Payments Trends in Canada, 2018 — in a Global Context

ANALYZE THE IDC FUTURE

IDC PERSPECTIVE Payments Trends in Canada, 2018 — In a Global Context

Robert Smythe Jason Bremner Vladyslav Mukherjee

EXECUTIVE SNAPSHOT

FIGURE 1

Executive Snapshot: Payments Trends in Canada 2018

This document identifies t he initi atives th a t are under way today to enhance core payment processes in Canada,These& a nges a re needed for financial and nonfinancial entities to offer advanced payment offerings to their clients. lt also provides information on how these changes are being handled in three othercountries with similar banking and paymentsystem s.

Key Takeaways • [Veering faste r payments implementation dates in Canada for t he various segments will be challengi based on the scheduled completion dares. Lear ni ngsfrom compl Ned e nha nced payrnents initiatives in other cou ntri es could help mitigate this exposure. • Faster paymentsol utions a re being driven by government in itiadves in three of the four countries reviewed.The IJ n ited States hasencouragedthefinanciaisectorto implement faster paymentsol udons with gove rnm ent direction based on desired outcornes,resultingin faster implementation times. .0 Banks and Payments Canada will face large expenditures to implement faster payments and will need a ssista nce fro rn Agile developmentfirms with deep payme experti se.

Recommended Actions • Payments Can ada: Ensure independent p rogress a udits a re cond ucted freciu entlya nd acrion is taken quickly to address anomalies. Need to q uickly move from study mode ro full implementation srate. Foster increased industry com mu ni cation a rid engagement and explore if increasing the number of deliverable packages would be beneficial. • Existing financial i55titutions4 Ensure payments processes wo rk with the new paymentsinfrastructure and start developing innovative payment offerings. Support Payme ni3.Canada initiatives.

▪ Fintechs Develop in nova tive overlay services to compete with existing bank payment offeri ngs,Th is is rnore t han a technology playas it will req ui re knowledge of payment rules and standards and a deep commitment to secure processes.

Source: IDC, 2018

April 2018, IDC #CA43317218 SITUATION OVERVIEW

Canada Is Finally Proceeding with Payments Systems Modernization, Including Faster Payments After decades of limited advances, Canada is finally moving forward with significant enhancements to its payment systems. This is being driven by government policy that wants to ensure that Canadian payment systems keep up with advanced payment systems that are being implemented in other countries. The government also wishes to make payment systems more open in order to foster more financial industry competition and innovation.

A key part of these initiatives involves massive changes to payments systems that will introduce faster settlement capabilities for most payment types. The introduction of data-rich payments that use ISO 20022 data format standards is also a key component that will minimize back-office payment handling and reciliation processing and save Canadian businesses billions of dollars annually.

The payments modernization program in Canada involves a continuous delivery of improvements over the next three years. This includes a new ACSS risk model that was implemented in March 2018 and a 3rd window for AFT-based payments that will be going live this in the fall of 2018.

While these enhancements will be costly for Payments Canada, the central payments authority, and the major financial institutions, they have no option but to proceed in order to respond to the government's payment enhancement directions. Major banks to compete with the payments aspirations of a multitude of Fintechs and deep pocket global competitors like Google, Facebook, Amazon, Apple, and Walmart will have to reshape their payment and banking offerings that their clients expect from their digital world.

Canadian financial institutions are also driven by the need to respond to potential technology-driven competitors and the threat of disintermediation. Payments modernization will also allow them to innovate faster, improve client experience, and generate new sources of revenue. The Achilles' heel in all of this for financial institutions is the ancient core process software that is an albatross around most of their necks.

Today, the typical retail banking client and even some corporate banking clients' major relationship with their bank is dominated by the use of payment services. This is precisely the area that more nimble competitors will be focusing on, so banks will have to respond rapidly if they are to defend their payment territory from the invaders at the gate.

This document identifies the initiatives that are underway today to enhance core payment processes in Canada. These changes are needed for financial and nonfinancial entities to offer advanced payment offerings to their clients. It also provides information on how these changes are being handled in three other countries with similar banking and payment systems. Faster Payments Global initiatives The move to faster payments systems started prior to the year 2000. It has now grown to where 29 countries currently have faster payment solutions. Figure 2 shows the timeline over which faster payments solutions have been implemented globally.

©2018 IDC #CA43317218 2 For purposes of this document, "faster payments" refers to payment systems that exchange and settle payments in seconds for individual transactions and not less than several times a day where batch processes are still used.

Canada is one of the laggards in introducing faster payments with 29 countries already having solutions in place. The plan that Payments Canada has identified could result in Canada joining the club of 29 by 2022. The Payments Canada plan looks to be challenging, so the key to meeting key milestones will be effective project management supported by experienced and motivated solution providers. Another critical factor is early agreement on the content of all deliverables by all involved parties.

A review of the plans and methods used to implement faster payments in Australia, the United Kingdom, and the United States was done to help assess the viability of Payment Canada's faster payments plans. The systems looked at included:

. United Kingdom: Faster Payment Service (FPS), deployed in 2008 . United States: Zelle/Early Warning/deployed in 2016 . United States: The Clearing House (TCH) Real-Time Payments (RTP), deployed in 2017 . Australia: New Payments Platform (NPP), deployed in 2018

Faster Payments Implementations Globally

Number of -Countries That fmplemented Faster Payments in Identified Time Window

Before 2000 2000-2009 21010-2014 2015-2017

Source: IDC, 2018

. Automated Clearing Settlement System (ACSS): It is a system that supports the entry of batch totals to facilitate the exchange of a variety of lower value, less time-sensitive and paper- based, and electronic transactions by Payments Canada direct clearer members . Large Value Transfer System (LVTS): It is an electronic wire system that facilitates the transfer of funds between participating financial institutions in real time with finality of payment and certainty of settlement. It is generally used to clear high-value time-sensitive payments. These existing systems are shown in Figure 3.

FIGURE 3

Canadian Payments System Current State Cp • r!" 7 1

Source: Payments Canada, 2018

Faster Payments Initiatives in Canada After eight years of study and analysis, Canada is finally taking the first step toward implementing a real-time, data-rich ISO 20022–enabled payment solution in 2018. While the process is being guided by Payments Canada, which operates the national systems for the clearing and settlement of payments in Canada, it would not have occurred without the direct intervention of the government of Canada's Department of Finance.

Beside faster payment processes, the government also has an objective to enhance financial system competition by broadening access to payment systems. This required changing the governance structure of Payments Canada to expand board membership beyond financial institutions.

Payments Canada has stated that it plans to have a real-time payments system available in 2019 for retail transactions, but this timeline looks to be aggressive based on the experiences of other countries and the time required in the past for new payment systems to be implemented in Canada. Hopefully Canada can draw on the experiences in other countries that have implemented significant payment system enhancements. The current program to modernize all aspects of the payments systems in

©2018 IDC #CA43317218 5 Canada currently shows activities extending into 2022. A payments system is not a static entity, so it is reasonable to expect that further deliverables will be required beyond the 2022 date.

The key components of a modern payment system include a real-time clearing and settlement system with payments accompanied by an electronic messaging package based on the ISO 20022 standard. This international standard facilitates the development of standardized messaging solutions that can be used by all parties involved in payment processes. Having payment details accompanying the financial transactions is essential to reduce back-office handling and reconciliation costs. A real-time payment system also provides for immediate and final payment, thus eliminating reconciliation activities as well as providing immediate access to funds. Payments Canada has committed to the incorporation of ISO 20022 into all modernization initiatives.

