The Ontario task force on competitiveness, productivity and economic progress recently singled out the “dead cash” on the balance sheets of businesses as an opportunity to boost the province’s prosperity.
If we want to give Canadian productivity and competitiveness a big shot in the arm, let’s use that cash to build a proper digital payments system for the 21st century.
Few people understand a system that that daily touches every single Canadian: the “payments system”. Even fewer appreciate the profound ways in which social and technological forces are changing the way we pay for goods and services. Almost no one understands the tens of billions of dollars of savings and the dramatic improvements in services delivery that governments and the economy could realize each year by automating processing and making the payments system digital.
The federal task force for the payments system review identified specific investments required by business and government to build a modern digital payments system that would realize billions of dollars in savings, substantial gains in productivity and service delivery and improved global competitiveness.
Finance Minister Jim Flaherty gets it. He has taken a number of important first steps to put payments on the national agenda. In Budget 2010, Mr. Flaherty signalled his concern about the ability of the payments system to keep up in light of new competitors and innovation and created the task force. The NDP get it; they have introduced a Private Members Bill to require the implementation of all four of the task force’s recommendations.
The task force recommended that the federal and provincial governments implement electronic invoicing and payments (EIP), partner with the private sector to create a mobile ecosystem, propel the build of a digital identification and authentication (DIA) regime and overhaul the governance of the payments system. Implementation of these recommendations would modernize our payments system and could save Canadians as much as 2 per cent of GDP in productivity gains, equivalent to $32-billion in annual savings.
Government leadership is critical to accelerating the shift to digital payments. Indeed, no country has successfully made the transition without government intervention.
Implementation of EIP requires corporations and governments to invest, primarily in business process and accounting software (a neglected area according to the Ontario report). However, these investments would produce substantial returns; organizations are able to reduce the cost of processing invoices (both receivable and payable) by 60 to 80 per cent. With the help of McKinsey and Company, the task force estimated the benefits of automating 80 per cent of accounts receivable and payable processing and payment at $7.7-billion annually -- $5-billion for large enterprises, $1.4-billion for governments, $700-million for small and medium companies and $600-million for financial institutions.
Financial institutions would need to make the largest investment – more than $1-billion each to replace their 35-year-old core banking platforms with modern systems capable of supporting immediate funds transfer and carrying the information their customers need to automate processing. This investment is also essential for banks to compete with new, better-equipped entrants to their traditional payments market, players such as Google, Apple, Amazon, Facebook and Paypal.
These new entrants use cloud computing and smart devices on the mobile internet to deliver instantaneous transactions. Banks use batch processing on mainframe computers, run over private networks and struggle to meet customers’ expectations for faster, better and more efficient products and services. A recent report by IDC Financial Insights showed that 75 per cent of the fastest growing banks globally had replaced their core systems. Sticking to old systems stifles a bank’s ability to compete with new, better equipped entrants to the market.
Strong banks have served Canada well over the past five years, but banks weakened by lack of investment and unable to compete with new entrants would do serious damage to the Canadian economy.
Twenty-seven members of the Single European Payments Area, the BRIC countries, even Malaysia and Romania, are significantly outpacing Canada’s transition to digital payments. Sixty per cent of business-to-business payments in Canada are still made by cheque. The U.S. makes less than 40 per cent of B2B payments by cheque, making it 50 per cent less dependent on paper than we are. Germany, Finland, Sweden, the Netherlands and the U.K. have almost eliminated paper payments. Not surprisingly these countries have demonstrated strong productivity gains over the past five years, leaving Canada to fall behind.
Canadian governments invested heavily to develop websites for government services; in 2007 Canada was the world leader in e-government. Over the past five years, we have fallen to number 16 as our investment has not kept pace with other nations. The same countries (mentioned above) that eliminated paper payments and automated invoice processing – from application (or invoice) to payment for government services -- are realizing 75 per cent cost reductions and dramatic improvements in service.
Instead, Canadians print an application form from a website, fill it in by hand and send it by post to the government office where a clerk inputs the information, processes it for payment, cuts a cheque and sends the cheque by post. Often customers have to contend with bank holding periods or charges from cheque-cashing services to get their money.
Self-service websites would allow Canadians to complete and submit their application online and receive payment directly into their bank account. Given the age profile of our civil service and our population it is imperative that we act now. Otherwise we will require an army of clerks to process the benefits requested by retiring baby boomers.
Fortunately, some progress is being made. The Payments Modernization Project led by Public Works and Government Services Canada is making progress towards the elimination of paper in federal government payments to citizens and businesses by April 2016. The next big step will be mandating electronic invoicing and payments.
The banks and the wireless carriers are working together to deliver mobile payments. CIBC and Rogers have begun rolling out their mobile payments service. According to Enstream, the wireless carriers newly created Trusted Services Manager, the service will expand to other banks and other carriers in 2013.
British Columbia and Nova Scotia have announced plans to issue digital credentials early in the New Year. A public-private partnership has been created to develop standards and frameworks for relying parties to authenticate these credentials.
Immediate action by corporations and governments to accelerate the transition to digital payments and processing would benefit us all. Putting the “dead cash” to work to dramatically reduce costs and improve service would boost productivity and competitiveness and ensure a better standard of living for Canadians in the digital 21st century economy.
Patricia Meredith was the Chair of the Task Force for the Payments System Review. She has been a Senior Advisor with Monitor Group Canada and a Senior Financial Services Industry Executive for over twenty-five years.