25 Sep 2020  /  by:

Meadhbh Monahan, Communications Specialist

  /  8 minutes

Ensuring the Safety and Soundness of Payments for the Credit Union System

Meet Sue Whitney, the payments guru who is leading Central 1 on our Payments Modernization journey. As VP of Payments Strategy, Sue has brought to Central 1 and the credit union system her vast experience of driving transformational change within Canada’s payments system (in the public and private sector). She was recently appointed to an additional three-year term on Payments Canada’s Member Advisory Council (MAC), a body which is mandated to provide counsel and advice to the Payments Canada Board on issues surrounding the clearing or settlement of payments and the development of new technologies.

Sue WitneyWe sat down with Sue to discuss the opportunities for innovation within Canada’s Payments Modernization process and how Central 1 is ensuring we have a safe and secure payments platform for Canadians from coast to coast– a critical factor to the success of the credit union system, the financial services industry, and the overall stability of the Canadian economy.

Tell us about your career to date and how your experience prepared you for your current role in Central 1, where your focus is on helping credit unions grow.

My introduction to payments came as a regulator. As Chief of Financial Institutions and Payments at the Department of Finance, I gained a deep understanding of the machinery of government, the politics of payments and the vital importance to the economy of central payments infrastructure.

As Interac’s Head of Fraud Stakeholder Relations, I charted their course for moving to chip cards and their overall strategy for managing debit card fraud, which was emerging as a problem. At that point, Interac was taking proactive measures to reinforce consumer confidence in using debit cards to access funds in their bank accounts. Being involved in this project gave me an appreciation for the importance of risk management in underpinning payments. It also galvanized my passion for payments as I witnessed first-hand the importance of simplified payments experiences for Canadians’ everyday lives.

As Visa’s Head of Strategy and New Products I drove the rollout of contactless payments, mobile wallet solutions, money transfer, prepaid and e-commerce using debit. Visa spent a lot of time focusing on delivering innovation which was sustained by innovative modern risk management: the two go hand-in-hand.

Moving to Payments Canada was a big change for me. As Head of Product Strategy and Head of Industry Relations, I grew to appreciate the great challenges and opportunities for credit unions in payments given the scale of change and impacts on financial institutions across the country as well as the strong desire from regulators to see the change that enables small financial institutions to deliver innovation and competition. My close work with regulators helped me appreciate the nuances of the regulatory obligations and how they are changing, which is helping me now as I work to ensure Central 1 is compliant with these regulatory obligations.

How do you view Payments Modernization? 

Payments Modernization is about being competitive in the global payments space. A key driver of modernization is ensuring that Canada’s core payments infrastructure meets the very best in global standards for managing financial risk. This will be achieved by adopting global standards set out by the Bank of International Settlements and Central Banks around the world. Central 1 is therefore actively focused on building up its infrastructure to meet the new standards, particularly related to clearing and settlement. Getting these foundations right will allow us to adopt different participation models and drive innovation.

Payments modernization is a critical step to thrive in a post  Covid-19 world where the need for innovative digital payment services is greater than ever. Just think about how our own payment behaviours have changed in recent months, moving towards more digital forms of payment and away from physical (cash and cheque) payments.

Where I get very excited is working with our credit union and financial institution (FI) clients to roll out a plan to deliver differentiated payments experiences for their members. From their perspective, knowing where to spend time and energy to make a difference for the end customer is a challenge. They can have confidence that Central 1 is building our processes, practices and technology to underpin their journey to innovation.

Payments Modernization offers significant opportunities to our clients in being able to offer new solutions to their members e.g. new product offerings, new data and insights about the customer that can help identify new ways to deepen your relationship and new capabilities to give customers higher levels of service, in real-time on a 24/7 basis. ​

Where do you see opportunities for the credit union system?

