Worldwide Payments Systems - Magazine
Canada's Payments system: A case study of
The Canadian Payments Association has had great success over
the years in fulfilling its key mandates. The checks, wire transfers,
direct deposits, pre-authorized debits and bill payments, that
pass through the CPA's payments system are the lubricants of
the Canadian economy. And we make sure that they all flow smoothly.
The CPA operates clearing, payment and settlement systems that
are the envy of countries around the world. And the organization
continues to take the lead in the development of new technologies
and payment methods.
The result has been a long and distinguished history of consistent
growth in the number of members, transactions processed and dollar
Last year, 4.5 billion transactions worth close to $34 trillion,
an average of $134 billion a day, were cleared and settled, more
than double the total of ten years ago. And the number of members
has increased from XXX to 116 during the last X years.
Particularly impressive has been the success
of the Large Value Transfer System, which provides real-time,
final payment and settlement, according to global standards.
Along with the Automated Clearing Settlement System (ACSS), which
handles paper-based and smaller transactions, LVTS a key element
of the country's payment system, in particular, because it eliminates
risk and enhances the system's overall stability.
LVTS has been highly successful since its inception in 1999,
and now comprises over 85% of the high dollar value of transactions
exchanged within the Canadian Payment Settlement Systems.
As a result, the CPA is trying to make LVTS even better, and
to find ways of moving more ACSS payments streams to settle over
to the LVTS.
One important step was taken late last year, when LVTS operating
hours were harmonized into the international Continued Linked
Settlement (CLS) system.
The CLS is a global service that enables the simultaneous settlement
of both legs of a foreign exchange transaction between member
financial institutions. The service currently links seven of
the world's central banks and many of its leading financial institutions,
including eight CPA members.
The implementation of a $25 million ceiling on paper-based payments
was another important move. This ceiling has the potential to
migrate an additional $7 billion a day over to LVTS.
Another key initiative that is inching slowly ahead is the Truncation
and Electronic Check Presentment (TECP) Project, which the Board
has devoted increasing attention to in recent months.
Check truncation is the most strategic and far reaching initiative
to transform the Canadian Payment System that has been undertaken
in recent years.
The use of imaging and electronic presentment would make an enormous
contribution toward reducing end-to-end check processing times
by decreasing paper movement between financial institutions.
Currently, more than a million kilograms of checks and other
paper-based items are shipped or flown across the country each
year, to the branches they were drawn on.
But with cheaper and faster digital scanning, storing, archiving
and retrieval systems, computerizing the entire process is becoming
an increasingly attractive option.
Electronic check presentment would eliminate numerous labour
intensive processes, reduce shipping and courier costs and substantially
boost the system's overall efficiency.
Several European countries have already gone ahead with check
truncation and electronic presentation projects of their own,
and the U.S. banking system is cautiously moving forward too.
Last year the Board formally established the goal of moving toward
electronic check presentment as one of its key priorities.
However the project would entail a substantial, industry wide
investment, -- about $183 million. And to implement such a system
the Bills of Exchange Act would have to be amended.
As a result, a thorough and detailed study of the project's feasibility
is currently being undertaken, and a final decision is imminent.ps
the subject will be either dealt with at the May 31th Board meeting
or at a subsequent Board meeting schedule in mid-June.
The bottom line is that in terms of openness, reliability, speed
and safety, Canada probably has the best payments system in the
But it is not enough to be the best. Canadian financial institutions
need stay ahead of the curve. And I am convinced that the CPA
is taking the right steps and leading the way.
Key challenges facing the Canadian payment
Despite the organization's impressive success during the last
two decades there remain some important challenges facing the
Canadian Payments system, and today I want to address a few of
The first issue I want to talk about is the openness of the system.
Then I will discuss the organization's role in spurring financial
services innovation. I will conclude with some thoughts about
where the CPA is headed in the future.
Access to Canada's Payments System
The question of the openness of Canada's payments system is a
crucial one. Over the years, bold steps have been taken to give
new players access, and the organization's membership has increased
dramatically as a result.
The first step came in 1981, when foreign banks got access to
the payment system through their newly established Canadian subsidiaries.
A second big push came in 1998 when foreign banks were given
the opportunity to open Canadian branches using liquidity reserves
from head offices in other countries.
Some of these foreign banks joined the CPA as users of the Large
Value Payment System (LVTS,) notably Bank of America National
Association & BNP Paribas (Canada).
One could say that the LVTS was the first step in opening up
the payment system for wholesale payments.
Most recently, in 2001, a third initiative, the Canada Payments
Act, part of a major financial services legislation overhaul
gave new players such as securities dealers, mutual funds and
life insurance companies the opportunity to become members of
their category in the Canadian Payment Association thus getting
access on their own to the payments system.
