Do you remember what making payments was like in the year 2000?
At a restaurant, you’d either be counting out your pennies and calculating the tip percentage in your head. Or if you wanted to pay with a credit card, you’d tuck it into the billfold with the edge discretely emerging from the top, for the waiter to take back into some secret room while you awaited your opportunity to put pen to paper and finally depart. Afterward, if you wanted to settle up with your fellow diners, you’d again be trading bills and coins, or perhaps just making verbal I.O.U. promises.
In 2018, consumer payments are completely modernized in Canada. Cash is losing favour to the growing availability of instant, contactless payments. According to Moneris, contactless transactions account for 41 per cent of all payments in Canada as of Q2 2018. When we pay our bill as the restaurant we simply tap our NFC-chip enabled credit card (or smartphone, or smart watch) to “the machine.” If we have to settle-up with friends afterwards we simply send an Interac email money transfer, now instantly deposited into their bank accounts with need for any action on their part. The consumer world of payments in Canada is completely modernized and more convenient.
Yet business-to-business transactions are stuck in the year 2000. Finance departments across the country must balance their accounts receivable and accounts payable against a general ledger of money moving in and out of a bank account. Batch payments can take days to complete. While other confederate countries such as the U.K. and Australia have already implemented real-time payments, and the U.S. has also done so via The Clearing House, Canada’s plan for modernization aims to have the infrastructure ready by the second half of 2019.
B2B soon to ‘Pay your way’
Payments Canada, the body responsible for providing payments infrastructure in Canada, will provide a real-time rail backend as part of a broader modernization effort. It is also facilitating the discussion around data standards that will be associated with every payment in the new system, part of the ISO 2022 standard that will allow banks to exchange relevant messages on top of payments and enable a new services layer on top of the real-time payments system. Banks are working to enable their own infrastructure to connect to the real-time rail, sometimes with the help of IT vendors such as IBM Canada. The front-end enabling the whole system is likely to be the same one that supports consumer payments – Interac.
“Everybody wants everything immediately today,” says Jan Pilbauer, the executive director of modernization and CIO of Payments Canada. “Moving to faster, or real-time payments is driven by consumers and the digitalization of our society. If you can do it with email, then why can’t you do it with money?”
Payments Canada is working with Interac as a service provider, he says. Serving as a convenient front-end that has been in the market since 2002 and reaches a majority of Canadians.
Building the technology will be the easy part, Pilbauer says. By the end of 2019 there will be a physical infrastructure for the real-time rail connected to the Bank of Canada. Guidance will be available for how service providers can use the application programming interfaces (APIs) involved in the data layer of the system.
The hard part will be building consensus among the key institutions collaborating on the system. There needs to be an agreed-upon set of rules and standards on how the industry can use the system. Every new rule introduced by the non-profit organization goes through a consultation process with financial institutions. Consumer groups, larger enterprises and governments also have their say. Following consultation, a board approves the rule and the final hurdle is the Minister of Finance, who has 30 days to disapprove the new rule or else it’s passed.
“There will be the asphalt that’s the technology component, and there will be the set of rules you have to follow on the road and when you have to pay the toll,” he says. “We’re providing the highway, now others have to come up with some cool cars that can use it.”
Paving the way for real-time payments
There are two layers to this real-time payments highway.
- The service layer that will be developed by payment service providers, connecting through ISO 20022 APIs. Example service include bill payments, tax remittances, insurance reimbursements, and online checkout.
- The system layer that includes core payment functionalities, rules and procedures, and messaging management. Here, functions include exchange and clearing, settlement, request-to-pay, shared services such as a proxy database (meaning payers can be identified by aliases such as a phone number or online ID.)
For banks, the modernization effort represents major changes to the ability to send and receive payment data, says Carolyn Burke, head of enterprise payments at RBC. RBC played a part in creating Interac through its CertaPay acquisition, the service that offered email money transfer capabilities as part of Interac. Recently, Interac’s capabilities have been upgraded with automatic deposits from email money transfer, as well as requests to pay. Now the service needs to be made robust enough for enterprise clients and support the ISO 20022 data standard.
