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Payments Trends in Canada, 2018 — in a Global Context

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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 ©2018 IDC #CA43317218 3 FIGURE 2 Faster Payments Implementations Globally Number of -Countries That fmplemented Faster Payments in Identified Time Window 10 8 3 Before 2000 2000-2009 21010-2014 2015-2017 Source: IDC, 2018 ©2018 IDC #CA43317218 4 Payments Status and Initiatives in Canada Payments Canada currently owns and operates two main clearing and settlement systems: . 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
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