Based on a recent study issued by Payments Canada, current payments processing systems are resulting in increased costs to Canadian businesses of C$3 billion to C$6.5 billion per year. To maintain the competitiveness of Canadian businesses, it is critical that plans to implement modern payment systems in Canada do not slip. Canadian Payments System Future State The future state payment system involves replacement of the existing clearing and settlement systems with entirely new systems. The new systems configuration is shown in Figure 4. In detail:

. Automated Funds Transfer (AFT): In September 2017, Payments Canada made amendments to the rules and processing capabilities that added a third inter-FI AFT exchange at 9:00 PM ET. This is a first step in a long payments enhancement journey in Canada. . Real-Time Rails (RTR): The objective of this system is to provide real-time payment capability that will result in faster and more convenient payments and money transfers while enabling new and modern ways for customers to pay. RTR is expected to address a large portion of the low-value payment requirements. A requirement for overlay service support for financial innovators and ISO 20022 capability has also been identified. Banks and other payment service providers (PSPs), ecommerce websites, mobile players, and so forth will be able to connect to the RTR using their own overlay services. Payments Canada has stated it is working with a single-source service provider that has existing connectivity and broad presence in the market. It also stated that RTR will be a new system with its own risk, access, and settlement models. Given their particular role within the Canadian market as the primary debit network, and Payments Canada's requirements, Interac is a strong contender to provide the technology support for RTP. Payments Canada's plan for RTR involves an initial release in 2019, followed by subsequent releases in 2020+. It anticipates that this could result in the long-term consolidation of retail payment functionalities into a single system. Payments Canada will be the operator of RTR but may not necessarily be the service provider. The risk associated with this approach is that the cost of RTR services will be established by a for-profit entity (Interac Corp.) versus a nonprofit entity like Payments Canada being accountable for the costs. An additional risk is that it eliminates competition across payment use cases to one set of rails. This seems counter to the government's desire to increase competition. This might be addressed by appropriate governance and rules. . Settlement Optimization Engine (SOE): This system will replace ACSS. In addition to Payment Canada's efforts, implementation will require changes by all 12 direct clearers that currently

©2018 IDC #CA43317218 6 interface directly with ACSS, as well as secondary impacts on indirect clearers that obtain clearing and settlement services from direct clearers. To comply with the government's objective to increase financial services competition, the SOE needs to be designed to provide fair, open, risk-based access that facilitates greater direct participation in SOE. It also needs to provide multiple intraday file exchange windows and same day settlement. The process of opening SOE to nonbank entities will probably result in traditional bank concerns being raised related to risk and that there will be limited interest by nonfinancial entities in direct SOE connections. SOE implementation is planned over three phases, with the first stage due in 2021. Current plans call for the existing 12 direct clearers to continue bilateral exchange of transactions, while all new participants will use the central exchange capabilities of SOE. It is expected that all SOE participants will eventually move to the centralised exchange model. . Lynx: This is a new core clearing and settlement system that will replace LVTS and will be implemented and operated by Payments Canada. This new system is intended to meet international standards for managing risk in both high value and retail payments. Phase 1 of Lynx is scheduled to be delivered in 2020. Subsequent phases, which include the use of ISO 20022 and payments tracking, are slated for delivery in future phases beyond 2021. In April 2017, Payments Canada selected CGI (Canada's LVTS), SIA (Italy's EBA Clearing), and VocaLink (U.K.'s FPS) to participate in a procurement process to deliver a new core clearing and settlement system for payments, named Lynx. No information is currently available on the status of these discussions, making a planned 2020 Phase 1 delivery date problematic unless notable progress is made this year. All systems that are planned will operate under an enhanced risk, regulatory, and rules framework that balances the need for safety and soundness with accessibility. Further:

. ISO 20022: A key part of each system is the use of the ISO 20022 global payment messaging standard, which includes rich remittance information along with detailed payment instructions. . Payment evolution: The objectives of payments system modernization in Canada are to provide: . Fast, data-rich, and simpler payments processes . Transaction transparency . Cross-border convenience . Risk-based access . Activity oversight . Strong support for innovation. It is anticipated that the use of payment platforms will evolve and could result in the migration of low- value payments from Lynx to RTR as the overlay features associated with RTR will make payment innovation advances simpler. As SOE moves to same day settlement, some low/mid-value Lynx payments may also move to SOE in cases where slower intraday settlement is sufficient.

Canadian Payment System Future State Men Other Payment I I • POS A151A, OD vISAI

•Pamir

Core Clearing & Settlement System RIR Ilea V t tele lu 11•1 (Trull:1y lou(V1C1_,

rFl 0 Lynx Lot .„C•eguee and 0•••• payment

Source: IDC and Payments Canada, 2018

Figure 5 shows the scope of these deliverables in more detail. From Step 1 to Step 3, the requirements that are planned to be delivered from 2019 to 2022 are massive. With external development resources not officially engaged to date, it will be a challenge to have the new systems available within the proposed delivery windows unless Payments Canada resources are able to cover this gap. The bottom line is that so many decisions are still required on how payment modernization will proceed, and that it will be difficult for Payments Canada to achieve the planned delivery dates unless the company can leverage off the experiences of other countries that have implemented similar systems.

New Canadian Payments System Evolution

A modem payments Step3 system that is fast,flexilie and secure, promotes Modern Infrastructure innovation and for Settling Large strengthens Canada's Value Payments competitive position

SOF Centralized exctunge Step 2 ISO 20077 Faster. Data-Ric h 7 hour fund Payment Capabi I't y avaiabiity 3rd Exchange

4=1

RTR I ynx Step 1 - Release 2 RTCS System RT R • ISO 20022 for ISO 200TI Flexibility for Fund-. transfers I uture dated Movement(Wester r Release 1 credit - Allas management payments Canada) ISO 20022 for transfers Enhanced fraud („1 Alias management R 1 R Fraud managementj utur e releases ACSS End to end ISO Colateral intr. 20022 ACSS EEL Al Lis ntmmgerners - Co'atria. int r QC ucr.J Early ISO 20022 Enhanritd fraud AIM adcpton managommt 2 hour fund Request to Pay evellADlbl Additiora messaging functionality(e4. Eta tch paymrrt LVTS LVTS processing)

Source: Payments Canada, 2018

Figure 6 shows how the various entities involved in payments governance and operations in Canada interface with the payment systems.

Finance Canada provides analysis and advice on financial matters, manages regulatory policy, and provides guidance to the Bank of Canada. The bank in addition to its monetary duties also ensures the proper operation of the payments and other clearing and settlement systems.

Payments Canada manages the national clearing and settlement systems and establishes payment system directions. Its structure has been modified so that oversight of Payments Canada has been expanded to remove the control that was previously the purview of the major Canadian banks. This was done by the government to foster financial industry competition by making payment systems more open. This also involved the creation of the following entities:

. Finance Canada Payments Consultative Committee (FinPay): It is a forum of public and private sector representatives tasked with advising Finance Canada on public policy aspects of the payments ecosystem.

©2018 IDC #CA43317218 9 . Stakeholder Advisory Council (SAC): Council advises Payments Canada on payment and clearing and settlement matters and provides inputs on proposed initiatives and regulatory matters. The 20-member council has a broad stakeholder base including consumers, businesses, retailers, and government. . Member Advisory Council (MAC): It is a consultative forum for Payments Canada participants. In addition to an advisory role on payments infrastructure, it is responsible for providing guidance on the use of new technologies for the Canadian payments infrastructure. It consists of a maximum of 20 members. Members are only selected from the major and midsize banks and credit unions, which are Payments Canada clearing participants, and not from other payment system users. . The Competition Bureau: In 2017, it issued a report that analyzed the role of technology in the Canadian payments ecosystem. The study focused on innovations that affect the way Canadian consumers and SMEs commonly encounter financial products and services, with a focus on payments and payment systems, lending, investment dealing, and advice. The bureau decided to study Canada's financial services sector as a result of public consultations in 2013 that identified financial services as an area of focus for potential advocacy initiatives. The sector is also an important pillar in the Canadian economy, and financial services play a significant role in the day-to-day life of most Canadians. It is not clear how Competition Bureau review could impact the evolution of Canadian payment systems.

FIGURE 6

Canada Faster Payment Systems

DANK OF CANADA BANQUE DLP CANADA Legend LI AcMg:4y Function Compliance Oversiglit •Direct Oversight System focused on low value pup co US million). non Closinpliaws_t mandate p ay • me nt tiros sensitive cranseaionrs. The system service cheque trOn5acnOnS. eleCtrilink funds tiara-en (EFT)and debit Infrastructure ACSS credit card trari5diciNleliS Total value of Acss transaclions in 2016 wars $4.6 bash. ACM.payment volumes.'and walw act seeing steady growth clue to EFT transa4lionis_ Finance PAY M ENTS Canada CANADA Electronic wlre system for funds transfers between will-Mailing financial' institutions. Generally used to LTVS clear high.vaive payments that sr,often time.sensrtyee, -t t row value or LVIS transualans ln 2016 was $41 trillion. .0 Finance Canada Stakeholder Member Market Dynamism Oversight Payments Advisory Advisory Consultative Council Council Comrnittee( Fin Pay) (SAC) (MAC) Competition Bureau

Source: IDC, 2018

Figure 7 shows the timeline associated with activities associated with enhancement of payment systems in Canada. Initial efforts involved the launch of ACSS in 1984 and LVTS in 1999. Prior to LVTS, the settlement of large-value payments starting in 1976 relied on the Interbank International

Despite the shortcoming of IIPS, such as the lack of central calculations of positions, the major banks were reluctant to proceed with a replacement due to the costs involved and the requirement to allocate capital. Eventually, in 1992, an agreement was made to proceed with the LVTS solution, but it took seven years before LVTS was launched in 1999. The major stumbling blocks were reaching agreement on the collateralized risk structure and how capital was to be allocated by the various LVTS participants. In essence, the LVTS initiative was being guided by a reluctant cast of participants.

