Canada's Payment Rails & How They Work - The Complete Picture

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Posted on October 5, 2022

Canada’s new payment rails are running full steam ahead. Pun intended. Over the past decade, countries around the world have been busy upgrading legacy banking systems to enable real-time payments and data-rich transactions. And Canada was no exception.

Payment rails, real-time rails (RTR), faster payments, instant payments, by now, we are sure you have heard them all. But what does it all really mean to the average business or for large enterprises? The fact of the matter is more than most think. Much much more.

Here’s where we explain what payment rails are, the types of payment rails, where ISO 20022 comes in and how companies are about to profit.

What are Payment Rails?

In 2016 the Canadian Government announced plans to build a new core clearing and settlement system. The plan included:

• Establishing real-time payments capability (real-time rail–RTR)

• Enhancing automated fund transfers

• Delivering an alignment with global regulatory standards

A payment rail is an established network that allows for the exchange of complex data in order to initiate the movement of money between a network that moves money from a payer to a payee. Either party could be a consumer or business, and both parties are able to move funds on the network.

Payment rails fundamentally provide the same functionally, however, they differ in terms of payment type, speed, technology or location. Examples include EFT, Mastercard, Visa and major credit card providers. Credit card rails are the credit card payment system. Blockchain is considered a newer type of payment rail, as are centralized electronic payment systems such as PayPal. When the funds transferred are immediately available, then the payment rail is considered a real-time rail.

Types of Payment Rails in Canada

EFT Payment Rails: Account-to-Account Payments

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, the majority of these electronic payments are happening via Payments Canada’s batch-based EFT system. This system runs over the Automated Clearing Settlement System (ACSS). Account-to-account (A2A) payments have seen a resurgence in popularity with Open Banking and improved payment rails. In 2020 alone, Canada saw 2.9 billion account-to-account transactions worth a cumulative $5.2 trillion.

With the funds moving directly from one bank account to another with no go-between or middleman involvement, A2A payments are becoming a go-to payment solution. The combination of Open Banking and advancements in technology make this payment method convenient, secure, and much cheaper in comparison to credit cards.

Credit Card Rails

Credit cards remain as a popular payment method in Canada. Almost 75% of Canadians carry at least one credit card with over 76 million Visa and MasterCard cards in circulation in Canada. 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 tend to be higher; merchants get charged fees to process payments using their payment infrastructures.

/1 Why is the credit card called “𝐭𝐡𝐞 𝐦𝐨𝐬𝐭 𝐩𝐫𝐨𝐟𝐢𝐭𝐚𝐛𝐥𝐞 product in banks”? How does VISA/Mastercard make money?

The diagram below shows the economics of the credit card payment flow.

1. The cardholder pays a merchant $100 to buy a product. pic.twitter.com/RjFKhoV7P6

— Alex Xu (@alexxubyte) August 11, 2022

Interac e-Transfer

Interac has fast become Canada’s go-to payment solution. Since the beginning of the pandemic, over 1 billion Interac e-Transfer transactions were executed, exceeding the value of $350 billion. Consumers love it because it is fast, efficient and secure. It is for this reason we see a big uptick in business use cases.

Launched in August 2021, Interac e-Transfer for Business provides immediate electronic confirmation of payments received by suppliers, which in turn reduces manual reconciliation processes. Businesses, which can send up to $25,000 per transaction, also have the option of sending funds directly to account numbers they have on record, in addition to an email address or mobile number.

Visa Direct

What is Visa Direct? And is Visa Direct the same as a credit card? To explain it simply, it is a push instead of a pull. In a typical Visa card transaction, funds are “pulled” from the cardholder to a merchant. Visa Direct reverses this transaction flow by allowing businesses to push funds to bank accounts using the card number. Visa Direct is a VisaNet processing capability that allows safe, convenient, real-time funds delivery directly to financial accounts using card credentials. In fact, Visa Direct is behind several real-time payment services like Square. Visa Direct has had great success in the gig economy and is gaining traction in the B2B space, where instantaneous transactions have become a vital tool in cash flow management.

