How will Canada reinvent its payments framework for a post-pandemic digital reality?

Torys Quarterly: The race to transform: Canada’s financial services

Major changes are set to take place in the coming years to Canada’s payments landscape.

Alternative digital payment solution platforms have entered and expanded the market and niche offerings, ranging from independent online trading platforms to digital loans and new financing providers. Add to this mix the COVID-19 crisis, which has proven a major change agent accelerating the already fast pace at which digital transformation has been taking place in the financial services industry: for example, The Economist reports that “[i]n America mobile-banking traffic rose by 85% and online-banking registrations by 200% in the month of April”1.

To address the significant momentum for change taking place in the financial services sector, Payments Canada is undertaking a multi-year initiative to modernize the nation’s payments ecosystem. In this article, we explore the potential benefits and opportunities that lie ahead for the nation’s payment service participants.

Payments Canada’s modernization plan

Payments Canada is responsible for the operation of the national clearing and settlement infrastructure and is currently in the process of implementing a new real-time payments system. The new system (referred to as Real-Time-Rail, or RTR) will be comprised of two main components: 1) the RTR Exchange; and 2) the RTR Clearing and Settlement. The RTR Exchange will facilitate the real-time exchange of payment messages between participants, and the RTR Clearing and Settlement will perform the real-time clearing and settlement of transactions between participants.

The RTR will provide for immediate benefits, including: 1) 24/7/365 availability; 2) real-time message exchange, where payment and transaction processing and settlement will be fully completed within seconds (i.e., in “real time”); 3) immediate payment finality for payors and payees; and 4) support for the ISO 20022 messaging standards (the data rich global messaging standard that will serve to harmonize payment messages both domestically and internationally).

The greater availability of secure payments data is arriving just in time to spur growth of fintechs in Canada by enabling new financial services, including through open banking APIs.

In order to be a direct participant in the RTR, you must be a financial institution and member of Payments Canada, but it is worth noting that the Department of Finance has proposed to expand the scope of membership to new entities, including payment service providers2. The opportunity for new entities to become participants will allow for greater potential service offerings to be made available to end user customers in terms of the methods and ways in which customers may pay for purchases in the future.

Taking advantage of the new payments ecosystem

In order to plan for the implementation of the RTR, participants will need to ensure that their systems are compatible with the requirements of RTR. This will involve ensuring that the participant has in place the infrastructure to meet the technical requirements for connecting to the RTR and to the extent that a participant is a direct participant, through participating in the testing of the RTR system before it is used in production.

Businesses (both participants and non-participants) are also now presented with the opportunity to plan for and implement new strategies that take advantage of the operational benefits and additional functionality that RTR will introduce. One such example will be the opportunity for participants to have payroll and bonuses deposited immediately into the accounts of employees. 

Beyond these operational benefits, businesses should view the new payments landscape as an opportunity to re-consider their overall customer strategy: how will future efficiencies and functionality around payments impact customer behavior? How can these anticipated behavioral changes be leveraged?  What opportunities exist to provide enhanced offerings to customers?

In addition to a general strategic review, for those businesses involved in the handling of payments, the use of the standardized ISO 20022 messaging format presents an opportunity to revisit their data strategy and optimize the most effective use of information handled through the messaging format.

The ISO 20022 standard notably provides for significantly more data than other standards currently used to process payments. The new ISO 20022 represents a potential opportunity to better understand user behavior through data analytics, implement safeguards against potentially fraudulent behavior (through more robust fraud detection algorithms), and develop new customer-facing services or products that are responsive to customer needs.

The greater availability of secure payments data is arriving just in time to spur growth of fintechs in the Canadian marketplace by enabling new and improved financial services, including through open banking APIs. Along with these opportunities, businesses should anticipate changes in Canadian privacy laws that are likely to empower consumers and place heavier compliance obligations on processors of payments data. Our accompanying article takes a closer look at these changes and what business should expect and plan for.

As Canada modernizes its payment systems, players in the sector should not overlook the potential benefits and opportunities that may emerge. Businesses that have not already done so would be well-placed to explore the potential impact of the RTR on their business operations3 and adjust their overall business strategy to allow them to leverage any benefits, including new service offerings, to advance ongoing growth.

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1How the digital surge will reshape finance”. The Economist. October 8, 2020.

2 Read more here.

3 https://modernization.payments.ca/the-benefits/for-businesses/

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