From 1999 to 2010, nothing significant related to payment system modernization occurred over these 10 years. In 2010, the Department of Finance decided that something needed to be done to keep Canada in sync with developments to payments systems that were occurring in other countries. In addition, it also wanted to increase competition in the financial sector.

A task force was established in 2010 to review the Canadian payments system and identify future requirements. Its final report was delivered in 2012, and then nothing was done until 2014. In 2014, the governance structure of the Canadian Payments Association was changed to make access to clearing and settlement processes open to a broader segment of parties involved in payments, to stimulate coopetition and innovation. The intent was to diminish the effective influence that a few financial institutions had over the payments systems in Canada. As shown previously in Figure 6, this control resulted in decades elapsing between significant enhancements in payments processes.

As shown in Figures 7 and 8, a speeding up of payment enhancement processes is being proposed. Time will tell if the planned implementation dates can be met. The current lack of identified feet on the ground to deliver the required solutions will make meeting most of these dates challenging.

Accenture was appointed as the project manager in 2017 and must now address many project deliverables that are scheduled for 2018 and 2019. This is particularly challenging when the solution providers for the Real-Time Rails (Instant Payments) and Lynx (LVTS replacement) have not been publicly identified.

Payment modernization implementation processes have taken about four years in Australia and the United Kingdom and two years in the United States. The United States achieved the two-year window by relying on a well-established private organization (The Clearing House) coming forward with a solution that focused on real-time payments and the transfer of funds, with the ability to both request payments and provide critical information about a payment, to efficiently deal with back-office reconciliation issues. The implementation process in the United States to this point is also devoid of significant bureaucratic overhead. The next step is to see if the Fed ACH also proceeds with a faster payment offering.

Several deliverables on the Canadian modernization timetable have a two-year window. Based on past history in Canada and other countries, meeting the target delivery dates for many of the deliverables shown in Figures 7 and 8 will be a challenge.

Canada Faster Payments Timeline, 1980–2019

BoC and Dept.of Finance began developing., new governance framework to improve system efficiency,flexibilityand promote innovation. ISO 20022.a global Task Force is electronic data Several milestoneswill Automated Cleanng largeValue Transfer launchedto review Legislation passed to interchange standard be reached around Settlement System System(I.YTS) was Canadon strengthen Canadian Lynx. payments for financial institutions, SOE and RTR. (ACSS)was launched. launched. system. payments governance. was adopted in Canada.

1980 1996 2001 2012 2015 2017 2019

1984 1999 2010 2014 2016 2018

Establishment of Dept. of Finance in Canadian paymentsAct Task Force released Finance Canada Accenturewas selected The first release of RTR is Payments Canada. cooperation with extends partropation in its fi nal report titled updated Code of by PaymentsCanada to expected in mid-2019, PayrnentsAdvisory payments systemto life "MovingCanada into Conduct for credit/debit lead a multi.year Payment Canada expects Committeelaunched a insurancecompanies, the Digital Age". card industry to ensure payments system subsequent RTR releases governance-focused securities dealers,and that interchange raze moclernrzation mutative. to happen every6 months. review of payment qualified corporations. FinPay is established reductionsare passed Payments Canada invited CGI,SIA and Vocalink to system. to advise on public on to merchants. participate ma competitive procurement process for a policy aspects of newCore Clearing and Settlement System(called lynx) payments system.

CompeutionCanada initiated a reviewof the Canadran financial services sector to exploreway of enhancing competition and innovauon adoption.

Payments Canada publisheda paper that outlined some of the changes requrred to modernize Canadas payments rnfrastructure 1. Lynx,a high value payments system to replace WI'S 2. SOE - batch payment system for lower valued.less time sensitive payments to replaceACSS. 3. RTR - a new real time paymentssystem with 2d/7/365 uptime for reaftime delivery of low value payments.

Source: IDC, 2018

Canada Faster Payments Timeline, 2017–2021

2017 2018 2019 2020 2021 Regulatory Implement changes to the ACSS ACSS Interim Credit. to meet new regulatory Risk Model Ready . requirements and align with ACSS interim Credn Risk global standards. Model implemented

AFT Market.Driven Adoption of 150 20022 for inter-Ft Exchange Enhance the batch AFT with lSO 20022, additional exchange III El window and faster funcls MT Phase 1 RFT Phase 2 availability. 3,e.

RTR RTR Phase I Enable faster payment RTR future capabilities with a real-time ISO 0 RTR Phan 1 R•ady Phase Builds 20022 payment rail. Contract awarded i

MarketstimulationforreaFtimeoverlays Lyn.Phase 1 LYNX Go-LIve Replace LVTS with Lynx. a new lynx Future reo Lyn.Phase 1 Repdy >• core clearing and settlement .0. Phase Builds O system. Contract awarded Incorporation of parallel Contract awarded 12 month testing period (a0Plorabon/ (91/ infrastructure) run and cutover SOE MIR Replace ACSS and L1S6E with SOE. SOF Phase SOE Phase 1 Reedy a new retail batch system for the >fb -1 2 Bu ilds clearing of low valued payments. SOE Masi 1 SOE Phu* 2

Rule Policy 1 Framework 9j= 4> Approach to expanded membership Modernize rules framework. 1 Modtended rutn and supporting Itg.slatn. changes

• => O Payments Canada Payments Canada Industry Go.Live Industry Go-Live Build Work Testing Market Stimulation Interim Milestone System Ready Range Milestone Range Date/ Milestone Work

Source: IDC and Payments Canada, 2018

Australia Payments Initiatives In looking at enhancement to banking and payment processes in Canada, it is usually prudent to look at what has occurred in Australia. The banking systems are similar; but because of the more aggressive approach followed by Australian banks, they usually introduce new technology at a faster pace than Canadian banks.

In 2012, the Reserve Bank of Australia (RBA) identified a need for a real-time payment platform, and this resulted in a system called the New Payments Platform being launched in January 2018. The system allows data-rich payments to be made by transferring funds from the bank account of one party to another in near real time, using an email address or phone number rather than a bank account number.

NPP Australia Limited (NPPA) was formed in 2014 to oversee the building and operation of the platform. The system was built by SWIFT, with KPMG as the project manager, using the architecture developed by the Reserve Bank of Australia in consultation with the four major Australian banks. Currently, there are 13 NPP participants. The company is mutually owned by the 13 participating institutions.

©2018 IDC #CA43317218 13 Australian Existing Payments Systems Refer to Figure 9 that shows the systems that were part of the payment system prior to the introduction of the NPP. This shows how the various systems interrelate and identifies the Fast Settlement Service (FSS) that will be added to Reserve Bank Information and Transfer System (RITS) to be the bridge between NPP and FSS. Further:

. Reserve Bank Information and Transfer System: It is a high-value settlement system, which is used by banks and other approved institutions to settle their payment obligations on a real- time gross settlement (RTGS) basis. Transactions are entered into RITS directly or delivered via external feeder systems including SWIFT and Austraclear. These include payments that settle through CLS, a multicurrency settlement system designed to reduce foreign exchange settlement risk. . High-Value Clearing System: Australian Payments Clearing Association administered system that uses the global SWIFT network to carry customer payments, correspondent banking flows, and the Australian dollar leg of foreign exchange transactions. These transactions account for around 70% of the value that passes through RITS. . Australian Payments Network Limited (APN): It oversees clearing systems for cheques, direct debits and credits, aspects of card transactions, low- and high-value payments, and bulk cash exchanges between financial institutions. This involves managing and developing regulations, procedures, policies, and standards governing payments clearing and settlement. It also administers the COIN infrastructure system, which provides network services and connectivity for retail payments. . Austraclear System: It is a settlement service for the OTC debt market and for derivatives traded on the Australia Securities Exchange (ASX) and ASX 24 markets. Austraclear is a wholly owned subsidiary of the ASX group. . Clearing House Electronic Subregister System (CHESS): It is an electronic book entry register of holdings of securities developed and managed by ASX that facilitates the transfer and settlement of share market transactions between CHESS participants. Australian Existing Payments Systems Governance Figure 9 also shows the entities involved in the governance of payment processes in Australia. More information on these organizations follows:

. Reserve Bank of Australia: Australia's central bank mandate is to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people. It does this by setting the cash rate to meet an agreed medium-term inflation target, working to maintain a strong financial system and efficient payments system and issuing the nation's banknotes. . Australian Prudential Regulation Authority (APRA): It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, private health insurance, friendly societies, and most members of the superannuation industry. . Reserve Bank of Australia Payments System Board: It is responsible for determining the Reserve Bank's payments system policy that will control risk in the financial system, promote the efficiency of the payments system, and stimulate competition in the market for payment services. . Payments Council: It is strategic coordination body for the Australian payments industry that engages directly with the Reserve Bank of Australia's Payments System Board. It fosters the ongoing development of the Australian payments system to ensure it continues to meet the

©2018 IDC #CA43317218 14 changing needs of Australian businesses and consumers with innovative, secure, and competitive payment services. . Australian Payments Council Payments Community: The Payments Community supports the Payments Council. It includes financial institutions, card schemes, major retailers, and other payments service providers; the Australian Payments Network; and the Reserve Bank of Australia. . Australian Payments Network Limited (AusPayNet): Previously, the Australian Payments Clearing Association (APCA) is a self-regulatory body for Australia's payments industry. It works to enhance the payments platform, encourage effective competition, and promote innovation in the Australian payments system. It has 100 members including Australia's leading financial institutions, major retailers, payments system operators, and other payments service providers. Membership is open to organizations that directly participate in at least one recognized Australian payment system.

FIGURE 9

Australia Existing Systems and Governance

Community of Interest Network (COJN) rod networkrg Alust rat lear System High Value Clearing System Legend PArfoe4liereued.4.60.1EirldeCe dayrnomi,correideadorteareeviloas. 11* rdrtl.eoge.dalr rr4o*S. rdPrbec rarrsiouorrs.Aor w oes ror7O% oi value •Ackul-Ary fund:Ion Wedleedi- passing LrrougARITS. Australian •NWI tWenight payments —$yrbcm Llnk 1 Network Real-time Gross S,ettlernent .0,341.7KATI.AfAlelli4I415 Paymemflearingissadatirm Asel4 regulalarybnely1acused paymenagtrermaixe

,— Reserve Ba nk Information & I 1 RESERVE FaSt RBA Payment Transfer System (RITS) BANK OF mO. 1-11 Settlement 1.— System 13oa AUSTRALIA Exchange Settlement Accounts I ( 5eryice(F55) lAlediee e0.411 maragernorn ellepericy and \ ..yon IN. La-A. P.Ivrqe--r. 1 .s 11-e S.E.7.:C.-q•-. Ausmaila Australian Net Settleiriefit Payment Council mpip. Payments Payments Council 1 Community Clea ri ng House SAS Pe SuraletKarrnolaror Urn Va lu e Payments El ect ronic Su 13 registe r Szakeholder XligralaApsyrrstnaminnowaim. System (CHESS) couned vath broad Herribefure 0511:1-IUM1 from representation. Pe ad rawmenLnipeozabom F

Source: IDC, 2018

Australia New Payment Systems Figure 10 shows the configuration of NPP. Details on the key components are as follows:

. New Payments Platform: This resulted from a review of the Australian payments system by the RBA's Payments System Board in 2012. The review identified features that would be desirable in the Australian payments system, like data-rich, real-time payments.

©2018 IDC #CA43317218 15 The Australian Payments Network (previously APCA) and a number of industry participants formed the Real-Time Payments Committee (RTPC) and submitted a proposal to deliver a solution that provided fast, flexible, data-rich payments. KPMG was engaged as the project manager, and SWIFT engaged to design, build, and operate the platform. The key features of the New Payments Platform include: . Speed: The ability to make payments in real time, with close to immediate funds availability to the recipient . 24 x 7 availability: The ability to make and receive payments 24 x 7, outside normal banking hours . Data enriched: The ability to send more complete remittance information with payments . Simple addressing: A system called PayID that enables users to more easily address payments to any recipient using an identifier like a phone number or email address . Overlay service providers: The first being Osko by BPAY The NPP system became operational in February 2018 and included PayID to simplify identifying payees and the Osko bill payment service operated by BPAY as the first NPP overlay service provider. . Reserve Bank of Australia Fast Settlement Service: This is a new RITS service supporting settlement of payments from the NPP. Australia New Payments Systems Governance . Australian Payments Network Limited: Previously, the Australian Payments Clearing Association formed the Real-Time Payments Committee in September 2012 to develop a way forward for the Australian payments industry on real-time, low-value payments. . New Payments Platform Australia Limited: Company was formed in 2014 to oversee the build, operation, and management of the NPP platform. Members included representatives from 13 major financial institutions in Australia. The company today is mutually owned by the initial 13 participating institutions.

Australia NPP Systems Configuration

NPP Australia N PP Steering SWIFT KP MG Limited (NPPA) Committee The SiftfirgeOtruniElee ervef.—Wr NPPAii teekgalenury KPIOG rewmAle far WAFT has a Itingtefill manairOP1751,xvgrain Pita te 1 aNd 28f NPPrs rt&F{Nlibbitrig bpentiorl Orflfaa SO design, build developmem.Meintenrcluelt ofthetift5.14PPAiS.8ifi1edlby and owate 14 Pp. Marldemtat5erelce It frfwi31 Itstiriziamt cirgarlia11.0r101450) tile re poeserninivelfram the pArri

swiFi !I-Redact. Legend •Difect Oversight

—System Link • I Osko by Bpay *• ■ ■ •• ■ 4W:1 by Spy Wined by MilOr ■•111 I thinkia Arl rtzgulip*Of Ma-Ellie Pfttrell13.eneStriati$ hunt vile NM. NimitftykYvkWOmpOWill POy11:1.- Entity A Entity B

Source: IDC, 2018

Australia New Payments Platform Implementation Timeline As shown in Figure 11, the implementation of NPP proceeded in an expedient manner from initiation to completion in four years. This was achieved by the Reserve Bank of Australia defining the overall architecture and then turning the implementation process over to the private sector.

Australia NPP Timeline, 2010–2018

The New Payments Platform(NPP) program was officially created. KPMG was appointed as the program manager.A Steering committeewas created to provide program oversight. NPPA reached a n agreement with Australias RTPC publishes a proposal that outlines the Reserve Bank of Australia(RBA)launched primaryblll payment provider, BPAY, to business architecture,timelinesand a largescale review of Australian payment provide an "over lay payment service'that processes for the New Payments Platform Industry testirg with NPP begins. infrastructure.The review focused on would provide fast fund availability a nd be (NPP). The proposal was accepted by the system needs over the next 5.10 years. available 24/7/365 to any consumer with a Payment System Board. bank account. 2012 2014 2016 2018

2010 2013 2015 2017

Reserve Bank of Australia publrshed a NPP is launched in February report that identified the need for a real. NPP Australia Limited(NPPA)was created to oversee the creationand operationof NPP development and internal testing with 13 participating banks time paymems system that supportslow. continues in advanceof industrytesting. and 50 smaller financial value payments and operates outside of the NPP. NPPA was founded by 12 leading Australian services organizabons. normal banking hours. financial institutions. SWIFT was appointed as the program Real Time Payments Committee(RTPC)is deliveryentity for NPP. The NPPA signed a formed. 12-year contract with SWIFT to design, build and operate NPP's core infrastructure. Reserve Bank's Payment System Board endorses a set of "core criteria-that will be RBA issued a paper that outlined the use of used to assess proposals for a real.time RBA's Fast Settlement Service(FSS) for payments system that can be used by settlement services within the NPP. consumers and businesses.

Paylo was selected as an addressing service partner for the NPP.