Automated Clearing House (ACH) - US Only

Cross-border business payments are an increasingly growing market. As EY points out, global cross-border payment flows are expected to top US $156 trillion in 2022. And in the same fashion that Canada’s payment rails are getting a facelift, so too is the U.S. For Canadian businesses operating in the U.S. or those sending payments across the border, things are about to get much easier.

One of the top American payment rails is the ACH. It is an electronic fund transfer made between banks and credit unions across what is called the Automated Clearing House network. ACH transfers are used for a variety of reasons, including direct deposit, money transfers and recurring monthly payments. ACH is popular. In fact, the ACH Network experienced significant growth in 2021, with over 29 billion payments valued at $72.6 trillion. Moreover, same-day ACH payment volume grew by nearly 74%. This figure is expected to grow in 2022.

Real-Time Payment Rails: Are We There Yet?

Every day brings us closer and closer to this modernized payment system. In 2023, real-time payment rails will be fully rolled out. The excitement in the payments space is palpable. We as a nation are to have in place a payment processing system that will enable fast, data-rich payments. Be it governments or businesses of any size, big or small, will have the ability to move meaningful sums of money instantly (24/7/365) and with certainty.

RTR payments will be irrevocable and are expected to level the playing field, according to Payments Canada. The system will be nimble. It will include features such as Request to Pay, so, for example, businesses can send and receive electronic requests for payment, all done within seconds.

Smaller payment providers will be considered, in many ways, similar to the Big Banks, with the RTR model not only supporting existing financial institutions but will also support non-bank payment service providers as well.

The system will be regulated by the Bank of Canada.

ISO 20022

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 couldn't previously work with one another. The standard applies to the routing of domestic, cross-border, ACH, real-time, and high-value payments. To sum it up, everyone in the financial world will be speaking the same language. The big benefit of this common communication will be the safety and speed within the payment settlement.

When ISO 20022 comes into place, Canadian consumers and businesses will see money transfer in a faster, more secure manner.

Behind The Scenes of The Real-Time Rails

Real-time rails ensure the settlement of payments in real-time. Canada’s real-time rail payment system will be operated by Payments Canada and regulated by the Bank of Canada, while Interac Corp. and Mastercard act as the cornerstones for making the RTR system function. Interac, already the main player in Canada with its existing infrastructure, will utilize its system to connect and exchange with close to 300 financial institutions. From there, Mastercard’s Vocalink act as the clearing and settlement solution.

Once 2023 hits, Canada will be in good company when it comes to faster payments; almost 60 countries have real-time payments in play. Real-time payments are booming; RTPs surged to 70.3 billion around the globe in 2020.

• India (25.5 billion)

• China (15.7 billion)

• South Korea (6 billion)

• Thailand (5.2 billion),

• U.K. (2.8 billion)

• Nigeria (1.9 billion)

• Japan (1.7 billion)

• Brazil (1.3 billion)

• U.S. (1.2 billion)

• Mexico (942 million)

Businesses Profit From Canada’s Real-Time Payment Rails

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 across the nation. So, with all these advances in payment rail technology making our lives easier, why would businesses even consider sticking to the old payment methods- like physical cheques and cash? Here are a few reasons to modernize, ditch the old ways, and get excited about Canada’s RTR.

✔️ Funds hit accounts in an instant. It will take approximately 60 seconds for a transaction to complete, this includes exchange, processing and settlement. Getting paid and paying vendors/employees instantly eliminates the hassles of paperwork and waiting for cheques and frees up time for running the business.

✔️ The “bank” is never closed with 24/7/365 availability. Send transactions anytime convenient, and receive money into your account when you need it the most.

✔️ ISO 20022 Canada’s system will run on ISO 20022–the global standard for exchanging financial information. By adopting ISO 20022, Canadian payment systems users will benefit from enhanced remittance data, global 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 and 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.