Lemieux Legal Services Marc Lemieux September 14, 2017 THE ADVANTAGES AND DISADVANTAGES OF FORMS OF B2B PAYMENTS IN USE IN CANADA A presentation to the Sports Industry Credit Association Lemieux Legal Services Marc Lemieux September 14, 2017

OVERVIEW OF PRESENTATION The general characteristics of payments Cheques and bank drafts Credit cards ATF credit and debit (a.k.a. « direct deposits » and « pre-authorized debits ») Electronic invoice payment LVTS wire transfers

1. THE GENERAL CHARACTERISTICS OF PAYMENTS Is settlement certain after completion of the payment transaction? When is the payee able to use the funds paid? What is the cost of the payment to the payor and the payee? How user-friendly is the payment experience?

2. CHEQUES AND BANK DRAFTS – SETTLEMENT CERTAINTY Simple cheques are revocable (including where the purchaser is not satisfied with the goods or services), and settlement can be reversed in case of insufficient funds, bankruptcy and fraud (CPA Rule A4, s. 5, s. 167 BEA, and s. 78 BIA) Certified cheques (where available) and drafts cannot be countermanded, but the settlement of certified cheques and bank drafts can be contested for a limited set of reasons related to fraud (Rule A4, s. 4(b) and (c), and s. 31 CPA)

2. CHEQUES AND BANK DRAFTS – AVAILABILITY OF FUNDS TO PAYEE There if often a delay between the reception of a cheque and the deposit of the cheque to the payee’s account As a general rule, domestic cheques and bank drafts are settled by the ACSS 1 to 3 days after being introduced into the ACSS The merchant’s account is credited provisionally on the day of the deposit, and the availability of funds may be subject to a hold period up to 4 or 5 business days The imaging of cheques and bank drafts does may reduce deposit delays, but does not reduce hold periods

2. CHEQUES AND BANK DRAFTS - COSTS Banks charge fees to payors that issue cheques (cheque payment fees, NSF fees, and cheque supply fees) Banks charge fees to certify cheques or issue bank drafts

2. CHEQUES AND BANK DRAFTS – PAYMENT EXPERIENCE Cheques can be lost, or damaged or destroyed in the mail Banks will not accept to cash a cheque where the payee’s name is misspelled What payee enjoys going to wait in line at the branch and physically remit cheques to a teller?

3. CREDIT CARDS – SETTLEMENT CERTAINTY « If you have problems with anything you buy using your Credit Card, you must pay the amount owing on your Account and settle the problem directly with the store or merchant. In some circumstances, we may be able to provide assistance in resolving disputed transactions. » (RBC Cardholder Agreement, s. 17) Reasons for Chargebacks stated in Network Card Use Rules do not include NSF/bankruptcy, but include commercial disputes and fraud (TD Merchant Services Agreement, s. 5.1)

3. CREDIT CARDS – AVAILABILITY OF FUNDS TO PAYEE As a general rule, transactions are settled by the credit card networks on the dates on which the transactions are completed As a general rule, the merchants’ settlement accounts are only credited the business day following the dates on which the transactions are completed Restrictions may apply to the merchants’ settlement accounts, such as security deposits or hold periods

3. CREDIT CARDS – COSTS (INTERCHANGE) The cardholder (client purchaser) pays fees and interest on unpaid account balances The merchant (vendor) pays interchange fees, acquirer fees and equipment fees Interchange fee (payable to issuer): between 1.5% and 3% of purchase amounts, subject to a voluntary undertaking, assumed in April 2015 by the credit card industry in Canada, to manage domestic consumer credit interchange rates to an average effective interchange rate of 1.50% This undertaking does not apply to B2B payments

3. CREDIT CARDS – COSTS (SURCHARGE) Can the merchant (vendor) impose a surcharge on the sale price to recover credit card interchange, acquirer and equipment fees from the cardholder (client purchaser)? No, according to the No Surcharge Rule stated in Network Card Use Rules (which Rules the governement did not attempt to regulate through the Code of Conduct for the Credit and Debit Card Industry in 2010) However, the No Surcharge rule was contested before the Courts as being contrary to Competition Law requirements (see Watson v. Bank of America, 2014 BCSC 532)

3. CREDIT CARDS – COSTS (SURCHARGE) A settlement was reached by the parties to the Watson case in June 2017, pursuant to which the credit card networks have agreed to make modifications to their No Surcharge rule, to allow Canadian merchants to impose checkout fees on credit cards, subject to sertain conditions designed to protect cardholders, including a surcharge cap, and a requirement for merchants to disclose their surcharging pactice. This change to the No Surcharge Rule will only come into effect 18 months after approval of the settlement by the provicial courts seized Until the change to the No Surcharge Rule becomes effective, what can merchants do?

