On April 20, 2016, the Canadian Payments Association (the "CPA") released a consultation paper "Developing a vision for the Canadian payment ecosystem" (the "Consultation Paper"), outlining its planned vision for the proposed modernization of the Canadian payments system. The Consultation Paper was issued following the CPA's consultation with broad classes of stakeholders including financial institutions, fintechs, businesses, government and consumers.
Key Findings from Stakeholder Consultations
The Consultation Paper describes the CPA's findings from its broad industry consultation on user needs. Stakeholders identified the following features as desirable features for a modernized Canadian payments system:
- Near real-time availability of funds – when making a payment, funds should ideally be made available to the recipient in 60 seconds or less. While some types of payments (for example Interac e-transfers) currently clear fairly quickly, other types of payments (such as wires) can take a long time to clear, as anyone who has spent several hours waiting for a wire to clear on a large transaction is well aware. While not all transactions need to occur in real time (for example, pre-authorized and pre-scheduled payments may not be as time sensitive), businesses expressed the need for a better solution than wires for time sensitive payments.
- 24/7/365 availability – Real-time payments should be able to be conducted at all times of the day/ week/ year, rather than only during business hours.
- Enhanced payment data – The payor should be able to include data about a payment when sending the payment (similar to the information line available on a cheque right now). Such data could be very powerful and could, for example, be leveraged by accounting software to automate invoice reconciliation. In this respect, Canada is in the process of adopting ISO20022, an international payments standard, which includes this feature (for further detail on ISO20022 and potential privacy and security concerns relating to the adoption of ISO20022, please see our prior post " First Draft of ISO 20022 Standard for Real-Time Payments Released, Raises Potential Privacy and Security Concerns").
- Transparency of payment status – Both the sender and recipient of a payment should receive automatic notification on payment status (such as currently done for Interac e-transfers for example) and should be able to track a transaction in real time (similar for example, to courier package tracking).
- Routing of payments through information other than banking information– Payors should be able to send payments to a recipient by using information other than banking information, such as, for example, a telephone number or email address. This would serve to both protect the privacy and security of sensitive banking information (since this information would not have to be communicated) and also to make sending payments easier and more convenient.
- Improvement of cross-border payments – Cross-border payments should be faster, more efficient and more transparent. Both businesses and consumers expressed frustration with the current state of cross-border payments. To ensure cross-border payments in a modernized system are as efficient as possible, the CPA should ensure interoperability with international standards. The planned adoption of ISO2002 in Canada is a key component of achieving such interoperability.
In terms of regulatory framework, the CPA noted that various stakeholders favoured regulatory oversight that would support payment innovation in Canada. In particular, participants in the payment system favoured functional regulation of payment entities (where entities are regulated based on the type of service provided rather than on the type of entity they are), and were of the view that regulation should be based on outcomes rather than process, and that regulation should be principles-based rather than prescriptive. New entrants (such as fintechs) also expressed the need for improved access to the payment system. Achieving long-term cost efficiencies was also identified as a goal for the modernization of the Canadian clearing and settlement system.
Canada is part of the second wave of countries undergoing payment system modernization. A first wave of countries (which includes the UK, Brazil, Denmark and Singapore) have already completed their payments modernization process. The second wave of countries is still in the planning, design or build stage, and includes Canada, the US and Australia. The Clearing House in the U.S. is anticipating providing ISO20022-compliant real time payments by 2017.
Being part of the second wave, Canada is in a good position to take advantage of the lessons learned by the first wave. The Consultation Paper lists the following best practices learned from a review of other countries' experiences:
- Build a new payment system – Most countries are building a new, standalone system rather than attempting to modify existing infrastructure. Building a new system on the whole appears to be less expensive and faster than attempting to modify existing payment systems.
- Leverage existing resources – While the first wave of countries had to spend considerable resources into building new custom built solutions, the second wave is able to benefit from "off the shelf" options created following the first wave. It may also be possible to leverage some of the existing infrastructure to increase efficiencies.
- Ensure appropriate incentives – While some initial modernization efforts have been mostly government mandated, more recent efforts tend to be more focused on addressing user needs.
- Support adoption of near-real time products – There should be an alignment between the modernization effort and the commercialization of real-time payment applications (typically P2P solutions), to drive early adoption of the new payment system.
- Support B2B functionality – While P2P solutions have generally been offered first, B2B solutions offer the most substantial value and modernization efforts should also ensure to address B2B needs, including the need for speed, scale and data.
- Consider all types of payments – Modernization initiatives should not just focus on immediate needs for near real-time payments but also provide for longer term changes such as enhancing batch retail and high-value systems.
It is clear from the scope and depth of the Consultation Paper that the CPA is taking a very deliberate, inclusive, transparent and thoughtful approach to the modernization process, in an effort to most efficiently build a new Canadian payment system that encourages innovation and addresses user needs of the various types of participants in the payments ecosystem. In particular, the Consultation Paper points to the key importance of data and transparency in a modernized payment system, while recognizing the need to include features addressing privacy and security concerns.
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