Source: IDC, 2018

The following are some key events in the Australian journey to faster payments:

. 2013: In June, the New Payments Platform Program was created to carry forward the work laid out in the RTPC Proposal. The NPP Program was overseen by a Steering Committee, and KPMG was appointed as the program manager. NPP was responsible for developing a platform that provides access to the infrastructure to encourage competition within the Australian financial services sector. . 2013: Throughout second half of the year, the NPP Program undertook work on planning as well as defining business and technical requirements. . 2014: Throughout the year, the NPP Program undertook a tender process for provision of the basic infrastructure that led to the appointment of SWIFT. . 2014: In April, RBA issued a paper titled Fast Settlement Service Information Paper 3 that identified that RBA's Fast Settlement Service will be a new service of the Reserve Bank Information and Transfer System, supporting settlement of payments from the NPP. FSS and RITS will provide line by line settlement of individual settlement requests received via the basic infrastructure, a system that consists of a switch, addressing service and communications network, to provide very fast settlement processing on a 24 x 7 basis. . 2014: NPP Gateways configured to support processing and routing of transactions between connected financial institutions and the Reserve Bank of Australia's Fast Settlement Service. . 2016: Building and internal testing continued in advance of industry testing. . 2017: Participant and industry testing was underway.

©2018 IDC #CA43317218 18 . 2018: NPP launch involving 50 banks, credit unions, and building societies in early 2018, with more scheduled to join later in the year. The overall Australian NPP initiative is seen to be a success as the faster payments solution, consisting of the NPP, BI, and FSS systems, became operational close to the planned implementation date. The overall program involved the development or upgrading of four major systems and took five years to implement. U.K. Payments Initiatives The United Kingdom is another good comparative. It already has a Faster Payment Service that was implemented in 2008. It provides near-real-time payment processes for a wide range of payment types.

The Bank of England (BOE) is now moving forward with a comprehensive payment renewal initiative. In 2017, the BOE released a plan for delivery of an innovative payment system. The new service will facilitate greater direct access to the bank's real-time gross settlement system for bank and nonbank providers of payment services and support settlement across most payment schemes. The solutions and planned delivery dates are shown in Figure 12. The initiatives are scheduled to take place over a seven-year time frame. U.K. Existing Payments Systems There are several payment systems controlled by the Bank of England or financial industry participants involved with payments. These include:

. Real-time gross settlement service: The system is owned and operated by the Bank of England (BOE) as the core of the settlement process for sterling payments and securities transactions. It is a critical part of the United Kingdom's two principal funds transfer systems CHAPS and CREST: . CHAPS: Same day electronic funds transfer service for high-value sterling payments that is owned and operated by the BOE . CREST: United Kingdom–based central securities depository and securities settlement system that is owned and operated by Euroclear . Bacs Payment Schemes Limited (BPSL): Bacs system is for making payments directly from one bank account to another via direct debit or direct credit schemes. Company is member owned, primarily by its bank members. . Faster Payments Scheme Limited (FPSL): Provides near-real-time payments, 24 x 7 x 365 including standing orders, internet, and telephone banking payments. It also supports Paym. It settles net, three times every business day in RTGS. It is a nonprofit corporation mainly controlled by its bank members. Key dates in its history: . May 2008 — Launch of Faster Payments Service . April 2014 — Paym is launched . November 2015 — Transaction limit increases to £250,000 . LINK: It is the United Kingdom's largest ATM scheme that enables customers to use ATMs and also supports Paym. The network settles in 24-hour cycles. Transactions that take place over the weekend and on public holidays settle in RTGS on a net basis on the following business day.

©2018 IDC #CA43317218 19 . Paym: It is a service that enables payments to be made using a proxy, such as a mobile phone number or an email address, to make a payment via Faster Payments or LINK to a bank account. . Cheque and Credit Clearing Company (C&CCC): It is a nonprofit industry body funded by its members. It has managed the cheque clearing system in England and Wales since 1985 and in Scotland since 1996. It is designated by HM Treasury as a Regulated Payment System, and as of April 2015, the payment systems managed by the C&CCC are regulated by the Payment Systems Regulator (PSR). While being an early implementor of real-time payment processes, the United Kingdom has been a laggard in the introduction of cheque imaging. Access to funds associated with deposited cheques can take up to six days. The implementation of a new, image-based cheque clearing system, which will ultimately provide faster access to funds, began in October 2017.

Further information on existing payment processes is shown in Figure 12. U.K. Existing Payments Systems Governance The governance processes for financial services in the United Kingdom emanate mainly from the Bank of England and the Financial Conduct Authority. Key players include:

. RTGS and CHAPS Governance: The Bank of England has dedicated governance arrangements for the RTGS and CHAPS services. The RTGS/CHAPS Board provides strategic leadership for the RTGS and CHAPS services, including the RTGS Renewal programme. . Financial Conduct Authority (FCA): The Financial Conduct Authority is the conduct regulator for 56,000 financial services firms and financial markets in the United Kingdom and the prudential regulator for over 18,000 of those firms. . Prudential Regulation Authority (PRA): The Bank of England regulates and supervises financial services firms through the Prudential Regulation Authority, which is the prudential regulator of around 1,500 banks, building societies, credit unions, insurers, and major investment firms. . Payment Systems Regulator Limited: It is the economic regulator for the £81 trillion payment systems industry in the United Kingdom. It is a subsidiary of the Financial Conduct Authority. . Bacs Payment Schemes Limited: It is a membership organization consisting of 16 of the United Kingdom's leading banks and building societies that operate and manage the Bacs payment system. The Bank of England provides oversight as directed by HM Treasury. U.K. New Payments Systems The plans include the development and implementation of a New Payments Architecture (NPA) to introduce effective competition between providers of payment services, composed of a layered structure to make it easier for innovation to occur at a quicker pace and also provide security, stability, and resilience.

The BOE published a Blueprint on May 9, 2017, for RTGS renewal and delivery of an innovative payment system. The new RTGS service will facilitate greater direct access to RTGS for bank and nonbank providers of payment services and support settlement across most payment schemes. The BOE will seek to harmonise the messaging standards used in RTGS with those used in the U.K. retail systems and major international wholesale systems. The renewal vision involves five key features:

The plan is to extend direct access to RTGS to nonbank payment service providers to enable broader access to payment systems. Electronic money and payment institutions authorised by the FCA would be eligible to apply for settlement accounts with the bank. They will not be eligible to participate in the Sterling Monetary Framework (SMF) and would not have access to reserves accounts or intraday liquidity.

A consultation paper by the Payments Strategy Forum (PSF) published in July 2017 provided a Blueprint for the future of U.K. payments. It sets out a vision for the U.K. retail interbank payment systems that will enable simpler access, ongoing stability and resilience, greater innovation and competition, increased adaptability and better security to meet the needs of current and future generations of payment service users.

The NPA program includes the revamp of RTGS, Faster Payments, BACS, and C&CCC systems. It does not include changes to CHAPS, LINK, and card schemes.

Faster Payments Service Limited in October 2017 requested expressions of interest from qualified parties for the renewal and associated full management of its NPA-compliant infrastructure. The procurement being led by FPSL is for the real-time 24 x 7 push payment clearing and settlement risk management system that is part of the New Payments Architecture. NPA will replace the Faster Payments Service. U.K. New Payments System Governance Several additional parties became involved in the governance of the new payments system:

. Payments Strategy Forum: The Payments Strategy Forum (the Forum) was announced by the Payment Systems Regulator in March 2015. The Forum led a process for the payments industry to collaboratively identify and deliver innovation initiatives. A report by PSF in November 2016, identified a strategy for the U.K. retail payments industry, included the consolidation of the three main U.K. retail payment system operators (PSO): Bacs Payment Schemes Limited, Cheque and Credit Clearing Company Limited, and Faster Payments Scheme Limited. PSF in May 2017 issued a New Payment Architecture Program Initiation document that outlined the responsibilities and deliverables for the NPA. PSF with the assistance of working groups and professional project management is responsible for the delivery of NPA. . Payment System Operator Delivery Group (PSO DG): This is established by the Bank of England and the Payment Systems Regulator in response to the Payments Strategy Forum that proposed consolidation of three retail payment system operators: Bacs Payment Schemes Limited, Cheque and Credit Clearing Company, and the Faster Payments Scheme Limited. . New Payment System Operator (NPSO): The plan in the PSO DG report issued in May 2017 has the NPSO taking ownership of the NPA design and implementation at the end of 2017. . Faster Payments: It comes under the jurisdiction of the New Payment System Operator, which is consolidating the United Kingdom's retail payment schemes. The NPSO will be responsible for further stages of the procurement process as well as the development of the rules and standards for the other components of the NPA.

