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InstaPay Interview with Payments Canada

23/05/2017

InstaPay recently had the opportunity to talk with Jan Pilbauer, Executive Director, Modernization and CIO for Payments Canada. In this wide ranging discussion you can hear more about Canada’s payment system modernisation plans and the introduction of real-time payments.

Q: Please can you provide us with a brief overview of Payments Canada?

A: The Canadian economy depends on the exchange of billions of dollars each day. Payments Canada is responsible for the clearing and settlement infrastructure, and the underpinning business and legal rules essential for those transactions. In fact, we are involved – behind-the-scenes – in the vast majority of day-to-day Canadian commerce.  We are talking about $3M per second passing through our systems – it’s pretty significant, especially for something the end user doesn’t even notice.

We take our role as a connector and collaborator very seriously. We have a duty to Canada to provide safe, sound and efficient systems that look out for the best interests of end users. To achieve this, we work closely with stakeholders across the country and globally to create the necessary balance of rules and standards.

With our Modernization program, we are working to provide a platform that allows those in the payments ecosystem to innovate and provide convenient, safe and efficient payment options for Canadians.

Q: Why did you decide to change your name last year?

A: As we began modernizing the payments system to best support the changing needs of Canadians, it became clear that we were also changing as an organization. Our new name and visual identity reflects the organization’s transformation in a rapidly changing payments marketplace. It also signals our growing connections and new approach to serving the Canadian economy. We will soon celebrate one year as Payments Canada.

Q: Which systems are included within the scope of your program(s)?

A: The scope of the Modernization program is outlined in our Industry Roadmap & High-level Plan, and includes 5 key priorities (or pillars) for building the right foundation for the future of payments in Canada – one with the capabilities to enable evolving payment methods for many years to come.

The first is replacing our existing Large Value Transfer System, a centralized system for high value, irrevocable payments, and the Automated Clearing Settlement System, which clears and settles balances between participants for lower value, high-volume payments.

These will be replaced with a new core clearing and settlement system, which we are calling Lynx. And I really like the name.

Canada needs this new core system as a foundation for future changes. While the existing platforms perform well in a static environment, the existing rules and aging technology will not accommodate the significant changes that must be made to support the evolution of payments.

Next, Canada needs a faster payment capability in the form of a real-time clearing system. Canada is unique from other countries in that we already have some aspects of a faster payment capability in Interac e-Transfer. However, Canadians need more.

We envision a faster payments system that serves as a platform for innovation, where market participants can leverage our clearing and settlement capabilities to introduce new services and customer facing applications.

The third pillar of the program is enhancements to batch Automated Funds Transfer. These batch payments – like payroll and bill payments – are a cost effective and efficient payment type that have been retained by most countries that have modernized. In Canada, they will continue to operate along with any new real-time system, but with a greater focus on service – a more uniform experience across the country and in all time zones and faster funds availability for the payees. We will make batch payments faster and better.

Fourth, we must continue aligning all systems with new regulatory requirements and global standards. That includes changes to our retail system, the automated clearing settlement system, in the short term, which was recently designated as a prominent payment system by the Bank of Canada, to meet new risk management standards.

Finally, we will modernize our Policy & Rules framework and establish standards – such as ISO 20022 – to ensure we have the appropriate balance between high-level principles that foster innovation and competitiveness, and flexibility and prescription to ensure continued safety and soundness in our critical payments infrastructure.

Q: What are the main drivers behind the payments modernisation program?

A: There are three key drivers behind payments modernization in Canada are:

1. Resilience and Technology

2. Consumer and market demands

3. International competition

It’s no secret that the payments landscape is changing – in Canada and around the world. Evolving technologies are offering Canadians new ways to communicate, connect and conduct business, with some showing the potential to dramatically impact the way we pay. As a result, consumers and business’ needs and expectations for payments are evolving as well. There are also new players entering the payments arena – in Canada and abroad, and some of the world’s largest and most innovative companies are introducing payment products and services.

In order for Canada to remain competitive in the payments market, it’s important that we enable innovation and convenience. It’s all about making things easier and more convenient for the customer – the payment experience must be frictionless.

Q: How does real-time fit into your payments modernisation plans?

A: The first phase of the Modernization program was the development of a Vision for the Canadian payments ecosystem, an industry-wide consultation that identified eight needs of a modern payments system.

One of the two most consistent findings in the feedback was around faster payments. A real-time payments capability is a key pillar of our Modernization plans. An always available system that delivers funds in a matter of seconds will satisfy the needs identified in the Vision, including real-time clearing, rich remittance information through ISO 20022, and enhanced functionality to better serve consumers, small and medium sized businesses. Another very consistent theme was requirement for rich data traveling with payments.

Q: When are you expecting to introduce realtime? What will be the initial service offered and channel supported?

A: We are early into the process, but we have some expectations around how this should look like in Canada: The real-time rail will be an always available system that delivers funds in a matter of seconds, and provides rich payments data based on the ISO 20022 payment  message standard. It will provide enhanced functionality to better serve consumers, small and medium-sized businesses, by providing easier, more convenient payments that are secure. The settlement model will also support innovation for expanding access in the future and adapting to market needs.

We have defined detail requirements, are in the process of evaluating a potential service provider and we hope that the implementation of this new real-time clearing rail can begin as soon as possible. Of course our rail needs user-facing services, we call them overlays, in order to bring the benefits to the market place. We are hoping to secure first few overlay services for the time our rail goes live and we are excited to see what else comes to fruition after that.

