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Over the past decade, countries have been upgrading their legacy banking systems to enable real-time payments and data-rich transactions. Canada is no exception, with its real-time rail payment system currently in development. Some of the most prominent players in the Canadian FinTech space, such as Interac® and Mastercard, are set to support the RTR system.
By now, you've probably heard of them all about payment rails, real-time rails (RTR), faster payments and instant payments. But what do these terms really mean to large enterprises or even the average business? The answer is that they hold far greater significance than one might initially assume.
Here, we explain payment rails, the current types of payment rails, ISO 20022's role, real-time payment rails, and where companies are about to profit.
A payment rail refers to an established network that facilitates the transfer of money between individuals, businesses, banks and other financial institutions.
The exchange of complex data drives financial transactions, and the rails serve as channels through which funds are moved electronically from a payer to a payee.
All payment rails fundamentally provide the same functionality but differ in payment type, speed, technology or location.
Examples include electronic funds transfer (EFT), Mastercard, Visa and other major credit card providers. Credit card rails run on the credit card payment system, while blockchain and centralized electronic payment systems like PayPal are considered newer types of payment rails.
When funds from an electronic transaction are instantly accessible, the payment rail used to initiate the transaction is categorized as real-time.
In 2016, the Canadian government announced plans to build a new core clearing and settlement system. The plan included:
• Establishing real-time payment capability (real-time rail–RTR)
• Enhancing automated fund transfers
• Delivering an alignment with global regulatory standards
In Canada, the most common method of transferring money electronically is through an electronic funds transfer (EFT). EFTs are a way of sending money securely from one account to another at financial institutions. Today, most of these electronic payments happen via Payments Canada’s batch-based EFT system. This system runs over the Automated Clearing Settlement System (ACSS).
These bank account payments ( or account-to-account/A2A payments have seen a resurgence in popularity). In 2021 alone, Canada saw 19.7 billion transactions worth a cumulative $10.8 trillion. This is mainly due to advances in financial technology, open banking and improved payment rails.
A2A payments have become a significantly viable payment solution for businesses and merchants. These payments move directly from one bank account to another, with no go-between or middleman.
While account-to-account payments have existed for decades, advances in API technology, open banking, and end-user experience are driving up demand for this type of payment.
Credit cards remain a popular payment method in Canada.
According to a 2023 report by CBA, nearly 72% of Canadians carry at least one credit card, with 76.2 million Visa and Mastercard cards in circulation. Credit cards run on an independent network operated by companies that provide the technology to power their transactions. Generally, this is why credit card processing fees are higher; merchants get charged fees to process payments using the credit card company’s payment infrastructures.
Interac e-Transfer has fast become Canada’s go-to payment solution. Since the beginning of the COVID-19 pandemic, over one billion Interac e-Transfer transactions—worth more than $350 billion in total—have taken place. Both individuals and businesses are increasingly using the platform for its fast, efficient and secure nature. For this reason, there has also been a noticeable uptick in business use cases.
Launched in August 2021, Interac e-Transfer for Business provides immediate electronic confirmation of payments received by suppliers, which reduces manual reconciliation processes. Businesses can send up to $25,000 per transaction and have the option of sending funds directly to an account with either an email address, mobile number, or account number they have on record.
Funds are “pulled” from the cardholder to a merchant in a typical Visa card transaction. Visa Direct reverses this transaction flow by allowing businesses to “push” funds to bank accounts using card credentials. This is a VisaNet processing capability enabling safe, convenient, real-time funds delivery directly to financial accounts. Visa Direct has had great success in gig economy payments and is gaining traction in the B2B space, where instantaneous transactions have become a vital tool in cash flow management.
Cross-border business payments are a growing market, and according to Juniper Research, the transaction value of these payments is set to exceed USD 42.7 trillion by 2026. And in the same fashion that Canada’s payment rails are getting a facelift, so are the payment rails in the U.S. For Canadian businesses that send payments across the border or even operate in the U.S., things are about to get much easier.
One of the top payment rails in the U.S. is the Automated Clearing House (ACH), a secure electronic network that allows for the transfer of funds between bank accounts. ACH is typically used between individual bank accounts for direct deposits, bill payments and EFTs. It also covers various other financial activities, including payroll deposits, vendor payments and recurring bill payments.
The ACH Network continues to show promising growth, with over 7.8 billion payments transferring $20 trillion in the second quarter of 2023. Same-day ACH value and volume also jumped by 26.1% and 7.7%, respectively, over Q2 of 2022. This figure is expected to grow tremendously in the coming years.
