With an evolving payments landscape, Canada is marching ahead to modernise its core payments infrastructure with a vision to build a modern payments system that is fast, flexible, secure and promotes innovation
Developments in technology, evolving customer behaviour and new market dynamics are all catalysts for change in the payments space.
Recent research has suggested that banks are committed to investing in areas such as digitising customer journeys, introducing machine learning, and improving technological and operational resilience, and this hasn’t been swayed by the pandemic.
Real-time payments are becoming increasingly popular as they allow participants to make and receive instant payments, providing convenience, speed, and faster availability of funds.
Payments Canada recently selected Mastercard’s Vocalink as the clearing and settlement solution provider for the country’s new real-time payments system, the Real-Time Rail (RTR).
“Ultimately, Canadians are seeking choice and convenience. Technology, payments innovation, and shifts in the ways that Canadians make payments are all contributing to our developing payments landscape,” says Ryan Grundy, lead, industry relations, Payments Canada.
Experts say Canada continues to hold a strong position among institutional investors on the world stage, in keeping with the strength of its financial markets and ‘big six’ banks — the National Bank of Canada, Royal Bank, the Bank of Montreal, Canadian Imperial Bank of Commerce, Scotiabank, and Toronto Dominion Bank.
Canada’s financial sector features robust and mature markets, stability and transparency, proven infrastructure, efficient settlement mechanisms and a well evolved regulatory framework – along with a focus on controlled innovation.
In line with the consolidated nature of Canada’s financial sector, the payments landscape also focuses on the major bank-driven players.
“In Canada, we see a synthesis of domestic innovation combined with global connectivity, with local players deploying Canadian solutions where they make sense according to Canada’s financial markets and infrastructure, while also driving connectivity or access to global platforms where either scale and accessibility make them the right direction — or, particularly in the retail space, where client demands and appetite for global solutions fits,” explains Lloyd Sebastian, vice president, global financial institutions, at CIBC Mellon.
For example, Interac is a payment network jointly owned by the consortium of banks, which links the banks along with other financial institutions, retailers and others to enable more seamless electronic financial transactions.
According to Sebastian, the organisation drives a significant majority of email money transfers in Canada, competing effectively against global solutions.
With Canadian consumers concentrated on a small group of big six players who offer integrated Interac services, that is likely to continue to shape consumer use.
Payment system modernisation and effective regulatory oversight are key themes, and while these have perhaps been accelerated by the pandemic the core initiatives and impetus predate 2020, Sebastian highlights financial market participants are aware that when it comes to payments, efficiency and convenience are a top priority.
Marching ahead
In line with efficiency and convenience priorities in Canada, Payments Canada is marching ahead with its journey to modernise the country’s core payments infrastructure.
“Its vision is to build a modern payments system that is fast, flexible, secure and promotes innovation,” says Sebastian.
As part of these developments, Payments Canada has selected Mastercard’s Vocalink as the clearing and settlement solution provider for the country’s new real-time payments system, the RTR. Expected to launch in 2022, RTR will support payment information travelling with payments and act as a platform for innovation, enabling the introduction of new payment products and experiences.
While RTR is operated by Payments Canada, it is underpinned by the ISO 20022 data standard, and regulated by the Bank of Canada. Canada’s new real-time payments system will consist of two components including a clearing and settlement component provided by Mastercard; and an exchange component.
Speaking at the time of the announcement Sasha Krstic, president of Mastercard in Canada, commented: “As a company that operates real-time payments systems, across card and account rails around the world, we’ve seen first-hand how consumers, businesses, and governments benefit from the efficiency, transparency, and innovation they provide.”
Indeed, there is lots of ongoing activity in Canada’s payments ecosystem. As well as the upcoming launch of the RTR system in 2021, Lynx, a new high-value payments system to replace the Large Value Transfer System is set to launch this year.
“Introducing Lynx is a fundamental part of Payments Canada’s modernisation program that will transform the country’s payments ecosystem. Lynx will replace Canada’s current Large Value Payments System. The Lynx system will be a world-class, high-value payments system built in compliance with Canadian and international risk standards and will support the global ISO 20022 messaging standard,” says Payments Canada’s Grundy.
Lack of data and transparency within payment messages is a major challenge in Canada’s payment space and this creates a number of inefficiencies for businesses of all sizes.
This includes labour-intensive payments reconciliation, limited predictability of cash inflows and outflows, difficulty tracking cross-border payments, and continued reliance on manual back-end processes.
As Lynx and RTR will be underpinned by the ISO 20022 messaging standard, they should be able to support businesses in overcoming these challenges.
“The standard enables the transfer of rich data with payments, a change that has the potential to improve automation and efficiency, reducing many pain points for Canadian businesses,” explains Grundy.
The platform for Canada’s large value transaction system (LVTS) is targeted to be migrated over to its replacement Lynx in Q3 2021.
“This upcoming change should enhance the SWIFT processing of payments and benefit processing for participants as Lynx will be a true real-time gross settlement system, helping to enhance the speed and efficiency of clearing Canadian dollar payments,” says CIBC Mellon’s Sebastian.
Meanwhile, the Canadian Depository for Securities (CDS) is aligning its efforts with the modernisation of Canada’s payments infrastructure for its participants.
For example, efforts are underway by TMX-CDS for the Post Trade Modernization Project, a new technology platform for Canadian market infrastructure that is designed to deliver an integrated technology platform for the TMX-CDS systems.
The future of payments in Canada
The payments ecosystem in Canada is evolving and experts expect it to continue to be influenced by domestic and international innovation, payment system modernisation, as well as efforts from the regulators to define the payments industry of the future, and consumer demand.
Grundy suggests broader access to Canada’s payments systems will enable payments innovation and competition.
“We welcome the Canadian government’s proposed retail payments oversight framework as an important step towards supporting broader access to core payments infrastructure,” he says.
Open banking is another area industry participants in Canada expect to see evolution in the coming years. Open banking is a global development that allows end users to share financial data with, and initiate payments to, entities that they choose.
Grundy comments: “The ability to selectively share data has the potential to fuel innovation and competition, and to support Canada’s overall global competitiveness. Payments Canada is pleased to be a part of the Department of Finance’s exploration of this initiative.”
Another area that is changing is central bank digital currencies (CBDC), a trend being driven by declining cash use and new payment options presented by cryptocurrencies, stablecoins and other reserve currencies.
Experts believe that digital currency has the potential to transform the payments industry and beyond, but it also has risks and complexities that need to be considered.
“There is an opportunity for Canada to determine the rules, standards, education and protections that should be in place to allow Canadians to take advantage of digital currency, in support of a strong and safe base from which the broader marketplace (including the payments industry) may compete and innovate,” affirms Grundy.
Meanwhile, CIBC Mellon’s Sebastian says: “We can expect to see new technologies, response to consumer demands on both the institutional and retail front, and of course the relentless pressures of competition, innovation, efficiency and regulatory evolution in response to market change.”
Additionally, there is expected to be a continued shift toward digital and contactless payments which is something that has been increased amid the ongoing pandemic environment.
With much opportunity on the horizon for Canada’s payments ecosystem, Sebastian concludes: “Canada has good bones for payment innovation. On a global scale, Canada is recognised for our highly-skilled, well-educated and diverse workforce, status as a hub for technological innovation and advanced infrastructure.”