Q: Will Canada have one national instant payments system (like the UK) or can we expect multiple competitive schemes to be launched as in the States?

A: The Canadian marketplace differs from the US, in that we have fewer players in the market. Our objective is to enable innovation and we will offer robust core real-time clearing capability with a strong settlement model that will allow various industry players to build innovative services on top. However, if there is another competitive clearing scheme launched next to our offering, we won’t prevent it. At this point it seems unlikely give the size of the Canadian market and we anticipate that the Canadian experience will be more similar to that of the UK.

Q: Which country payment schemes are you watching most closely and why do you highlight these ones?   

A: Countries around the world have launched major initiatives to modernize their national payments infrastructure and support innovation in payments. So, as Canada is not the first country to modernize, we took a look to some exciting developments for inspiration. Our international research has actually influenced creation of our Roadmap.

For example, in the UK, users can send and receive payments using a mobile number and, more recently, the system has expanded to allow customers to purchase and use bus tickets through their smartphones, and to send and receive electronic gift cards using mobile payments.

The US also introduced recurring direct payment, which is giving charities the opportunity to set up recurring donor payments, significantly enhancing their fundraising efforts.

In Australia, BPAY is transforming the way people pay their bills, making it super simple for them to do so from their mobile phone. This gives customers choice and convenience and benefits businesses with better cash flow and reconciliation.

At a more foundational level, China is one of countries where the payments have transformed the most. Point-of-Sale payment experience is now quite different there. In addition, they have opened up access to core payment systems to a greater numbers of direct participants.

And Sweden is one of modernized countries to enhance batch payments to offer intraday reporting for treasury management, automated notifications and messages, automated accounts receivable, electronic invoicing. Batch continues to be the “workhorse” of many payment systems.

Q: How fast a customer experience time do you feel is necessary?

A: In the Vision for Canada’s payments ecosystem, the need for faster, real-time payments was defined as less than 60 seconds – but we’re aiming for less. Today, even a payment made in a minute is too long, as consumers increasingly demand one-click, instantaneous service. Near real-time experience, in a matter of seconds, enables additional use cases.

Q: What will be the likely maximum transaction limit that you will support at the launch of instant payments?

A: At this point, it’s too early to confirm transaction limits. But we intend to be as flexible as possible in the core clearing infrastructure and design for potentially higher value flowing through the system. The overlay service providers, on the other hand, will have to develop their risk models, authentication/authorization mechanisms, and will likely introduce transaction limits that suit their business model.

Q: Which use cases are expected to drive real time payments adoption in your country?

A: The most common request we heard through the Vision was for near real-time availability of funds to support time-sensitive transactions. This goes across various use cases – consumers, businesses and governments. As we anticipated, consumers seek a P2P experience that is fast and simple “like using cash” but with enhanced functionality. They expressed the desire to use electronic payments for more types of transactions, with additional data and for higher values, truly in near real-time and with a simple interface. Somewhat surprising was the commercial appetite for real-time payments: small merchants and other organizations (such as schools) typically only accept payment by cheque. The lack of a convenient, affordable electronic options hinders the migration away from paper payment instruments.

In terms of driving adoption in Canada, both consumers and businesses will benefit from the ability to send payments instantaneously, more data traveling with payments will make invoicing and reconciliation seamless, more efficient and support informed decision-making, as well as improve cash-flow management.

Through our research and market insights, we have learnt that Canadians have already embraced near real-time consumer options where they are available: for example, consumers have access to a secure, near real-time money transfer service offered by most financial institutions in Canada. But for transfers over a couple of thousand dollars and for business to business payments, the only same day payment option is a wire transfer. Wires can take several hours to reach the payee, require detailed payee account information for routing, and are more expensive than cheques and AFT payments. We expect that our new real-time clearing rail will help with all of these.

Q: Will you plan to support proxy identifiers as an alternative to account numbers to initiate a payment? If so which ones?

A: Yes, and we have built our requirements to account for this functionality. Paying by using a simple alias (a “proxy”) was one of the findings in the Vision: Canadians want the ability to pay other consumers and businesses using information that they already have such as an e-mail address, telephone number or even social media identifiers, rather than using bank account information.

In addition to making transacting easier, sharing a ‘token’ or alternate identifier other than account number is perceived by consumers to be more secure. Businesses of all sizes also seek the ability to safely route payments using publicly available information. This feature would be particularly valuable for governments and businesses that still rely heavily on cheque payments due to the challenges and privacy concerns associated with capturing account numbers. This may also support better ways to connect with the under-banked/unbanked.

In addition, there are a lot of activities happening in the digital identity space in Canada and we are connected to that. A ubiquitous digital identity for all Canadians can solve some of the challenges we face in payments today.

Q: How do you expect settlement of transactions to be supported?

A: This is also to be finalized later in the process. We have to find the right balance of allowing transfer of good funds, operating 24×7 when markets and central banks are generally not open for business, with broader access and overall efficiency. There are various models out there ranging from fully pre-funded settlement models to fully or partially collateralized deferred-net-settlement models. Wherever we land, we have to ensure flexibility for the future. With the pace of change in the payments world, the changing actors and new products appearing every day, a model we choose today may not serve us very well in the next few years. We have to be flexible and adapt the system without requiring a significant re-architecting.   

Thank you Jan very much for taking part in this interview. We appreciate you making the time to talk with us. The InstaPay Community will benefit from hearing about your program, priorities and timescales. Good luck in delivering the projects.

Author: Art Division