The problem with moving money around in Canada six years ago was that it took a while to determine whether a cheque was good.
The fastest method, the Interbank International Payments System, took an entire day. During that day, anything could happen – the person who sent the money could withdraw all the funds or go bankrupt, or the bank itself could go under.
As a result, those on the receiving end had to either trust the sender and the bank, or wait before doing anything with the money. In a worst-case scenario, a bad money transfer for a large amount could cause a domino effect across the banking system, as company after company and bank after bank drew on non-existent funds to make payments, transfers and withdrawals.
To solve that problem, the Ottawa-based Canadian Payments Association (CPA) and its member banks decided to create an on-line system for guaranteeing money transfers – the Large Value Transfer System (LVTS), which was launched in February of 1999.
According to CPA general manager Bob Hammond, the guarantee works in two ways. First, participating banks put some money on deposit at the Bank of Canada, which acts as a central clearinghouse. There must be enough money to ensure that all transfers out of the bank’s accounts – minus the amount of transfers to the bank – are guaranteed. Second, each member bank pledges a certain amount of money into a kind of insurance account or short-term loan system.
Accounts are still settled at the end of the day, however, and Hammond said there are no immediate plans for real-time settlement.
At first, Hammond said, he expected that the LVTS – which is more expensive than writing an ordinary cheque – would be used for transfers of $50,000 or more. “But we’re finding that 50 per cent of payments are for less than $50,000,” he said.
Today, reflecting the value the LVTS provides banks and businesses, some $100 billion goes through the system each day, Hammond said. That’s significantly more than the $20 billion that goes through the old non-secured network, the Automated Clearing Settlement System.
Only 15 of the largest banks in Canada belong to the LVTS, Hammond said, but they in turn offer system access to smaller banks. Bank of America Corp. in Charlotte, North Carolina, was one of the first to join, and now uses LVTS to offer its own branches worldwide, as well as other banks, access to Canada’s financial system.
“It is an extremely efficient, fast and sound way for us to offer our clients finality of payments,” said Susan Roberts, vice-president of Bank of America’s Canadian branch operations. She said the system was one of the top five worldwide, and it was installed at just the right time. “It allowed us the time to get ready internally for it to come.”
Members have to invest in back-office computer equipment and dedicated terminals, Hammond noted. The limited access and dedicated lines help make the entire system more secure, he added.
When LVTS was launched last year, it brought Canada in line with other industrialized nations, many of which, including the U.S., have systems that provide certainty of settlement and finality of payment, Hammond said.
“This is extremely important in making the important and time-sensitive payments that are involved in major business transactions and international trade.”