Canada’s Payments Modernization initiative – which will bring a faster payments system to the country’s financial infrastructure – is currently expected to go live by 2022. Financial Institutions (FIs) will be able to provide new services to their customers once the Modernization initiative is complete, including real-time payments, same-day settlement capabilities, and more seamless user experiences with the adoption of ISO 20022 standards. FIs will also be able to make better usage of their data and identify opportunities to improve their services and efficiencies. For example, Payments Canada estimates that FIs could save roughly $4.5 billion over a five-year period by phasing out checks alone, and replacing them with real-time payments.

Payments Modernization brings both significant opportunities and significant challenges for Canadian banks and credit unions. The opportunities include being able to conduct business faster, provide innovative solutions for their customers, and enable larger sums of money to be transferred faster. The new “always on” system will operate on a 24/7/365 basis and can perform tasks such as automated payment transfers more seamlessly, reducing Canadians’ reliance on cash and cheques. FIs will also be able to leverage troves of new data that can help them improve their services and enhance their organizational workflows.

The challenges presented by Canada’s Modernization effort can best be summed up by paraphrasing the words of rapper Notorious B.I.G.: Mo’ (real-time) money, mo’ (real-time) problems. For starters, real-time payments provide less time for FIs to review financial transactions and a narrower window to detect and stop fraudulent activity. Users will be able to transfer larger amounts of money which could mean more significant consequences if fraudsters are able to swindle funds. The new ISO 20022 standard, meanwhile, could upend how some FIs have traditionally managed their data and could complicate their existing workflows.

Modernization promises to fundamentally disrupt how Canadians conduct payments. FIs need to anticipate the wide range of changes that will fundamentally alter how they conduct business. The following outlines the top four challenges that Canada’s Financial Services sector can expect to face once the Modernization initiative goes live.

Faster Payments, Faster Fraudsters

One of Modernization’s key advantages is the enhanced speed at which payments will be transacted using real-time rails. The improved speed of payments will mean FIs and businesses can enjoy more stable cash flows, automatically reconcile payments with invoices, and gain greater insight into money flows and cross-border transfers.

Unfortunately, FIs are not the only players that can benefit from real-time payments. Fraudsters are also looking for opportunities to use real-time payments to their own advantage. FIs will have less time to review transactions for suspicious activity once real-time payments become available, which will make the risks of fraud much greater.

Other nations have already experienced this on their own faster payment systems. Fraudsters in the U.K., for example, made off with £600 million (equal to roughly $1 billion CAD) in the first half of 2019 using the nations’ Faster Payments System (FPS). To counter this, U.K. officials have considered implementing a 24-hour delay on all first-time transfers in an effort to stop fraudulent transfers from being committed through FPS.

Canadian banks and credit unions will need to take the threat of fraud seriously once Modernization goes into effect. While enhanced, seamless services will be available to their legitimate customers, FIs do not want to extend the same benefits of real-time payments to fraudsters.

Learning a New Payments Language

Data will be another game-changer of Modernization. Payments Modernization will make the new ISO 20022 standard available, which will provide the Canadian payments ecosystem with additional data points, and all around higher quality data. This will enable enhanced reconciliation and the seamless exchange of data amongst FIs, allowing for greater insight into the status of payments.

Technology solutions can help FIs adapt quickly to the ISO 20022 standard and make better usage of this newly available data. FIs can quickly determine how their customers engage with their systems and make improvements to their product offerings. Greater access to data through technology solutions can also empower banks and credit unions to break down internal data silos within their organizations, improving communication among internal teams and allowing them to leverage existing data to its full potential. Eliminating these silos can help FIs to realize new data-based opportunities to enhance customer experience and reduce operational costs.

While ISO 200222 is intended to make banking more seamless, some FIs might be hesitant to adopt the new standard and adjust their operations, because some payment practices are difficult to change. ISO 20022 will put pressure on FIs to make the effort to embrace Modernization’s new reality. Banks that lag behind in helping their customers and clients adapt to the new payments standard risk getting left behind in the market and losing business to competitors and new FinTechs.

Keeping Customers’ Funds Safe

Consumers are poised to be the top benefactors of the Payments Modernization initiative. The benefits for Canadians include being able to send money faster and transact in larger amounts. Electronic transfer amounts in Canada are currently limited to $3,000 per day. Daily transaction limits will start at $10,000 once Modernization goes into effect. Customers will be able to make rent payments, emergency money transfers to cover unexpected developments, and last-minute bill payments to avoid late charges or penalties. The payments occur immediately and are irrevocable.

Despite these benefits, once again the mo’ (real-time) money, mo’ (real-time) problems dilemma comes into play. The irrevocability of authorized real-time transfers is designed to protect FIs from potential defaults. The same feature also carries significant risks for consumers. That’s because fraudsters also see opportunity in these higher transaction values. If fraudsters are successfully able to steal funds from customers, the transactions cannot be reversed.

Financial Institutions must bear in mind that the same irrevocable real-time payments that are designed to protect them leaves their customers vulnerable if they are successfully defrauded. Once Modernization becomes reality, consumers will be much more conscious of whether their banks can protect their assets especially knowing that transfers cannot be undone. Canadian FIs would be wise to invest in solutions like two-factor authentication (2FA) that can reduce false positives for consumers and prevent a wide range of fraudulent activities.

Impediments from Rules-Only Legacy Systems

Before FIs can tap into the potential benefits of Modernization, they must first contend with their existing legacy technology systems.

These legacy banking systems can pose one of the biggest barriers to FIs before they can participate in the real-time payments economy. This is because most older systems rely heavily on rules-based workflows which are insufficient and outdated for the digital payments economy. This could cause some FIs to view their existing legacy systems as barriers to benefiting from Modernization’s new features.

Banks and credit unions that depend on these outdated legacy systems will miss out on the opportunities of real-time payments and digital banking. By moving away from rules-only based legacy systems, FIs can make greater usage of artificial intelligence and machine learning solutions to make faster, more informed decisions with all available data.

Key Takeaways

Canada’s financial institutions must consider how these issues could impact their operations once Modernization goes into effect. Once it goes live, Canada will join the ranks of nations and regional bodies that have already launched their own faster payment initiatives, including Australia, the European Union, Singapore, the U.S. and the U.K.

In a way, the timing of Canada’s Modernization initiative is fortunate. As it prepares to join the faster payments revolution through its Payments Modernization initiative, Canadian FIs can learn lessons from other markets that have already launched their own systems, including the UK’s FPS and Australia’s New Payments Platform (NPP). One of the most important lessons that banks and credit unions operating in these systems have already learned is that it pays to work with technology partners to make the most of enhanced payments infrastructures.

As Canadian banks and credit unions adjust to Modernization’s capabilities, they will need technology partners of their own. Many technology solutions have already been launched to address the issues faster payment systems in other global markets have already encountered, and can make adjusting to Payments Modernization a seamless process. FIs can quickly analyze data and stop fraud in its tracks using AI and machine learning solutions. Customers can transact confidently and seamlessly knowing their assets and data are protected. Perhaps most importantly, technology solutions can help FIs bridge their legacy systems to the real-time payments system without having to replace them entirely.

Payments Modernization will bring big changes to Canada’s financial services landscape. It is essential for Financial Institutions to embrace the right technology solutions in order to help their customers access the full benefits of real-time payments.