Canada is set to overhaul the way financial transactions are processed as changing technology and globalization reshapes the way individuals and businesses move money and access their funds.
Payments Canada, a not-for-profit group that clears and settles payments on behalf of all chartered banks in Canada and other financial institutions, is poised to roll out a five-year plan to update its outdated processing system on Thursday. This behind-the-scenes infrastructure clears and settles $197-billion worth of payments made by retail customers and large financial institutions each business day. The changes will be largely invisible to consumers at first, but over time will affect the way goods are bought, money is transferred and the amount of information that can be attached to payments.
The change comes as rapid changes to technology have caused consumers and businesses to demand faster and simpler payment processing than the current system can handle. And the costs will add up as Payments Canada prepares to spend as much as $250-million to make the changes. The organization's 115 members will also incur their own separate costs as they adjust to the new standards, legal frameworks and regulations. Some of the big banks are already budgeting and readying teams to tackle the transition.
"All payments are a friction in the economy and commerce. If payments aren't smooth, we all kind of suffer," said Jan Pilbauer, executive director of the modernization program at Payments Canada, which was formerly known as the Canadian Payments Association. "We know that Canadians expect a bit more from payments."
The legacy Canadian payment-processing system is creaking under the weight of increased real-time retail payments, new entrants to the payment space, changing global standards for sending payment messages and regulatory pressures. Many of the old systems designed to process cheques and transfer funds can take many hours – even multiple days – to clear.
Financial institutions also told Payments Canada in a consultation process that they want richer business data to be able to travel with payment information.
"So, if you are paying an invoice, I don't see why the invoice couldn't be part of the payment. Once the payee receives the payment they can see what the payer decided to pay for and what they decided not to pay for, and the reconciliation [of the data] wouldn't be manual," Mr. Pilbauer said. As payments become evermore global, many countries are standardizing this process and Canada wants to align itself with these trading partners.
Consumers and businesses also increasingly want to be able to initiate and receive payments at all hours of the day, any day of the year. To cater to that 24/7 demand, the electronic-payment space has attracted fintech startups offering inventive digital wallets and in-app payments. But the old clearing and settlement systems don't have the access tools and other features needed for easy development of new applications and software.
In a consultation paper aimed at stakeholders earlier this year, Payments Canada said that "Canada's core payments systems are largely outdated and were not designed to support emerging needs for faster, data-rich payments and regulatory change."
"People have to be able to use the [new systems] to build new, exciting and cool services," Mr. Pilbauer said. He likens the project to building a good road with clear laws, where different new business developments such as electric vehicles, driverless cars and Uber rides can all make use of the same motorway.
Canada lags many of its global counterparts in developing a more modern payment system. Britain, for example, implemented faster payments infrastructure in 2008, and other regions such as the United States and Australia are also in the process of speeding up transactions. Some of these countries are now preparing another wave of modernization as innovation in smartphones and other technologies keeps changing end user's demands.
After observing the successes and failures of these efforts, Canada is now taking a broader approach that also includes initiatives to strengthen legacy systems, Mr. Pilbauer said.