provide retail payment services during the RPAA Transition Period, but only if businesses submitted an application on PSP Connect within the timeframes mentioned above. If an application was not submitted, and it is later determined that the business is a PSP and has contravened the RPAA, the Bank can take enforcement action including the issuance of a notice of violation with or without an administrative monetary penalty.

Determining whether your business is a PSP that must register with the Bank can be complex, as it depends largely on the nature of your operations and the clientele you serve. While this assessment requires leveraging your in-depth knowledge of your business, the Bennett Jones Financial Services group is here to guide you throughout the process and assist with any subsequent steps, including registration if required.

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