However despite the changes, and despite major efforts by the
CPA, not one of the new players that the legislation was designed
to encourage has since joined the CPA as a member.
Many in the association would have liked to have seen such innovations
as a life insurance company designing an annuity that is accessible
through Interac, or money market funds available through Internet.
But for various reasons none of these initiatives were undertaken.
Ps Jean-Paul Caron, nous avions ici une reference
ou un point de jugement qui disait : some of the more cynical
people would say that Insurance Companies did not truly want
access to the payment system, but were demanding this in part
to head off banks efforts to sell insurance products at the branch
level' (I though that statement had a good puch to it is
it politically incorrect?)
This brings us to the first question that I want to address:
With the major structural changes to the legislation, why has
there been so little change in the composition of the CPA?
Is it because the system is inequitable for those who want access?
Let me give you my take. I believe that the system as structured
is substantially equitable for all the key financial service
players, and that the perception held in some quarters
-- of the Canadian Payments Association being a bank-controlled
club is largely a myth.
All membersin the Association play a major role in the exchange
of settlement items. Some of the members have also built profitable
businesses by developing relationships with smaller members and
arranging to process their clearings. Others have set up systems
to offer paper sweep checking accounts arrangements through their
own infrastructure so as to offer non-members the capability
to issue checks payable to order to third parties.
But participating as a full member status implies adherence to
operational efficiency and tight standards and rules. To play
the game as a full participating member, new membersmust incur
substantial expenditures, which many players are reluctant to
undertake, especially in light of the fact that easy profits
in the deposit and loan businesses are far from certain.
Canadians are a particularly demanding lot when it comes to financial
Whichever financial institution they deal with, they insist on
a complete set of payment services, which can be accessed through
a variety of channels.
Canadians want access not only to a national network of branches
and ABMs, they also want to be able to bank online, 24 hours
a day, seven days a week and the list goes on.
They also want those services at a very reasonable price. And
they are getting what they are asking for.
According to a recent independent survey, Canadians pay less
for their financial services networks than in most advanced countries
in the world.
However, as many potential players are finding out, it costs
a lot of money to launch an affordable range of financial products.
It costs even more to link these systems with the Canada's payment
system. And generating a sufficient number of clients to get
unit operating costs is not easy.
In a nutshell, to set up the necessary infrastructure would be
prohibitive for a new entrant with relatively small customer
base. To give you an idea, it cost several million dollars just
to set up a few white label systems and Internet pages.
Fortunately, as CPA members know, you don't have to be a Direct
Clearer to get access to the payments system.
All of the major securities companies, except one, get access
to the payment system through their parent companies, which for
the most part are large Canadian banks. The exception, Merryl
Lynch, works closely with BMO.
Mutual fund and insurance companies have reasons of their own
for not diving head first into the deposit business.
At National Bank we discuss, negotiate and implement partnerships
with mutual fund and insurance companies on and ongoing basis.
From these and other contacts, I have come up with two primary
reasons that these organizations are not rushing into the golden
doors of the payments system.
The first is that although Canadians might like their insurance
and mutual fund companies, they also realize that they are being
well-served by their existing financial institutions.
Canadians will not settle for less. Insurance and mutual fund
companies realize this, and they are being very careful about
moving into business sectors that are outside of their core competencies.
A second reason that insurers and mutual funds don't want to
step too far on other financial institutions' traditional turf
is that their business models are quite different.
Insurers and mutual fund companies make their money based on
the value of the assets they manage. Their primary incentive
is making sure that money flows in, but never out.
Sure, many would like to provide their clients additional flexibility
to withdraw cash. But if they make it too easy, it could become
To put it bluntly, insurance companies and mutual funds want
as much control as possible of their clients' financial resources.
There is nothing wrong with that. But I don't think that insurance
companies and mutual funds will try too hard to market retail
products until there is a more persuasive business case to be
Another important consideration is the fact the CPA has evolved
over the years to increasingly accommodate stakeholders who are
not members. These continue to have a strong voice in the organization
through the stakeholders' advisory council.
The council is a good example of the organization's flexibility
and ability to innovate. It was instituted several years ago
(1997), after considerable consultation, to give various users
and providers of payment system services a say in the evolution
of the CPA. Those consultations are ongoing, and they include
substantial access to the organization's management.
In fact, there is no more glowing example of the council's success
than the fact that its existence was enshrined in the recent
One could say that the establishment of the Stakeholder Advisroy
Council was the second step in opening up the payment system.