3. CREDIT CARDS – COSTS (SURCHARGE) Not much… Cause the credit card payments to be received by an affiliate in the US where local laws allow the imposition of a surcharge (needs to be verified for compliance with local laws and Network Card Use Rules) Bump prices up all around and grant discounts to clients using a cheaper form of payment (not great if all vendors in a market do not act simultaneously) Using « euphemisms » such as « adminstrative fee » is not helpful as substance ultimately wins over form

3. CREDIT CARDS – PAYMENT EXPERIENCE The payor in credit card payments needs to provide card information to the payee or the payee’s service provider (security concern) Credit cards can be used to facilitate user-friendly (but fraud sensitive) B2B online purchases and payments Credit cards can also be used to facilitate super user-friendly (but fraud sensitive) B2B payments by mobile phone or email

4. PRE-AUTHORIZED DEBITS - SETTLEMENT CERTAINTY PADs are premised on the existence of a “continuing but revocable” agreement between the payor and the payee, that provides an authorization for the payee to issue PADs against the payor’s account at its bank A payor has 10 business days to revoke a Business PAD (Rule F1, s. 14, and Rule H1, ss. 20(1)(a)), on the basis that there was no agreement with the payee, or that the contested PAD was used otherwise than aa authorized in the agreement

4. PRE-AUTHORIZED DEBITS - AVAILABILITY OF FUNDS TO PAYEE As a general rule, transactions are settled by ACSS on the dates on which the transactions are completed As a general rule, the merchant’s account is credited the Business Day following the dates on which the transactions are completed There are typically no restrictions to the availability PADs credited merchants’ accounts, and the payments funds become available to the merchants on the day of such credits

4. PRE-AUTHORIZED DEBITS - COSTS Banks charge fees for the processing of PADs on behalf of payees These fees, if any, vary from bank to bank and are minimal when compared to credit card fees

4. PRE-AUTHORIZED DEBITS – PAYMENT EXPERIENCE The payor in PADs needs to provide account information to the payee (security concern) Pre-authorized debits can be used to facilitate user-friendly (but fraud sensitive) B2B online purchases and payments Query: can pre-authorized debits also be used to facilitate super user- friendly (but fraud sensitive) B2B payments by mobile phone or email?

5. ELECTRONIC INVOICE PAYMENT – SETTLEMENT REFUSAL The payor’s bank may not contest the settlement of electronic invoice payments (Rule A4, s. 4(a)) Electronic payments are irrevocable (ss. 28 to 30 of Rule H6), subject to the right of the payor to cancel a payment (Rule E3, s. 14)

5. ELECTRONIC INVOICE PAYMENT – AVAILABILITY OF FUNDS TO PAYEE As a general rule, electronic invoice payments are settled by ACSS on the dates on which the transactions are completed As a general rule, the merchant’s account is credited the business day following the dates on which the transactions are completed There are typically no restrictions to the availability of electronic invoice payments credited merchants’ accounts, and the payment funds become available to the merchants on the day of such credits

5. ELECTRONIC INVOICE PAYMENT – COSTS Banks charge fees for the processing of electronic invoice payments on behalf of payees These fees, if any, vary from bank to bank and are minimal when compared to credit card fees

5. ELECTRONIC INVOICE PAYMENT – PAYMENT EXPERIENCE On-boarding issues: banks may accept or decline to act as payor Fis for a Corporate Creditor (ss. 11-12, Rule H6) Electronic invoice payments can be used to facilitate user-friendly (but fraud sensitive) B2B online purchases and payments Query: can electronic invoice payments be used to facilitate super user-friendly (but fraud sensitive) B2B payments by mobile phone or email?

6. LVTS WIRE TRANSFERS – SETTLEMENT REFUSAL There can be no reversal of a LVTS wire transfer Ever For whatever reason (except in the case of a LVTS wire transfer sent to the wrong payee)

6. LVTS WIRE TRANSFERS – AVAILABILITY OF FUNDS TO PAYEE The proceeds of LVTS wire transfers are immediately available to the payee on the day of the payment transaction

6. LVTS WIRE TRANSFERS - COSTS There are costs for the payor These costs can be important and depend on the payor’s bank

6. LVTS WIRE TRANSFERS – PAYMENT EXPERIENCE SMEs may find it a challenge to direct their account manager to use LVTS for a wire transfer instead of other systems for wire transfers Fees can be prohibitive for smaller payments LVTS wire transfers cannot be used to facilitate user-friendly (but fraud sensitive) B2B online purchases and payments, let alone B2B payments by mobile phone or email