©2018 IDC #CA43317218 21 . UK Finance: From July 1, 2017, the finance and banking industry operating in the United Kingdom is represented by a new trade association, UK Finance. UK Finance will bring together most of the activities formerly undertaken by the Asset Based Finance Association, the British Bankers' Association, the Council of Mortgage Lenders, Financial Fraud Action UK, Payments UK, and the UK Cards Association. It will represent around 300 firms in the United Kingdom providing credit, banking, markets, and payments-related services. The governance changes are quite extensive, and it will be challenging for parties in the United Kingdom operating current payment systems and implementing the NPA to address the new governance process without being bogged down by increased bureaucracy and uncertainty.

FIGURE 12

U.K. Faster Payments Systems

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_ , largni n4qvilX14- , , Link ATM ra4werrk settle. irk 24 flour CALK. Week eniPted4a5. , -, .1 Real Time Gross 1 Service Iransirtbansare 011 i Clear lug Frouse I rYlL oft Iwo bursme&selay. / Settlement(RTGS) Automated r I Payments System 1.1.4."lartcr LIFTWIT:IrI m. (CliAPS) Suppensfitdriiple St.NLIem ern modes pm &Mix:. I lirur 1..11ernern5 for lowsratKirrerilti lichynstrcarri feeder netkvirki inierbaptparfieric spier!)fce f N.1 thsal melieelmetycek seeJes meth voluewirOesad, 1 Visa iniA riwregici. rivyrrierrlsoricl kprf I Wttls/Lekilitkeklid2ry IrdriNlx5411 va•hee paraeAti. Operattalty 1 Europe I ate seeded on a ro basis.a.n RGE sirior. 2017. % t ,.. e next business clay. Cheque & ccnirid paymcnLmbtfr.far the BANK OF ENGLAND P exthained rid sectlermens of Credit P cheques and(redo tor r consumers ruo financial I Iicazccc) ifiSthuNkerS

Source: IDC, 2018

The United Kingdom is looking at an eight-year process from 2017 to 2025 to implement the NPA (see Figure 13). The time required may be the result of the number of systems and parties involved in the implementation process. The scope of the NPA initiative is similar to the scope of Payments Canada Payments System Modernization initiatives. It will be challenging for Payments Canada to complete the modernization tasks within the targeted four-year window.

U.K. Faster Payment System Timeline, 1996–2025

BoE announces a plan to develop Stakeholdersexpect to continue The Faster Payments a blueprint for a next generation defining system requirements Service, Bacs and linage RTGS system. Following The NPA is expected to be Faster Payments for the NPA. Key development Clearing System (ICS)will Service is stakeholder consultations,the launched following core launched. phases for implementation of have migrated to NPA and BoE released a high.level upgrades to RTGS functionality+) the NPA are expected to be the legacysystems will be statement that outlinedthe 2020. outlined in 2018. shut down. vision for a new RTGS systern. 1996 2015 2017 2020 2022

2008 2016 2018 2021 2025

T he Payments Strategy Forum was launched bythe Payment CHAPS system ownershipwas Major ity of new RTGS Bacs transactionswill be Systems Regulators to identify transferredto the Bank of functionality is expeaedto be RTGS commencesopera tions. migrated tothe NPA. the future direction of the UK England. lWe by 2020. payment system

A program for the long-term renewal of the payments infrastruatrewas officially launched by BoE in partnersHp with key stakeholders.

The New Payment System Operator(NPSO) took ownership of the New PayrnentsArchitecture (NPA)initiative; a project to modernize the UK payments architecture and develop a next generation RTGS solution. The Payment System Operators Delivery Group (PSO DG)submitted a recommendation for the consolidation of three paymentsystems: Bacs, Faster PaymentsServices and Cheque and Credit Clearing(C&CCC).

Source: IDC, 2018

U.S. Payments Initiatives The operation of the payments system in the United States is split between the Federal Reserve Bank (Fed) government entity and private payment solution providers. Figure 14 shows the key players and their roles and is further described in the sections that follow.

A key difference between faster payment initiatives in the United States and the other countries covered in this document is that the Fed while providing guidance and goals has stepped back from directing how faster payments solutions are to be implemented by 2020. The Fed has also not expressed interest in operating a new faster payments service.

The governments of Australia, Canada, the United Kingdom, and the United States have taken a hands-on role in defining faster payments solutions and directing how they will be implemented. The United States in following its government light inclinations has left it to private financial system participants to move forward with their selected approach. This has the advantage of speeding up implementation processes as illustrated by Figure 14. U.S. Existing Payments Systems . Fedwire Funds Service (Fedwire): It is a real-time gross settlement system provided by the Federal Reserve Banks that enables participants to initiate funds transfer that are immediate, final, and irrevocable. In 2008, approximately 7,300 participants made Fedwire funds transfers. The Fedwire Funds Service is generally used to make large-value, time-critical payments. . The Clearing House Interbank Payments System (CHIPS): It is a bank-owned, privately operated electronic payments system. CHIPS handles domestic and international high-value

©2018 IDC #CA43317218 23 payment transactions in U.S. dollars. It is a real-time, multilateral payment system typically used for large dollar payments that combines the liquidity efficiency of a netting system and the intraday finality of a real-time gross settlement. Banks typically prefer to use CHIPS for payments that are less time sensitive, instead of Fedwire, as CHIPS is less expensive (both by charges and by funds required). One of the reasons is that Fedwire is a real-time gross settlement system while CHIPS allows payments to be netted. The Clearing House The Clearing House is a banking association and payments company that is owned by the largest commercial banks operating in the United States. It owns and manages the following entities on behalf of the major banks in the United States:

. The Clearing House Association LLC: It is a nonpartisan organization that engages in research, analysis, advocacy, and litigation focused on financial regulation that supports a safe, sound, and competitive banking system. . The Clearing House Payments Company LLC: It owns and operates core payments system infrastructure in the United States and is currently working to modernize that infrastructure by launching a new, ubiquitous, real-time payment system. . Electronic Payments Network (EPN): It is an electronic automated clearing house (ACH) that serves as the sole private ACH in the United States clearing and settling nearly $2 trillion in U.S. dollar payments each day, representing half of all commercial ACH and wire volume. It handles numerous types of credit transfers, such as payroll payments and dividends, as well as debit transfers, such as loan payments and insurance premiums. . SVPCO: It is the Clearing House's line of business that operates the Clearing House Electronic Cheque Clearing System (CHECCS), a computerized settlement system that streamlines the cheque clearing, collection, and return process, and enables the secure exchange of digital cheque images between financial institutions. The Clearing House does not exchange physical cheques any longer as a result of The Check Clearing for the 21st Century Act (Check 21) federal law that became effective in 2004. Check 21 allowed electronic cheque collection to become the primary method for handling cheques. Almost all cheques processed by the Fed today are deposited and presented using the Fed's electronic cheque collection services. These changes have enabled the Reserve Banks to reduce their national cheque-processing infrastructure so that, since early 2010, paper cheques have been processed at one location nationwide, down from 45 in 2003: . Reserve Banks ACH (FedACH) Network and Electronic Payments Network: These are the two ACH operators operating in the United States. Each processes about half of the ACH transactions. . Same Day ACH Payments: An ACH Rule change in 2015 added intraday settlement windows. Implementation started in 2016 and was completed in 2018. This allowed for the same day processing and settlement of virtually any ACH payment.

U.S. Payments System

TVatianal Automated NACHA,o comprickkordelh Mr Federal Reserve, rrharoarmlhe nalnand reepulatlorespmerring Clearing House the end rnaleckElleyegeddIrredtile led E ppo. WK.& Ned Putretkled at aro elle:dry As.sociation (NACHA) Eribtralrberirtreldyfrerftilake FedWire Funds Federal Reserve I *MCI ISan MAStrla Ltd siname must Service (FedWire) UNITED STATES who* run by ihe Roe alsbnesyn:sh* umber" VIM FEDERAL =P Automated hassenst she oeboebixed P 11% realltcnegrude sel Element ;pinny...MOM try C tearing House tilortochymerumorgoliPPO. The leea.em I ult. Fe*TM IIMINVE 1 ha L INW1011210131111 RESERVE SYSTEM masons.lar opivccem7sesr501. 4ri censsses0.1 I +MAE Undid ransfer Mt are immtaaLtgnat. (FeOACH) ; ACM Yellerlt a Ste Lt5- atrdirrrexatrldence accemed.seelliflne II guides/tit:WI rnakeLlrydquilie l.tre.<01 KAP korwls. 11 P C l earing House 1 IhemeraUr4 Fir er..50#1.eirtlrarw ekannE p i him-Darn similar Ph Orph'rr vaaekd try Feder al Electronic i ikeitfve.flESJ d the or.). pied a I Ear aperacce Clearing House p x`ihrAuGc+naietl Cleanns House(ACK' formwork li Payments i Association ▪ thd. Lidded Raids and praDevsei abaci. Kele a r t Network .(1E12N) ; al mrnmerrJallLHtiahxnrm Mt LI—S. T{HA)

