Canada’s real-time payment rail (RTR)
The global payments ecosystem is trending strongly towards real-time, data-rich ISO20022 enabled payments, says Jan Pilbauer, Executive Director of Modernization & CIO, Payments Canada, as he outlines the country’s plans for an instant payment system that is on trend to begin by the end of 2019.
The world is seeing an explosion of faster and smarter payment offerings across Asia, Europe, Australia and North America, with the SCT Inst scheme, NPP and US TCH RTP platform just some of the latest infrastructure examples.
Payments Canada began responding to the global and domestic trend towards faster payments in 2015 with an ambitious modernization initiative that I will provide an overview for here. Our plan includes the launch of a new Real-time Payment Rail (RTR) by the end of next year but it is part of a wider overlapping, on-going project.
Rather than approaching modernization as a series of upgrades, we began by imagining how we could facilitate the Canadian financial sector’s goal of a fast, flexible and secure payment system that is efficient, convenient and interoperable. We want a system that will promote innovation and strengthen Canada’s competitive position.
Our end goal is to optimise the way that Canadians make payments, resulting in a richer set of payment options to meet emerging needs and an improvement in the supporting infrastructure. The user experience will enable Canadian consumers and businesses to focus on payment parameters such as speed, cost and efficiency, rather than the technical methods of transfer such as wire; automated or electronic funds transfer (AFT/EFT); electronic data interchange (EDI); or real-time payment.
We answered this challenge with an ambitious plan that pushes the bounds of the possible. The plan is underpinned by three new systems, detailed in the Payments Canada Modernization Target State, which is our detailed PDF project plan. The three new overlapping Canadian payment systems are:
- Lynx: A new high-value payments system.
- Retail clearing with enhanced batch payments: Formerly called the Settlement Optimization Engine (SOE) this is a three-phase overhaul, with the first stage due in 2021. It will ultimately mean that all participants in retail bank and e-commerce payments in Canada eventually move to a centralised exchange model, at their own pace.
- Real-time payment rail (RTR): This is the supporting infrastructure due by the end of 2019, with additional releases to follow thereafter. Banks offering overlay services and other payment service providers (PSPs), e-commerce websites, mobile players and so on, can all connect to the RTR and bring their own overlay services.
All the three new principal Canadian systems that are planned will operate under an enhanced risk, regulatory and rules framework that balances the need for safety and soundness with accessibility. Fundamental to each system is the introduction of the ISO 20022 global payment messaging standard, which includes rich remittance information along with payment instructions.
Our intention is for ISO 20022 messaging to form the foundation for payments in Canada. This includes not only financial institution (FI) and corporate payment message formats, but also ISO 20022 terminology, component and element definitions, business models and application programming interfaces (APIs) that are used within the payments ecosystem.
The messaging standard and APIs will aid interoperability and access. We believe that the wholesale adoption of ISO 20022 is a strategic move that will safeguard Canada’s global competitiveness for years to come. Its popularity is evidenced by SWIFT’s on-going discussions around migrating from its traditional MT message formats to ISO 20022 and by the US’ ISO adoption plans that are already in place.
RTR & Interac
As mentioned, the real-time payment rail (RTR) is expected to go live in the latter half of 2019, with additional releases to follow in 2020 onwards. Rolling it out first is fortuitous for several reasons. Canadian consumers and businesses need to make fast, cost-effective payments. Businesses are also seeking the ability to send and receive payments faster in order to satisfy customer demand and streamline business processes. Additionally, they want to ensure they have a level playing field to compete with countries like the US, UK, Singapore and many others who have already deployed instant real-time payment systems.
At the same time, Canadian consumers have already embraced person-to-person (P2P) payments through Interac e-Transfers. This Canadian back-end system presently connects banks allowing them to offer fast, but not instant, consumer payment solutions. In this respect, Canada is exceptional among adopters of faster payments services since we have an existing system that offers many of the features of a real-time payment system.
In 2016, Canadian consumers and businesses sent 158 million money transfers using the Interac platform, totalling over CAD $63 billion in value. There is a strong desire to capitalise on Canadians’ familiarity with real-time value-added services to address other applications, such as bill payments and reimbursements, as well as to increase transaction limits on existing payments.
