29 Jun 2020  /  by: Sue Whitney, VP Payments Strategy  /  5 minutes

Payments Modernization: How to prepare now for Canada’s digital payments future

Digital payments are coming of age. The COVID-19 pandemic is accelerating the shift towards fast, flexible and secure digital payments and reinforcing the importance of payments modernization.

Central 1 is well advanced in preparing for Payments Canada’s modernization initiative which aims to provide consumers, businesses and financial institutions (FIs) with a modern, fast and convenient payment system. As a leader in the payments space and a trusted partner to credit unions, we were the first Canadian financial institution to offer the mobile functionality of Interac e-Transfer® and the first to offer cheque imaging in Canada. We are the credit union system’s financial institution connection point to Payments Canada and have a responsibility to deliver payments safely, efficiently and cost-effectively. This all means we are well positioned to anticipate the changes that are afoot and to advise the credit union system on the steps it must take now to prepare.

Technology is changing the way Canadians pay for things and we’re seeing a quicker pace of innovation, particularly since the COVID-19 pandemic accelerated the shift towards digital payments.

Consumers can use mobile payments like Apple Pay and Google Pay, as well as send money by email or text. Even cryptocurrencies such as bitcoin and ether are being tested in the payment space.

Canada’s payments modernization

Over the course of the next two years, Canada will experience a major upgrade to the core infrastructure and rules of its payments systems. The overall outcome is a faster, more flexible and secure payments infrastructure that puts Canada at the leading edge of global payments by:

  • building a new high value payments and core clearing and settlement system (Lynx);
  • establishing a fast, always-on payments system that allows for real-time money transfer with finality using account numbers, with funds travelling in seconds (Real-Time Rail);
  • improving the speed and convenience of automated funds transfer; and
  • migrating payments messaging to ISO 20022, a global messaging standard which allows rich data to travel with electronic payments.

How Central 1 is preparing for payments modernization

Inherent in every aspect of payments modernization is ISO20022; an explosion of data that will travel with the payments message. In preparation for the enhanced ISO 20022 data, we have developed a data solution that will act as a bridge for credit unions and other FIs which are not yet able to receive the ISO 20022 message format. We will store the data and make it available in an easily digestible format.

We’ve taken critical steps to ensure we meet our obligations as one of only 17 direct connectors to Lynx, the new infrastructure which will replace the Large Value Transfer System. All participants are currently working towards key project milestones so that we can go live together in late summer 2021.

In our role as an advocate for the credit union system, we recently met the Department of Finance to discuss membership changes which would allow credit unions to directly access some of Payments Canada’s systems, a change we believe will give credit unions new choices in how they deliver payments services to their customers. It’s our belief that the credit union system wins when credit unions are permitted to expand their capabilities and deliver innovation – regulatory changes to eligibility for membership creates choices in how they do that. We are very active on Payments Canada and Interac working groups and committees which are defining the shape of Canada’s payments future. Often, we are the voice for smaller financial institutions, ensuring that rules and technology are sufficiently flexible to accommodate them. We also work hard to build alignment with the large banks, where it makes sense. At the same time, we are consulting our members and clients about pertinent issues such as fraud management enhancements which will support our clients in a fast, always-on payments system.

How credit unions can prepare

Get Ready for IS020022:

The brand-new ISO20022 message format will be integral to Lynx, the Real-Time Rail and the Automated Clearing and Settlement System (ACSS). So now’s the time to:

  • understand the ISO20022 messages for Lynx which were recently published by Payments Canada. If you are not familiar with the ISO 20022 message set, we encourage you to read a great little paper published by SWIFT called ‘ISO 20022 for dummies’;
  • investigate when/if your banking host can support the new message format so you can leverage the value of ISO20022;
  • update your data strategy, focusing on: data storage, displaying and/or transmitting this new payments information to your customers, using data to understand customer behaviour (or potential fraudulent behaviour) and generating customer-specific products;
  • consider training or hiring a data specialist;
  • examine if you need to update your operations to support the fast, always-on payments system; and
  • consider the impact that shifting consumer payments behaviour will have on your revenues and expenditures. For example, it’s likely that wire payments will be replaced by real-time rail payments and various finech payment solutions over time – an outcome which may affect revenues and one which will require significant education for employees and customers.

Get ready for Lynx:

In 2021, Lynx Phase 1 will be the first major Payments Canada system to go live. This entirely new technology solution will remove settlement risk from the system by replacing Bank of Canada settlement guarantees with a requirement for each participant to be responsible for full collateralization and back stop of all their payments, before those payments can be introduced into the system. This means Central 1 is updating our liquidity processes and credit risk management so we are ready to continue managing risk on behalf of credit unions and other FIs. Fortunately, there’s very little preparation required from FIs for this phase. In 2022, phase 2 will see the adoption of MX/ISO20022 standard which will create opportunities to enhance wires payments experiences, including new opportunities for cross border payments.

Get ready for RTR:

I call the 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 be 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 in 2022, 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 financial institutions 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.

Here’s how to prepare:

  • Consider your business priorities for the next few years, like customers or segments you want to attract and/or retain, your digital strategy, revenue opportunities and cost reduction targets, community initiatives, enhancing cross border offerings and making them easy to access, etc.
  • Then consider how payments can be a tool to help achieve that. What payment behaviours cause friction today or are limiting, or cause call centre volume? Think about interesting fintechs you have read about or want to know more about and how they might integrate into your payments offering as we modernize.

Reach out to Central 1

We are looking at partnerships and are open for your suggestions. We think RTR is a great platform for driving differentiation and addressing unmet market needs so we are happy to brainstorm with you on how to do that!

A global transformation of payments is underway as customers demand seamless, instant, borderless payments and new payment providers challenge incumbents for market share, using technology to disrupt traditional networks and business models across retail and wholesale payments. Now is the time to start the action plan – the infrastructure changes are coming soon.

Not sure where to start? Central 1 is here to support you every step of the way, providing technologies and partnerships that meet or exceeds Payments Canada and Interac requirements and allowing your financial institution to innovate safely and efficiently. Our dedicated payments experts are ready to discuss any aspect of payments modernization and to provide more detail on our data solution and connection to a forthcoming RTR overlay service. Feel free to reach out to our team today!