“The opportunity for the Canadian economy is in B2B payments,” Burke says. “Data is a huge part of this, you need it to be real-time or there’s no value to businesses.”
RBC will be able to offer its business clients a simplified approach to accounting with the right data standard in place. Accounts receivable and accounts payable can be automated with the invoice details sent as part of the payments transaction. It will also be able to help its public sector and larger enterprise clients with efforts to digitize their businesses. It could provide more analytics capabilities around the payments model, but also ease sales flows in many scenarios.
Burke shares one example of a real-time collections capability. A wholesale building supplies company might bill its clients monthly, and extend them a line of credit that they can use to acquire supplies to stay on schedule with their construction. If a client maxes that credit line but needs a delivery of supplies, that’s a problem because more credit can’t be issued until they pay their monthly bill. But with real-time payments, the client could pay a portion of the amount owed and then proceed with the sale.
That means banks need to get their data lakes ready to receive and present data to other players on the real-time rail. They’ll also have to meet a higher bar for fraud monitoring as payments volumes scale up. Currently, Payments Canada is exploring a ‘cover-all’ defaulter pay model to back the system.
One advantage to doing a real-time payments rollout after earlier adopters such as the U.K. is that Canada can learn from problems experienced elsewhere, Burke says. The U.K. rolled out the infrastructure when the ISO 20022 standard was less mature, and the payments came with a limited data set. The result was that billers asked for the payments to be slowed down, because they couldn’t determine what they were being paid for.
Preparing for the modernized system is a “medium to large project” for RBC, Burke says. There will be many moving components rolled out between now and the end of 2019.
“It’s not an overnight thing that will occur,” Burke says. “We didn’t go from imperial to metric without a few bumps either, but it’s a journey worth embarking on.”
Big Blue’s bolt-on payments cloud
Not every bank will embark on the journey alone. IBM Canada says that it is in talks with three out of the big five Canadian banks on helping to provide services on the real-time rail. It’s sectioned off a part of its data centres in Toronto – where it hosts its IBM Cloud clients – and launched the IBM Payments Centre – Canada (IPCC) to help clients address real-time payments challenges.
IBM will allow financial institutions not eager on taking on an infrastructure project to bolt-on to the real-time rail through IBM Cloud services, says Andrew Higgens, leader of IPCC.
“If you’re a small guy and you haven’t bee doing any investment for 20 years, that puts you in a position where you can’t compete,” he says. “We’re looking at providing a fundamental level of payment services that will overlay on top of Payments Canada.”
IBM has experience implementing real-time payments projects around the world. Its clients include The Clearing House (the payments settlement service for U.S. banks), Australia’s New Payments Platform, and the SEPA Credit Transfer Instant Payment Service in Spain and Portugal.
With the IPCC, it wants to create a central marketplace where banks can buy and sell financial services from one another as well as newer entrants such as FinTech companies. Higgins points to Toronto-based Dream Payments and Montreal-based Expertis as examples that could provide services on top of the new data layer.
Canada is a leader in its payments infrastructure in many ways, he says, but it’s lagging when it comes to real-time payments. The vast majority of institutions in Canada haven’t done anything to catch up to where other international players stand.
“They might want to treat this capability like commoditized plumbing and hand it over to us,” he says.
As to why the effort has lagged compared to other modernization conducted at banks, Higgins has a reasonable explanation. “Real-time payments is something your country has to lead, modernization is something banks do to reduce costs and complexity.”
Of course, once the real-time payments infrastructure is available there will be no going back to the old system. Just like you wouldn’t tolerate sitting at your table after your meal, waiting for your waiter to return your credit card to you, businesses will quickly adapt to the new payments standard as well.
Five years from now, we’ll wonder how we ever suffered a payments system that didn’t include data.