It’s clear that financial technology (FinTech) enabled firms that specialise in payments (PayTechs) and many other new market entrants are looking at P2P payments as an area for disruption. There are a plethora of P2P solutions like Venmo, Zelle and Square Cash emerging around the world that offer alternative solutions. That is why it is so important that Payments Canada consider an access model that finds the right balance between safety and security, while still promoting innovation. We will believe this strategy will set Canada up for a future of brilliant innovation in the financial sector.
Robust functionality & overlay services
While details have yet to be finalised, the objective of the first RTR release in the second half of 2019 is to deliver robust functionality and quick end-to-end payment processing timeframes supported by an access framework and clear financial risk and settlement model. Other features include a high level of security with adaptability to emerging threats, privacy, and to risk management tools that can deliver the most secure payments experience possible.
The RTR will form the technology platform and business framework upon which overlay services can be developed. These value-added services will have the benefit of real-time payment capability – instant and irrevocable exchange and clearing of payment items with a robust settlement model and shared services that support exchange and clearing.
We foresee that the initial shared service will consist of an alias database that will enable the use of a payee’s alias in addition to a transit / routing / account number. For example, one might send money using a mobile telephone number or an email address, instead of a bank account number as is traditional.
A settlement model that minimises credit risk will support the safety and soundness of the RTR and broader system access. There are currently two settlement models under consideration:
- pre-funded real-time settlement
- & deferred net settlement.
Whichever settlement configuration is finally chosen, prefunding cash or acceptable forms of collateral will be held at the central Bank of Canada. We will be working closely with the Bank of Canada, member FIs and other stakeholders in the coming months to decide the most appropriate financial risk and settlement model for the Canadian RTR.
Adding value via a data-centric system
The RTR will provide users with a host of benefits. Faster, more efficient and ‘friction-free’ payments that are transparent and data-rich is the end goal. Eventually, these payments will transcend borders and form a platform for innovation. When transactions are exchanged and cleared in real-time, payees get quicker access to funds. The initial shared service will add convenience.
While speed, convenience and an expanding array of real-time payment services are high on the list of benefits for end users, we expect that data will create the most opportunities for business. The methods that Canadian businesses currently employ to process payments cost them CAD $2.9 billion to CAD $6.5bn annually, according to a new study by Payments Canada and EY Canada.
In the same vein, Payments Canada’s research into reducing the use of cheques and replacing them with data-rich electronic payments instead anticipates savings of as much as CAD $4.5bn over five years. The opportunity is even greater when we consider the impact that automating payments reconciliation could have on liquidity and working capital management – key concerns for corporates.
Adoption of the richer ISO 20022 messaging standard will enable FIs, FinTechs / PayTechs and PSPs to leverage the rich transaction data that flows alongside payments. They can better understand market trends and create new products and value-added services that meet emerging business or consumer needs, especially those that create efficiencies for end users.
The ISO20022 messaging standard also enables payors to be rail-agnostic and to choose the right speed and cost according to the need. In addition, the standard will help facilitate cross-border commerce, given its deployment in other real-time systems in the US to our south and elsewhere in the world.
Employing ISO 20022 with enhanced data will provide the compliance information, rigour and granularity required for regulatory procedures, covering fraud, anti-money laundering (AML), know your customer (KYC) and other such reporting obligations and tax audit activities. It will also engender greater transparency in payments, ultimately resulting in opportunities for greater customer service.
A great leap forward
As with any initiative of this magnitude, benefits will accrue as the rollout progresses: from faster, more convenient and data-rich payments, to easier cross-border commerce, to a wide variety of value-added real-time payment services that will benefit consumers and businesses alike.
The RTR and Canadian payment system overhaul will play a pivotal role in underpinning financial sector innovation. We expect it to spur growth in the PayTech industry, bring new players into the payments ecosystem, and ultimately help to stimulate and safeguard the Canadian economy.
Canada’s forthcoming RTR represents a giant leap forward in the Canadian vision of a fast, flexible, secure and interoperable payment system. It’s our belief that it will assure Canada’s place as a leader on the world stage.
- You can learn more about the Payments Canada Modernization plan by clicking on the highlighted text and reading this earlier InstaPay text interview and InstaPay video interview carried out at the Sibos 2017 trade show in Toronto in October.