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Payments Canada modernization: challenges, opportunities, and key considerations

While the end goal is clear, the path to modernization is still being charted

Payments Canada's efforts to modernize its payments infrastructure will have far-reaching implications for financial institutions. While Canada currently sits in the middle of the international pack of countries that have introduced real-time payments systems, Canada is looking to make significant improvements to its payments infrastructure by carefully balancing requirements for speed and efficiency with safety and security.

Striking a new balance

Key insights

  • Modernizing from the current hybrid structure towards a true RTGS system will have significant implications for liquidity needs and collateral requirements for financial institutions
  • In the coming years, Payments Canada and other oversight bodies will have to balance the potential opportunities, such as new business models, greater speed and increased efficiency, with potential risks
  • The transition process will be incremental, complex and lengthy, but will ultimately bring Canada more in line with international practices and further establish the country's financial system as a major player in the global ecosystem

While Payments Canada's modernization initiative is set to usher in modern technology that can support innovation and efficiency, it will have to take into account the Bank of Canada's efforts to preserve safety and integrity. These efforts include the mitigation of cyber security risks and collateralizing fully to remove central bank guarantees from the process in large value systems. The benefits of modernization, however, are far-reaching from fast data-rich transparent transactions to cross-border convenience, activity-based oversight and risk-based access.  

While the aims of payment modernization efforts across the globe tend to be universal, each economy is responsible for charting the course of their delivery.  

“You have two very different trends. Different countries have emphasized the retail systems as a platform for innovation, or the RTGS [real-time gross settlement] for large volume system safety and soundness," said RBC's Carolyn Burke, Head, Enterprise Payments, during a recent RBC Investor & Treasury Services' Payments Canada Modernization briefing. “Canada, on the other hand, is doing everything to modernize all at once, so it is quite ambitious for a fairly small country." 

Learning from international best practices 

As a recent entrant to the payments modernization game, Canada benefits from having the opportunity to learn from other economies.

When considering the potential opportunities Burke suggests looking to the United Kingdom (UK), which had a clearance period of three to five days for payments prior to modernizing in 2008. 

“The UK government wanted to compress that. They did look at having multiple automatic clearing houses but decided to go with a real-time payment system," said Burke. “The Faster Payments Service in the UK has been very successful."

While the speed of payments is an important consideration, data remains a vital piece of the equation, as the two are not always compatible. 

The benefits of modernization are far-reaching from fast data-rich transparent transactions to cross-border convenience, activity-based oversight and risk-based access

“If I look at the US, the clearing houses responded to the Fed's call for faster payments, and they have delivered, but they have also enabled the data component, which is key," Burke added. "Many corporate clients are not looking for speed if they cannot have the detail around what the payment is for." 

Burke says that Canadians have access to fast payments through Interac email money transfers, which recently expanded into the business market, and is also moving toward ISO 2022 standards as well as an Application Programming Interface (API). As a result, she adds, the country already has access to “fully modern, fully rolled out fast payments with data, so Canada should actually lead the pack, which is good news." 

The opportunity for Canada

While some countries, like the UK, already have real-time payments systems in place that only need to retrofit to ISO 2022 standards, Canada is looking to do a complete overhaul, which comes with far-reaching opportunities as well as considerations. 

“Looking to do everything all at once is extraordinarily ambitious, and I do believe the program will have to be somewhat paced," Burke said. “Certainly most important to the Bank of Canada is a replacement for our high value system, known as LVTS [Large Value Transfer System]." 

While the speed of payments is an important consideration, data remains a vital piece of the equation

Ambitious as Canada's payments modernization approach may be, Burke is optimistic about the implications for Canada, including richer data and remittance information, greater security, real-time 24/7/365 availability, the development of proxy and alias services, and new B2B capabilities. As a result, Canadian financial institutions should keep a close eye on Payments Canada, and potential rule changes that may be introduced as part of amendments to the Canadian Payments Act this year.  

Implications for financial institutions 

While the process will be gradual, it will nonetheless have significant implications in the short and long-term, explained fellow panelist Dan Hartley, Managing Director, Payments Modernization at RBC. He noted that the national payment systems are being modernized, including the underlying risk framework. 

“Moving from LVTS, which is really a hybrid payment system, to a true RTGS system will have impacts on intraday collateral requirements for direct participants" he said.

Hartley added that liquidity savings algorithms will be utilized within the new RTGS system to help support intraday liquidity and payment efficiency across the system.

“The issue of urgent versus non-urgent payments is important to what we do. Certainly the key structural, time sensitive payment requirements today for our clients and us include CLS Bank and CDSX, and these payments will continue to be large collateral consumers, " he said. “Overall, financial institutions need to be mindful that collateral requirements are expected to increase to support payments in future." 

Liquidity savings algorithms will be utilized within the new RTGS system to help support intraday liquidity and payment efficiency across the system

As it currently stands, phase one of the enhanced AFT initiative is set to go live in October 2018, an interim credit risk model was announced in March 2018, and the new real-time payment system is currently being designed with Interac with a target date of late 2019. 

The vendor selection process for new high value payments systems is currently underway with a target end date of 2020, and Hartley suggested meeting these timelines will depend on both the development of the technology and the collateral requirements that result. 

Realizing the potential while managing the risks 

The Canadian payments system is undergoing a significant modernization effort that seeks to speed the rate of payments and align the country with global standards. Canada is gradually evolving from its current hybrid system toward a true RTGS system, which will have significant implications across the board. While there are clear benefits to this transition, Payments Canada will have to balance them with the potential risks. As a result Canadian financial institutions should prepare for an increase in collateral requirements and liquidity needs as the modernization effort is rolled out.

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RBC Investor & Treasury Services Payments Canada Modernization Briefing (March 23, 2018)