The CPA's diverse board of directors, recently expanded to 16
members from 11, is another indication of the organization's
ability to integrate a variety of views into its decision-making
Board members include Investors Group, and Trimark, which are
represented through their Trust subsidiaries, as is Manulife
through a banking subsidiary.
So if mutual fund and insurance companies are reluctant to take
the tough steps necessary to become members of their own category,
does that mean they are not interested in banking-type of products?
Of course they are interested. Mutual fund and insurance companies
would love to be able to market investment loans to use as a
leverage tool to help sell their investment products.
But most are not equipped, or not willing, to deal with the substantial
challenges involved in evaluating and providing for credit risk.
Mutual fund and insurance companies would also like to offer
high yield ING type of accounts, in which their clients could
park their liquidity, before moving it into more permanent investments.
But these kinds of accounts require a costly interface with the
Mutual fund and insurance companies want to give to their clients
the image of a full service financial institution, with the service
structure they are used to.
At National Bank we have developed a model that enables mutual
funds and insurance companies to offer all of these services,
-- including investment loans and high yield accounts, --without
the headache and expense of setting up the necessary infrastructure.
We call it the white-label partnership offering.
We have set up numerous partnerships with insurance companies
such as Promutuel and Great-West Life and mutual funds dealers
such as Investors Group. These deals enable both partners to
focus on their core competencies.
Our partners get substantial benefits from these deals:
- They preserve and broaden their existing clientele by providing
broader and more attractive service offering.
- They get a cut on the sale of these additional services, whether
they be deposits or loans, without incurring the infrastructure
and regulatory costs required to provide these services internally
- They have limited set-up costs and are able to hit the ground
In short these partnership arrangements are win-win propositions
for both parties.
To conclude, I believe that on balance Canada's financial institutions;
including securities dealers, mutual funds and insurance companies,
are well served by the existing system, which is designed to
accommodate a wide variety of stakeholders and players.
Innovation in Canada's Payments System
But if newly eligible players are choosing not to become members,
does that mean financial services industry innovation is dead?
I don't think so. I believe that it would be a mistake to link
financial services innovation solely with access to the payments
In fact the evidence is overwhelming that financial institutions
continue to innovate, and that the Canadian Payments Association
is more than keeping up.
30% of Canadian adults now do some form of online banking and
many take advantage of the many new functionalities like bill
presentment services and person to person payment offered by
many Financial InstitutionsCredit card use is increasing, as
are EDI electronic payments, B2B payments, direct deposits, pre-authorized
debits and shared ABM cash. At the same time the paper check
usage is decreasing
Canada leads the industrialized world in per capita debit card
usage. We are far ahead of our Southern neighbors in that respect.
Outsourcing is on the upswing. For example National Bank has
major services contracts with IBM, Bell & CGI. At the same
time, we are seeing Increased back-office efficiency as evidenced
by the success of organizations such as INTRIA and SYMCOR
And there are many initiatives in the early stage of development
such as Public-Key Infrastructure and one-time payments, which
will enable Financial Institutions to take advantage of a projected
multi-trillion dollar E-commerce market. In short, innovation
is alive and well in Canada's financial services industry.
So where do we go from here?
I believe that the CPA should continue to focus on its key objectives
and priority initiatives as outlined by the Board last year.
The CPA must continue to manage the efficiency, safety and soundness
of the payments system.
In practice that means:
Continuing to move forward with the industry wide Truncation
and Electronic Check Presentment initiative.
Investigating potential enhancements to the LVTS, such as introducing
new services and promoting straight-through processing.
Evaluating a new framework that would facilitate "credit-push"
Cooperating with other organizations to develop an industry-wide
business continuity plan for the system as a whole.
The CPA must also continue to enhance relationships with key
stakeholders, regulatory groups and related payment systems,
as well as managing their diverse needs.
And finally, the CPA must continue to optimize organizational
processes as well as its committee and rule structures.
In conclusion, I believe that the CPA's contribution and performance
during the past year continues to be highly positive and that
Canadians are well served by the existing systems.
However it's also clear that the Association has moved a long
way from its roots as Canadian big bank-controlled oligopoly,
and has clearly opened up to accommodate a range of new players.
In fact the final chapter in this saga has yet to be written.
I am confident that with the new payments regulations we will
eventually see new members seeking membership to the Canadian
In the meantime CPA membership continues to include foreign banks,
mutual funds and insurance companies, which have a direct input
into the decision making process through the stakeholders advisory
council or through a Trust or Bank subsidiary.
In fact, with its new legislative mandate, its new president,
its active board and its numerous initiatives, I am confident
that the CPA is well-positioned to handle the challenges of the