The Clearing House(TCH) e , *WM gw...41gedetler 41.1.4laif Ow ring House i Clearing House I 'tidal-Merge WW1 1.1 Stre dd.% &insr41 i Idellelpg IA /Wife di$1.5 Siiidel te lltrieelbeeWegbleule MI]Mellltredi Dn.} ehtiliel: Payments interbank , 1:64104,41 *Mit{ Md.141Atidael, n 0.9546. whICP14 MX(*girt enahisloveyesas , PaymemM System i combines Iptis Om*imprielphonrcs pormsxabsyneeksihd she more MIA* Corn pa ny worm:ft lailddlley tale Ilea 11#1*14 edidetleledefidel% 00:1110.1W101 L8 Need (FayCol L (CHIPS) Meter. and 0.4 9ri44-5.fivry 11745- geikeN rrW latetem *UNIT Cer PC1. emnic gerder.- 1 ;

%KO li an 106.66y6444 that wrens Legend Small Value eft4e5.41.1lAkirtr.044 OP Sft# SO gel Iltdde 6'neger5 0}"ftel.ert Sr.tyndt+7 0.Ingrtrel:del ▪ ArMittes F unalan Payment {TOW e."Nettl.enrOdgtr !Kt ,M4,10 kayeertet5 •Citert Crobrialght Company CSVPCD) 145.9.1...A151.4f.e eirral. VW-K/1 Orld•VvraLey OM:VW Igrgerggi.SIC .4.Crf.404.rrier Systern • Ir4Alml•

Source: IDC, 2018

U.S. Existing Payments Systems Governance There are three major entities that have oversight of banks in the United States. In the case of payments, the Federal Reserve has taken a leading role. The following is a brief summary of their mandates related to payment processes:

. Federal Reserve: It does not have the authority to mandate the introduction of faster payments, but it can play a leadership role in coordinating industry participants and encouraging them to implement a faster payment infrastructure. It has established a 2020 target for the availability of real-time payments. The Fed has deferred a decision on it assuming an operator's role. . Comptroller of the Currency: This is a bureau of the Treasury Department that exercises control over the operations of national banks through a variety of means. . Federal Deposit Insurance Corporation (FDIC): It directly supervises and examines insured state-chartered banks that are not members of the Federal Reserve System. . Consumer Financial Protection Bureau: A U.S. government agency that makes sure banks, lenders, and other financial companies treat clients fairly. . National Credit Union Administration: It provides regulation and supervision to ensure a safe and sound credit union system.

©2018 IDC #CA43317218 25 U.S. New Payments Systems Planning Federal Reserve's 2013 Payment System Improvement — Public Consultation Paper received broad agreement with the gaps, opportunities, and desired outcomes presented in the paper that addressed payment speed, security, efficiency, cross-border processes, and need for collaboration.

The Federal Reserve System Faster Payments Task Force (FPTF) was established in 2015 and included more than 300 participants from banks, corporations, consultancies, technology firms, nonbank payment providers, government bodies, and consumer groups. During 2015, it published 10 recommendations for making payments faster and developed 36 criteria that could be used to evaluate faster payments solutions. Many of the recommendations are aimed at addressing the gaps and shortcomings of a decentralized operating model with multiple players.

In January 2015, a paper titled Strategies for Improving the United States Payment System was issued by the Fed. It contained five strategies related to stakeholder engagement, effective approaches, and security, domestic, and cross-border payment efficiency, along with enhancements to the Fed payments, settlement, and risk management services.

In January 2016, the FPTF released a document titled Faster Payments Effectiveness Criteria. This identified six desired outcomes that will facilitate the movement to faster payments and 36 criteria to measure the effectiveness of proposed solutions.

In early 2016, the FPTF solicited proposals for end-to-end faster payments solutions that could address the need for fast, safe, ubiquitous payments. 22 proposals were received and after review by McKinsey, which has been hired by the task force to conduct an independent review, 19 proposers continued with the task force review process that ultimately resulted in 16 solution proposers deciding to release their proposals to the public.

The Fed in September 2017 published Strategies for Improving the United States Payment System: Federal Reserve Next Steps in the Payments Improvement Journey that identified five desired outcomes and the tactics it will use to improve the speed, safety, and efficiency of the U.S. payment system. The Federal Reserve also issued a paper in September 2017 titled Faster Payments: Market Structure and Policy Considerations.

In January 2017, the FPTF released the first of its two-part final report that described the task force's approach and articulated its views on the value of faster payments for addressing stakeholder needs. The second part, released in July 2017, shared the results of the proposal assessment process and recommended industry actions to support the goal for all end users to be able to benefit from faster payments transactions by 2020. The report detailed 10 possible approaches to achieving a faster and more efficient payment system.

The task force recommendations identified the need for ongoing industry collaboration to address infrastructure gaps; develop models for governance, rules, and standards; and consider actions and investments that will contribute to a healthy and sustainable payments ecosystem. A number of recommendations called for Federal Reserve support to facilitate this ongoing collaboration. Faster Payment Model Options in the United States The U.S. payments industry is in the process of developing ubiquitous, safe, faster electronic solutions for making a broad variety of business and personal payments. Although a few private sector firms are

There are three potential market structures that may emerge:

. A dominant operator environment . A multioperator environment . A decentralized environment It appears that there is a movement to a decentralized approach in the United States and evidenced by the launch of the Clearing House Real-Time Payments system. The Zelle and Venmo payments solutions have also been launched. The decentralized real-time payments environment approach that is gaining traction in the United States is opposite to the centralized solutions being pursued in the other countries covered by this document.

The Fed and the FPTF have established a year 2020 deadline for availability of ubiquitous real-time payments. The Fed is not taking an active role in developing a solution other than encouraging the private payment sector to provide solutions. The Fed has also not identified an interest in managing and operating a real-time payment application. While this approach reduces bureaucracy and overhead, the lack of common standards and processes will make movement of payments between multiple diverse systems challenging. Faster Payments Initial Implementations The Clearing House TCH in conjunction with FIS submitted a proposal in April 2016 to the Federal Reserve's Faster Payments Task Force requesting evaluation of its Real-Time Payments system. The solution was designed to deliver a real-time payments system in the United States that will help achieve ubiquity by making enhanced RTP services available to more than 3,000 financial institutions.

The RTP solution is based on VocaLink technology that supports e-invoicing, bill payments, insurance claim payments, and cash on delivery payments. RTP also provides transparency and certainty, with immediate confirmation notices, that payments have been sent and received and instantaneously settled. It also includes nonfinancial messages alongside the financial transaction data.

The RTP system enables participants to initiate credit transfers, receive final and irrevocable settlement for credit transfers, and make available to receiver's funds associated with such credit transfers in real time 24 x 7. The RTP system only handles payments in the United States. The RTP system provides a mechanism for participants to send and respond to requests for the return of funds for any reason.

TCH will determine a prefunded requirement for each sending participant based on the sending participant's anticipated RTP activity. A sending participant must transfer funds in an amount equal to or greater than its prefunded requirement to the prefunded balance account via Fedwire before it can originate any RTP payments.

The RTP system shall not release a sending participant's payment message to the receiving participant unless the sending participant's current prefunded position is equal to or greater than the amount of the payment Message. TCH shall provide reconciliation reports after the close of reconciliation windows throughout the RTP day at times established by TCH.

