Payments Modernization in Canada

November 2, 2020

Over the last few years, financial institutions around the world have initiated their payments modernization journey, adopting newer technology solutions, and moving away from their older legacy systems. Like in other industries, systems modernization is imperative for business agility and competitiveness, and with the banking sector being the backbone of all businesses, its evolution has been a priority across the world.

Since 2016, Canada has also been taking steps towards mainstreaming payments modernization under the guidance of Payments Canada. The key objectives of the Canadian Payments Modernization initiative include:

  • Rebuilding the foundation for high-value transactions
  • Developing real-time payments capability
  • Enhancing automated fund transfers and batch payments
  • Aligning with global regulatory standards and best practices
  • Modernizing regulations and frameworks governing all types of payments
  • Embracing new standards for improved interoperability

The current phase of Payments Modernization is expected to be fully delivered and operationalized by 2023.

Benefits of Payments Modernization

Payments Modernization is a transformative process aimed at enabling faster payments processing and bringing more flexibility and security into transactions. In addition, modern payments platforms will make room for more robust analytics, giving financial institutions the ability to improve risk management, gather better insights, make more informed product decisions, and reduce fraud.

Overall, Payments Modernization is a win-win proposition for all stakeholders involved. The benefits to different stakeholder groups are outlined below:

For Customers

The initiative will do wonders for transaction speed, allowing customers to complete payments in real-time. Daily transfer limits are also likely to be increased making larger transactions easier. Payments Canada has also embraced the ISO20022 global messaging standard that will facilitate data-rich transactions, making it easier for business customers to track cross-border payments, match payments to invoices, and improve their financial oversight and cash flow management. The proposed modernization will also give customers unprecedented flexibility with banks adopting more robust authentication and offering an expanded pool of proxies for identification and multiple payment channels.

For Banks

For financial institutions, enhanced payment offerings and increased flexibility for customers could serve as a competitive advantage. Moreover, with modern payments platforms, banks will be able to leverage their customer data to garner more robust insights into customer spending patterns and use analytics to understand customer preferences and deliver better-performing products and services to improve customer satisfaction.

Payments Modernization will also equip banks with advanced fraud analytics to identify and mitigate risk. According to the Canadian Anti-Fraud Centre (CAFC), over 46,465 reports of fraud were filed in 2019, with victims cumulatively losing over $96 million. They also estimate that only about 5% of fraud cases are reported. Payments Modernization will also enhance banks’ capital and liquidity management capabilities, and allow for data-backed business decision-making.

It is key to note that Payments Modernization is not a well-defined, consistent target state, but is at the discretion of each financial institution. The impact on banks depends on the degree of advancement they adopt. For banks that adopt the bare minimum modernization needed to comply with the new frameworks, there may be limited impact, while for those that see this as an opportunity to beat the competition by embracing innovation, it could significantly improve their market positioning, customer satisfaction, and profitability.

Adastra’s tiered depiction below gives a better picture of how banks can get the most out of their Payments Modernization budget.

For Governments and Regulators

For regulators, the initiative will pave the way to better compliance and increased transparency through improved frameworks and rules. Once the Payments Modernization in Canadian banks is complete, government agencies will also be able to disburse emergency funds more efficiently through real-time payments and keep better track of payments made to beneficiaries.

A Long Road Ahead but the Journey Starts Now

A complete upheaval of existing systems is almost never without risk. Payments Canada is working closely with regulators and financial institutions to identify and eliminate these risks before full implementation of Payments Modernization.

These risks range from inadequate skilled manpower for execution, capability constraints, and complications in adopting new technologies, which could lead to service disruptions and system failures in the early days of implementation. Adastra can deliver value by enabling data-driven functionality to complement and enhance your payment solutions. We can also provide solutions like intelligent payment routing that will help you tap into hidden opportunities to offer better value to your customers. Data is the underlying factor in nearly all elements of Payments Modernization, and Adastra can help you derive the maximum value from your new data, while avoiding data-related issues, so your organization can implement Payments Modernization in a smooth, timely manner.

Newer risks could involve potential increase in fraudulent activity and exposure to cyber risks that could stem from limitations in fraud and money laundering monitoring due to increased transaction speeds and a wider pool of customer identifiers and payment channels. As per FinTRAC’s report ‘Estimating Scale of Money Laundering in Canada’, between $5 billion to $40 billion is laundered in Canada every year. The adoption of the ISO20022 global messaging standard will bring a richness of data in payment information and enable efficient payments clearing and settlement among financial institutions globally. By standardizing messaging and improving the robustness and quality of data, it will not only support interoperability, but will also allow for new capabilities in advanced customer analytics, including behavioral analytics, and analytics to prevent financial crimes.

Mitigation of risks will require proactive planning and execution on part of financial institutions. For instance, analytics capabilities will need to be strengthened to allow for real-time fraud analytics, newer authentication procedures will need to be established, and efforts will have to be made to protect all payment channels and types equitably. Adastra has extensive experience in developing and implementing real-time fraud and anti-money laundering analytics, that can help financial institutions identify and prevent fraudulent activities. We can also develop custom solutions for near-real-time inquiry into all channels (branch, contact centre, web/mobile, etc.) in order to protect your organization’s operations and customers across your business.

The benefits of Payments Modernization far outweigh the risks, and financial institutions and standards bodies hard at work to make the implementation process smooth, seamless and secure. In preparation for the upcoming reforms, banks and financial institutions will need to determine how the initiative will impact their risk models, payment processes and customers, and should develop a roadmap of actions that will be required at their end. Planning in advance will ensure that banks have a clear approach in line with their long-term goals and have the resources to support implementation.

Payments Modernization will be an ongoing process and organizations that approach it with an open mind and an eye to the future are more likely to bear the fruit of their investments. This initiative will change the way banks and financial institutions operate within Canada and outside its borders and is an opportunity for both financial institutions and the country to establish their competitive edge in the global market.

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