Thanks to a new $15 million electronic funds transfer system, financial institutions can now transfer large Canadian dollar payments in a matter of seconds.
The Large Value Transfer System (LVTS) was developed by DMR Consulting Group Inc. for the Canadian Payments Association (CPA), and can be accessed by most banks and credit unions across Canada. It has been it its testing phase since August, but last month was the first time the participating institutions were subject to real-time risk controls, including the pledging of collateral to the Bank of Canada.
This means the banks can now guarantee right away that the funds are available, which increases the efficiency and security of the transactions, said Don Sinden, program director of application maintenance and support at DMR in Ottawa.
“So when [banks] transfer funds, they are immediately transferred to the other institution, and are immediately available to the receiver.”
Prior to implementing this system, funds were not cleared until the next day, or in some cases two to three days. This meant the payments were not final and could be revoked.
Now, if the bank doesn’t have the funds the transfer will be rejected immediately. The LVTS intercepts a copy of the payments in order to validate it, then sends confirmation back to sender and receiver in real-time.
The system sits on one centralized mainframe in Toronto, with a backup site in Regina that is available within two hours if there is a problem at the primary site. The network configuration is all new, with each bank accessing the LVTS over a private network via NT workstations running MQ Series on a Visual Basic interface.
According to Sinden, DMR implemented the hardware and software using its own system development methodology called Macroscope, which includes requirement definitions, functional designs, system architecture and writing the actual code needed.
“So, in order to get all of these banks talking to each other, there was quite a variety of specialized software, including several security packages – because security is a big concern here,” Sinden explained.
Part of the design of the system stipulated a minimum configuration for the banks’ hardware, and as long as they complied with that, there was no difficulty in them gaining access to the LVTS, he said.
“Where the challenge came was in integrating the various components of security software with a combination of mainframe computers and PCs. We have some very sophisticated encryption software, and there were some difficulties in integrating that with our application. But we finally managed it,” he said.
“We are talking about large values. In any given day, this system could transfer in excess of $100 billion.”
Jim Dingle, deputy chairman of CPA and research advisor for the Bank of Canada, said one of the main reasons for implementing the LVTS was to reduce the systemic risk in the payment system.
“If there is a default of one institution, it could cause a second, or third, or fourth institution to default as well – sort of a domino effect,” he explained.
Also, most other trading countries already have similar systems in place, which put Canada at a disadvantage, he said.
“There was a perception that if Canada didn’t also follow that pattern, the international competitive position of Canadian institutions would drop off. [Because] if the world thinks that a Canadian dollar payment is not final for a while, or has an air of uncertainty, they may keep their transactions in U.S. dollars, or German Marks.”
Pierre Roach, director of LVTS, for the CPA said the biggest advantage is that the system ensures payments are final and irrevocable.
“Which means if you get a payment in LVTS, you don’t have to worry at all about it being returned. As soon as you receive that wire payment it has immediate, real-time finality. So, as soon as it hits your account, it’s yours.”
Roach predicts the LVTS will be used more and more by businesses in Canada, especially as a replacement for writing large cheques. There are between 30 and 40 billion cheques worth $50,000 and over being validated through traditional systems every night, but many of these will start clearing through LVTS in the form of electronic payments, he said.
“Even in the first month of operations, we noticed a lot of that moving to LVTS. It will never replace [paper cheques] completely, but there will be a shift over as businesses realize the benefits of dealing with the new system.”