Canada is on a multi-year journey to update its payments systems, ushering in modern technology that can support innovation and efficiency. The systems will be faster, more flexible, secure, and allow for new and innovative capabilities to be built. When it comes to cashless payments, Canada is already one of the world’s most cashless societies, narrowly edging out Sweden and the UK, thanks to the ubiquity of credit, debit, and prepaid cards and the availability of contactless payments.1 While payments modernization is a global trend, with 30+ countries having either already modernized or are in progress of doing so, Canada is poised to leapfrog ahead.
Carolyn Burke, Head of Enterprise Payments at RBC, discusses the benefits and implications of payments modernization for corporate and public sector clients, and the financial services industry.
1. What is the scope of Canada’s modernization program?
Working closely with the financial services industry, the Government of Canada, and the Bank of Canada, Payments Canada is replacing both of its core systems, the large-value transfer system (LVTS) and the automated clearing settlement system (ACSS), and introducing real-time, round-the-clock payments with enriched ISO 20022 data. It’s absolutely essential to the Canadian economy and financial system that the requirements for speed and efficiency are carefully balanced with safety and security.
This year, we passed two key milestones. First, a new credit risk model was introduced for the Automated Clearing Settlement System (ACSS), where the vast majority of retail payments are cleared, including both paper-based and electronic payments. The new credit risk model enhances the system’s safety and soundness, facilitates future innovation and, importantly, aligns our retail payments system with international best practices and risk management standards.
Second, Canada recently updated its batch processing Automated Transfer Funds (AFT) system to provide more convenience and choice for Canadian businesses by introducing a third daily interbank file exchange period, and faster funds availability. Our clients can move funds faster, make time-sensitive same-day payments, and have more time to send payments for processing, which is particularly beneficial to companies in Western Canada.
2. How does Canada’s modernization initiative compare to other countries?
Different countries have emphasized the retail systems as a platform for innovation, or the real time gross settlement (RTGS) for large-volume system safety and soundness. Canada, on the other hand, is doing everything to modernize all at once. It is an extraordinarily ambitious initiative, and one that requires extensive time and resources among all financial institutions. We’re working through how to best pace the initiative, and are leveraging the experiences other countries have had.
Certainly in low-value P2P, Canada can hold its own, compared to other countries. Canadians now have access to near real-time payments through Interac® email money transfers with a proxy alias. Recently, Interac® expanded into the business market, and is also moving toward ISO 20022 standards.
3. What opportunities are you most excited about and why?
It is an exciting time because we’re redefining the entire payments experience from start to finish. We put our clients at the centre of everything we do from modernizing the “plumbing” of the payments systems to leveraging leading solutions that makes banking simpler and convenient. Innovation has always been RBC’s core tenet. In the past seven months, we’ve met with over 100 corporate and public-sector clients across Canada in full-day greenfield sessions to discuss modernizing payment capabilities, and gain real insight into their pain points. We’re hosting several more client sessions next year. Engaging our clients is how we accelerate innovation. It will enable us to design and develop meaningful tools and services and a flexible infrastructure that will meet their needs.
All of the systems will enable access to rich data from ISO 20022. It’s one of the most important keys to unlocking friction-free payments.
Many corporate clients aren’t looking for speed if they can’t have the detail around what the payment is for. Enriched data gives context to the payments and allows businesses to begin to automate key business processes, such as accounts payable and accounts receivable. Currently, many B2B payments are made via cheques that carry invoice information. In a modernized payments system, invoice details travel electronically with the funds, or can be linked to the payment for easy reference and/or automated pick up, making for more straight-through processing, robust reporting, easier reconciliation, and a more secure transaction from start to finish.
4. How are financial institutions impacted?
Financial institutions will need to consider the implications on their short- and long-term liquidity and collateral requirements to support payments in the future. Canada is moving from LVTS, which is really a hybrid payment system backed by the central bank, to Lynx, a true RTGS system, with no central bank guarantee. That will impact intraday collateral requirements for direct participants.
Overall, we see immense potential. By leveraging a modern payments infrastructure that’s fast, flexible, data rich, and secure, financial institutions will be able to deliver new products and services. At RBC, we’re reimagining our services and redefining how we create value for our customers and aim to remain a leader in retail, commercial and wholesale payments in Canada.
Certainly when we can offer 24/7/365 payments travelling with enriched data and remittance information, it opens up doors to new automation and analytical capabilities for corporations, public sector organizations, and financial institutions. We’ll see new business models emerge, increased efficiencies, and greater speed to market, and adaptability to consumer behaviours. The ability to transform data into knowledge into value is the new competitive advantage that will differentiate all industries, not just banking.
5. What do companies need to do to prepare for these changes?
We are currently developing solutions that will allow businesses to take advantage of the opportunities and benefits that will arise from the upcoming changes. But, there are things companies can do to prepare. For example, determine how you want to manage 24/7/365 customer payments; think about your current infrastructure and how best to take advantage of the incoming information and how it might improve your cash application process; and, review and understand the opportunity to increase automation of historically labour-intensive payment activities. For instance, can accounts payable and receivable processes become straight-through?