I call the Real-Time-Rail (RTR) the “jewel in the crown” of Payments Modernization because it has the awesome combination of speed in transaction (sub 10-seconds) and rich data. Under RTR, low flat pricing, open access rules and a new risk management model will enable new partnerships and collaboration, making it the foundation of modern, fast and secure payments. This has been the experience in markets all over the world and it will be great for Canada to get this truly game-changing system in place. Once the RTR arrives, it is very likely that customers will gravitate to it more and more and reduce usage of other legacy payment methods. It is set to become a platform upon which fintechs and FIs will congregate to build solutions that address customers’ specific pain points. For example, opportunities ahead could include: Central 1 collaborating with small business payment solutions providers to deliver an integrated accounting and payments solution, using the ISO 20022 messages, or working with innovative e-commerce platform providers to provide deposit account-based solutions for e-commerce solutions.

What process changes will happen within clearing and settlement as a result of Payments Modernization?

First, let me explain what clearing and settlement is. We all know what it is to write a cheque, tap our debit card or send an e-transfer, but behind those actions are the arrangements put in place to allow financial institutions to move money. Sometimes the money moves immediately, but very often it moves the next day. Every day, participants on the Large Value Transfer System (LVTS) and the Automated Clearing Settlement System (ACSS) must finalize positions by settling what they each owe one another.

As a Direct Clearer in Payments Canada’s ACSS and Direct Participant in LVTS, Central 1 settles billions of dollars in payments every month for the Canadian credit union system. We have a responsibility to deliver payments safely, efficiently and cost-effectively for the credit union system.

The real-time gross settlement design mandated for Lynx (Canada’s new high value payments system coming next year) and RTR (coming in 2022) require Direct Clearers such as Central 1 to pre-fund all payments sent by its payments clients.

Lynx will transition the LVTS from a ‘survivor-pay’ to a ‘defaulter-pay’ model and remove the need for the Bank of Canada to guarantee the finality of settlement if a participant defaults.

In our role as Group Clearer for Ontario and B.C. credit unions and for the other provincial centrals, we are obligated under Credit Union Prudential Supervisor Association rules to ensure that any one member’s settlement activities do not impede the ability of other members to settle their payments.

With this greater reliance on our own funds to prefund settlement in real-time, we are required to implement additional controls beyond collateralization based on daily net settlement activity. Getting the money movement part right helps us reduce risk. A big part of the changes coming with modernization is the eradication of risk by shortening the gaps between when you promise to pay and when the money finally moves and the transaction is finalized.

What is Central 1 doing to meet these new regulatory requirements?

We are helping the credit union system accelerate payments innovation and offerings by making certain that Canada’s new high-value payments system addresses the credit union systems’ technology, data, regulatory and treasury requirements. We are building the processes to support clients to meet all the new demands for faster, more final payments and funds movement and have the liquidity in place to meet the needs of its client’s customers.

Describe Central 1’s approach to risk management.

We’ve chosen a risk management approach that ensures greater visibility into end-to-end transactions thereby fulfilling the stringent regulatory obligations the financial services industry is currently facing as a result of Canada’s Payments Modernization initiative.

Our approach allows Central 1 to:

  • monitor incoming and outgoing transactions by a participant in real-time in order to monitor client payment capacity and oversee intraday liquidity positions;
  • hold transactions if a participant does not have the available settlement capacity; and /li>
  • facilitate the different credit risk mitigation capabilities efficiently on a per-system basis, which will be required for Lynx, RTR and ACSS.

We chose an approach that’s for the betterment of all our clients as we all prepare for the many exciting, innovative and regulatory changes coming with Payment Modernization. When the Lynx high-value payments system goes live next year, we will behave fully implemented new processes to deliver on our obligation to scrutinize and enable or stop payments if there is inadequate liquidity to support the payment.

Real-time payments bring an increased risk of fraud. How will Central 1 help credit unions mitigate fraud?

We are fully committed to supporting our clients as real-time payments are implemented in Canada. We have examined other jurisdictions where real-time payments have been implemented and we are working with an industry-leading consultant to identify a robust fraud solution that will support individual credit union efforts to both prevent and mitigate fraud losses.  We will shortly finalize a solution that meets the unique needs of our clients at a reasonable price. We want our clients’ customers to feel confident in trying these modern payments, knowing that best in class global vendors are supporting us.