27 November 2018

Are you ready for Canada’s payments system modernization?

From two-hour or real-time payments, to changing business models, the nature of how to manage payments is evolving

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When it comes to business, every transaction depends on a fast, effective and reliable payments system. An early leader in payments technology, Canadaʼs financial institutions are now working to make the system even better.

In Canada, approximately $200-billion in transactions occur each day, according to Payments Canada, the not-for-profit, financial institution funded organization that oversees Canada’s payments system.

These may include everything from large-value business-to-business sales to small-value retail purchases. Some payments are still made by cheques, but more and more are online bill payments, direct deposits and wire transactions.

All of these payments are processed through a complex system that has to keep up with the latest technology and infrastructure to keep payments moving as quickly and securely as possible.

While consumers might see their payments processed immediately at the store or online, that’s just the beginning.

Banks have to keep track of every transaction meticulously and in a frictionless way, so that suppliers and service providers get their money fast and the record of who paid how much to whom is accurate.

Business transactions — whether it’s an international grain deal from Saskatchewan to India or auto manufacturing transaction between Canada and the U.S. — might involve several banks in different countries. It can take time, sometimes even several business days, for settlements to be completed.

The aim of modernization is to make payments and settlements happen as fast as possible. Once a pioneer in global payments, Canada now lags behind, according to Michael Klopchic, Head of Global Liquidity and Cash Management at HSBC Bank Canada.

In order for the country – and companies operating within – to remain competitive on the global stage, it’s important for Canada to keep up technologically, he says.

“The Canadian payments system dates back to the eighties and nineties, and at the time Canada was leading edge,” Mr. Klopchic says.

“The technology works well, but there hasn’t been a lot of new investment in the system. What we’re finding is that the world has leaped ahead, and Canada needs to catch up in accessing the technology,” he says.

Payments Canada is spearheading a modernization program that began in 2015. It aims to better reflect the way business is done in the 21st century — relying less on cash and more on faster, easier, secure transactions that can cross borders and be completed in a few hours rather than many business days.

The modernization program is on track to be completed by 2020. “Some of the early milestones have already been achieved,” Mr. Klopchic says.

For example, in the fall, the Electronic Funds Transfer (EFT) payments system added a third exchange window at 9 p.m. ET to extend the business day. Additionally, same-day settlements were added, which reduced turnaround times for payment settlements between financial institutions to two hours, giving businesses quicker access than ever to funds.

“We saw these types of faster payments take effect in the United Kingdom and in Europe, and we can leverage that experience for others around the globe,” says Drew Douglas, Regional Head of Global Liquidity and Cash Management at HSBC Bank USA, N.A.

“The challenge is moving to real time. Achieving faster payments typically means speeding up an existing technological process — you go from a few days down to a few hours,” he explains.

“With real-time, you need a different ‘rail.’ It’s not necessarily a matter of compressing the time; you actually move to a different process. This is an experience we have had in other markets and can bring to the system in Canada, and our customers, as a global bank,” Mr. Douglas says.

Modernizing the payments system is important not only for overall Canadian competitiveness but also for individual businesses as they operate within Canada and across the world.

“We have seen many companies change their business models. In the U.S., for example, some customers have moved to rely on a same-day settlement; some are moving to real time. This changes a company’s operating cycle, allowing for more efficient cash flow that brings wider business benefits,” Mr. Douglas adds.

Furthermore, in India, mobile collections are becoming more popular in the delivery of goods, with transaction being settled over their mobile phone. For small- to medium-sized enterprises, this is significant as it creates more efficient working capital, but also undermines the need for receivables to accept the funds faster.

Mr. Douglas says that a global bank has an advantage in that it needs to keep up with how payments are changing in all the markets where it operates and serves clients.

“At HSBC, we can leverage the global product team and the technology itself that connects clients to their markets,” he says.

Some European countries have moved to a completely paperless payments system, which means no cheques. This creates a faster, more reliable system that reduces the likelihood of cheque fraud.

In North America, however, it’s unlikely that cheques will be eliminated completely, he says, global trends do give decision makers a better understanding of the shifting payments landscape.

Modernizing payments offers benefits to customers of all sizes.

“It means if someone is going to pay you, they’re going to pay you more quickly. For commercial customers, whether you have to pay or whether you need to receive a payment, having access to those funds as fast as possible is a huge advantage,” Mr. Klopchic says

Until recently, a West Coast company had until 1:30 p.m. PT to ensure an EFT payment reached a customer in another time zone in Canada with no guarantee of same day settlement. Now, with the addition of third exchange window and guaranteed same-day settlement, West Coast companies have until 6 p.m. PT to submit an EFT payment, ensuring their customer receives it same day.

A more modernized payments system can create opportunities; it can improve infrastructure, increase the amount of information that can be transported and shorten the time required for reconciliations and receivables, Mr. Klopchic says.

“The payments industry is evolving and companies will need to adapt to continue to grow their business. Having a strong banking partner, along with right tools and solutions will be critical to help navigate, optimize and manage their cash flow as they continue to do business here at home or around the world”


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