©2018 IDC #CA43317218 27 TCH launched its real-time payments system in November 2017. The RTP system was designed and built through the collaborative effort of TCH's 25 owner banks to meet the objectives of the Federal Reserve Faster Payments Task Force. RTP is open to all U.S. deposit-taking institutions with a goal of reaching ubiquity by 2020. RTP System Governance The TCH board of managing directors has delegated authority to the RTP Business Committee to oversee the operation and management of the RTP System. Other Payments Systems Additional payment systems are appearing in the United States, but these do not fully comply with the criteria established by the FPTF for faster payment services. Their presence is an indicator that many more systems will be launched in the future. This will bring the need for ubiquity to the forefront. Further:

. Zelle: A digital payments network launched in 2017 in the United States. It is owned by Bank of America, BB&T, Capital One, JPMorgan Chase, PNC Bank, U.S. Bank, and Wells Fargo. The Zelle service enables individuals to electronically transfer money in minutes from their bank account to another registered user's bank account (within the United States) using a mobile device or online banking service. Users can also request that funds be sent to them. . Venmo: A system owned by PayPal that can be used by anyone to pay family and friends in the United States with a phone number or email, whether or not they have Venmo. All recipients need to do is create a Venmo account to claim their payment. A key Venmo requirement is that funds received or sent must be placed in a Venmo wallet. Direct bank to bank transfers are not available. Availability of funds can take one to three days, and significant changes would be required for it to join the faster payment ranks. U.S. New Payments Systems Timeline The National Automated Clearing House Association (NACHA) was established by the American Bankers Association in 1974 and oversaw conventional paper cheque clearing for 30 years. In 2004, a significant introduction of electronic processes occurred with the Cheque Clearing for the 21st Century Act that allowed for the exchange of electronic cheque images. By 2010, there was a need for only one paper cheque processing center.

In 2004, the Canadian Payments Association also identified a need for electronic cheque processing. Implementation began in 2008 but required the establishment of bilateral agreements between Direct Clearer banks, as CPA members could not agree on a centralized exchange process. The bilateral approach continued until 2013 when CPA rules were changed to permit the central exchange of image captured payment items. The transition to electronic cheque images in Canada took nine years versus six years in the United States. This need for 50% more time to achieve the same results as our U.S. counterparts generates some concern that the dates identified in the Canadian Faster Payment plans can be met.

Another example is the initiatives by the Fed to improve payment processes in the United States. This involved identifying strategies and the establishment of a Faster Payments Task Force (FPTF) in 2015 (see Figure 15). In 2016, the FPTF issued a request for proposals that resulted in 19 submissions after an initial review. The Fed was not in a position to award any contracts, so the respondents were left to their own devices on how to proceed. One of the respondents was the Clearing House, and they

Contrast this with Canadian efforts that started in 2010, and eight years later, the only identified deliverable is a series of published papers. This track record does not engender confidence that the timelines to deliver the enhanced payment solutions will be met.

FIGURE 15

U.S. Faster Payments System Timeline, 1974–2018

The FPTF announced an RFD for a next NACHA and Accenture begin The Check Clean rg for the 21st The Federal Reserve outlinedfive core pillars generation payment system.As part of this collaborating to launch a CenturyAct is enacted. The law that would serve as the foundation for a next process,22 proposals were reviewed by an developer community. is designed to enable banks to generationpayments system:speed,security, independent assessment team.Following the focused program to support handle morecheques efficiency, international interoperabilityand initial review.l9 proposers opted to continue API standarckzationacross electronically. collaborativesolutiondevelopenent the process of task force review. the payments ecosystem 1974 2012 2015 2017

2004 2013 2016 2018

The National Automated The Federal Reserve initiated a The Federal Reserve issues a new paper around some of Clearing HouseAssocration paymentsystemimprovement The Federal Reserve publishes the the near-termoperational priorities for payment system (NACHA)is formed as a branch initiative to pronlote payment Strategiesfor Improving the U.S. Payment modernization.The paper builds on the findingsof the ol the American Bankers speed.safety, efficiencyand Sysrem paper to kickstart the payment Strotegteslor tmproving the U.S. Payment System report. ASSOCiation. broad user accessibility. infrastructure renewal process. NACHA established a new rule providing The FPTF releases a report titled The U.S. Path To Foster for same-dayACH processing and Payments final Report Port One: The Foster Payments Task settlement of almost al I AC II payment by force Approaeh. The report outlines the PPTF's approach 2018. Implementation proceeded n to payment system modernization. three phases starting in 2016. Fed Faster Payments Task Force(FPTF) The Clean ng House(TCH) launches a hosted Real.T was established by the Federal Reserve. Payments Incubator sennce for early-adopter financial FPTF involves more than 320 institutions in the US. The solution allows financial organiutions,representing a varietyof institutions to begin testing of real-time payments. stakeholder segments.The task force developed 36 criteria that could be used The FPTF releases a report titled The U.S. Poth to Taste, to evaluate faster payments solutions. Payments,final Report Port TWO:A Coll to Aet,on.The report identified the proposed assessment process and recommended indusuyactions to support reaching a paymentsystemmodernization milestoneby 2020.

The Interim Collaborauonwork Group(ICWG)was established by t he FPTF to faci litate the development of a payment system governanceframework for rhe US.

The Clearing House(TCH) launched RTP,its real.time payments system faster payments network.

Source: IDC, 2018

ADVICE FOR THE TECHNOLOGY BUYER

Payment technology and solution acquisition staff in banks and central payments process providers need to assess the internal capabilities of their organization to quickly deliver faster payment solutions. Where gaps exist, they will need to move quickly to acquire skilled resources before they are engaged by competitors.

Carefully assess the amount of work involved to ensure the organization is capable of implementing the most significant change in payment processes in decades. Past experience has shown that when payment processes are involved, the time and effort to deliver solutions often exceed expectations. All project plans including internal and external resourcing will need to be carefully audited to ensure that they mesh with the payment modernization plans of the central settlement authorities.

Related Research . IDC MarketScape: Worldwide Payment System Implementation Services 2018 Vendor Assessment (IDC #US43550917, February 2018) . IDC FutureScape: Worldwide Payments 2018 Predictions (IDC #US43253217, December 2017) . IDC PlanScape: Implementing a Strategic Payment Hub (IDC #EMEA43211617, December 2017) . The Future of Payments: Faster, Cheaper, and Better (IDC #US42833717, August 2017) . Amazon and Whole Foods: The Payments Perspective (IDC #US42841217, July 2017) . PSD2 and Fintech: Delivering Innovation (IDC #US42715517, July 2017) . Presentation: Canadian Banks Digital Transformation and Maturity Level (IDC #CA42119017, February 2017) . Perspective: Money 20/20, 2016 — Discussing the Future of Financial Technology in Payments and Bank Channels (IDC #US40136116, December 2016) . Business Strategy: The Rise of "Alternative" Rails in the United States (IDC #US41831916, December 2016) . Perspective: Banks and the Blockchain (IDC #CA41214116, November 2016) . Business Strategy: Mobile Payments in Canada — 2016 Status Update (IDC Financial Insights #CA40652216, February 2016) . Perspective: Banks Not Positioned to Deliver Mobile Payments' Core Functions (IDC Financial Insights #FI256851, June 2015) . Business Strategy: Worldwide Consumer Mobile Payments Forecast, 2015–2020 (IDC Financial Insights #FI256909, June 2015) Synopsis This IDC Perspective identifies the initiatives that are underway today to enhance core payment processes in Canada.

The Canadian government has initiated a Payment System modernization initiative that after eight years of study is finally moving into the implementation phase. The intent is to enhance financial services competition, substantially reduce the cost of handling payments by Canadian businesses, and keep Canada in sync with enhancements of payment systems globally. Taxation authorities were also interested in the inclusion of data-rich payments that would help compliance with tax laws.

Key components include the acceleration of payment transactions, the access to payment systems by nonfinancial entities, and the use of ISO 20022 payment data standards to reduce payment handling overhead.

It is interesting that while the financial industry is embarking on a costly payments modernization journey, there appears to be no groundswell of consumer interest in features like faster payments and faster fund transfers. Delays in moving funds from account to account that involve days seem to be accepted as the norm. The payments modernization process has therefore been driven by the interest of governments in maintaining the competitiveness of the country and financial institutions in reducing their costs.

©2018 IDC #CA43317218 30 "The implementation of enhanced payment systems in Canada is a challenging initiative involving substantial costs, challenging implementation plans and many participants. The key to success will be the early agreement on the scope of the deliverables, highly skilled solution providers, and exceptional project management skills to keep control of the many participants that are involved," says Robert Smythe, research associate, IDC Financial Insights.

©2018 IDC #CA43317218 31 About IDC International Data Corporation (IDC) is the premier global provider of market intelligence, advisory services, and events for the information technology, telecommunications and consumer technology markets. IDC helps IT professionals, business executives, and the investment community make fact- based decisions on technology purchases and business strategy. More than 1,100 IDC analysts provide global, regional, and local expertise on technology and industry opportunities and trends in over 110 countries worldwide. For 50 years, IDC has provided strategic insights to help our clients achieve their key business objectives. IDC is a subsidiary of IDG, the world's leading technology media, research, and events company.

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