Significant developments are underway, while there’s no specified rollout date for the RTR payment system. In the next year or so, Canada will adopt and embrace this new payment processing system that will enable fast, data-rich payments. Governments or businesses of all sizes, whether big or small, will have the capability to instantly and reliably move substantial sums of money 24/7, 365 days.
According to Payments Canada, RTR payments will be irrevocable, and this feature is expected to level the playing field. The rail system will be nimble and include features like Request to Pay, which businesses can use to send and receive electronic requests for payments in real-time. Smaller payment providers will also be considered, with the RTR model supporting existing financial institutions and non-bank payment service providers.
Since 2017, The Clearing House’s RTP® network has reigned as the go-to solution for real-time payment transactions. A payment network enabling near-instantaneous transfer of funds, RTP® has gained popularity over time as a critical component of the evolving digital payments landscape in the U.S. With real-time settlement and confirmation of transactions, RTP® remains a popular option for many businesses and consumers.
With the launch of FedNow this past July, however, it will be interesting to see if two real-time payment networks can coexist in the U.S. market.
One thing is for sure: with the surge in real-time payment capabilities, businesses and consumers now have a wider array of options, providing them with more flexibility, speed and control in their financial transactions.
The RTR will go live with the ISO 20022 financial messaging standard. The ISO 20022 standard will increase interoperability by supporting non-Latin alphabets and harmonizing formats that previously did not work together. The most significant benefit of this will be the safety and speed within payment settlements.
When ISO 20022 becomes effective, Canadian consumers and businesses will experience faster, more secure money transfers.
Real-time rails simply ensure the settlement of payments in real-time. Interac Corp., the leading player in Canada with its existing infrastructure, will utilize its system to help the RTR payment system connect and exchange with roughly 300 financial institutions. From there, Mastercard’s Vocalink will kick in with its clearing and settlement solutions.
As of 2023, more than 70 countries have adopted real-time payments, with 195 billion transactions recorded in 2022—a YoY growth of 63.2%. India snagged first place, accounting for 46% of all real-time transitions worldwide in 2022, with Brazil following behind at 15%.
The top five real-time payment markets worldwide:
India – 89.5 billion RTP transactions, with YoY growth of 76.8%
Brazil – 29.2 billion RTP transactions, with YoY growth of 228.9%
China – 17.6 billion RTP transactions, with YoY growth of 0.9%
Thailand – 16.5 billion RTP transactions, with YoY growth of 63.4%
South Korea – 8.0 billion RTP transactions, with YoY growth of 9.6%
The RTP market is forecasted to reach 511.7 billion transactions by 2027 and will reportedly account for 27.8% of all electronic payments globally—up from 18% in 2022.
The situation right now with legacy payments leaves a lot of those end users in the position of having to expend effort on reconciliation. After they receive a payment, they have to match up the funds that have been deposited into their account with the information that goes along with it. It’s long been a pain point, in particular for medium- to large-sized corporate users.
Janet Lalonde, Payments Canada
The RTR is about to deliver a big boost to enterprises nationwide. With advances in payment rail technology, the entire financial operation can be expected to run smoother.
Modernized payment solutions can benefit businesses significantly, allowing them to reap the rewards.
✔️ Funds hit accounts in an instant. It will take approximately 60 seconds for a transaction to complete, and this includes exchange, processing and settlement. Getting paid and paying vendors and employees instantly eliminates the hassles of paperwork and frees up time for running the business.
✔️ With 24/7/365 availability,“banks” are never truly closed. Send transactions when convenient, and receive money instantly when you need it the most.
✔️ The RTR system will run on ISO 20022—the global standard for exchanging financial information. By adopting ISO 20022, RTR users will benefit from enhanced remittance data, worldwide interoperability and multiple payment standards.
✔️Less paper and way more time. The data that comes with RTR payments will allow businesses to abandon resource-draining paper invoicing, cheque payment processing and reconciliation tasks.
✔️ Across the country and the world, we will see financial connectivity. Instant payment solutions will reach almost every single consumer and company.
✔️ Backed by the Bank of Canada (BoC), which has stood tall for 84 years, safety has been promised by Canada’s prominent payment system with strict requirements in place for all participants looking to engage with the RTR system.
While the RTR has not yet arrived in Canada, VoPay's payment technology allows digital platforms and their customers to access the tools they need to navigate the complex and dynamic payment landscape today.
One single API integration. One unified source. Full brand control.
