Episode 20: Faster payments are only part of the real-time payments story

Transcript of the recording

Cyrielle Chiron:
The payments landscape continues to evolve at a rapid pace, but the fundamentals of what Canadians want have not changed. According to data from Payments Canada's most recent Canadian Payment Methods and Trends report, consumers and businesses want more payment options. So one of the ways to give Canadians more payment options that appeals to the instant and always-on experiences that they have to come to expect is through a real time payment system. I'm Cyrielle Chiron, Chief Strategy Officer at Payment Canada and host of The PayPod, which explores the trends and topics influencing payments in Canada and around the world.

Joining me today to discuss real time payments is Janet LaLonde, Senior Director, Real-Time Rail at Payments Canada. Janet is responsible for leading the development of the Real-Time Rail or the RTR as we often say, Canada's new 24/7/365 payment system that will facilitate the delivery of payments in real time.

Welcome Janet and thank you for joining me today on The PayPod.

Janet LaLonde:
Thanks Cyrielle, thanks so much for having me.

Cyrielle Chiron:
Great. So let's get right into it. A lot of our listeners are payments experts, but some are new to the payments industry. So I'm going to start with a very basic question for you, Janet, to set the stage for our discussion. So the question is this one, what are real time payments?

Janet LaLonde:
Thanks for that question Cyrielle. So, to provide a simple answer, real time payments will allow Canadian consumers and businesses to send and receive payments within seconds, between accounts that may be at different financial institutions. So this can be done at any time that's convenient for a Canadian. They can do it day or night, seven days a week and all year round. In addition to being available at any time, real time payments will also be guaranteed, and this is critical as you can imagine for some payment recipients. As an example, a small business owner who receives a real time payment for goods that they've ordered online can release the goods immediately knowing that the funds have already been credited to their bank account without any delay and without any concern that the payment might be reversed at a later time. Not all payment types have this kind of certainty today. These characteristics can help businesses to run more efficiently. They can move goods faster, they can keep their customers happy, and that finality is key. It means that the payments can't be undone.

Cyrielle Chiron:
Okay, thanks. That's a good, actually a good definition. So thank you for that. So now that we have a better understanding of what real time payments are, can you tell us a bit about the introduction of real time payments in Canada? Specifically, I believe a lot of people might have asked you this question before, but why does Canada need a new payment system that supports real time payments?

Janet LaLonde:
Sure. So I think it's really important to look more broadly at what's happening around the globe. Realtime payment systems are being introduced to multiple jurisdictions. I think more than 58 countries right now are live with realtime payment systems. And so in Canada, we really do need this to keep pace, an always available system that delivers data-rich payments within seconds, providing that real time capability is what will allow us to meet the needs of Canadians as we identified during Payments Canada's public consultation on the future of payments in Canada. At Payments Canada, we're really excited about developing Canada's new real time payment system. The Real-Time Rail or RTR, as we commonly refer to it, will support Canadians being able to make and receive immediate irrevocable payments between accounts at different financial institutions, 24 hours a day, seven days a week and all year round.

Cyrielle Chiron:
I think the key here is keeping pace, right? When you say 58 countries, that's a lot. We don't want to be the ones who are not being paced with innovation. So that's very interesting. So how will the RTR differ from Canada's other payment systems? You mentioned a little bit of some aspects, but what will be the key differentiator here?

Janet LaLonde:
Sure. So, I mean, if we look across some of the other payment systems and payment mechanisms available to Canadians today, the RTR is going to provide a faster alternative, a faster alternative to cheques, a faster alternative to AFT or automated funds transfer payments, which many people would more commonly recognize as pre authorized debits and direct deposits. These typically can take about a day after a payment is sent before the recipient receives the funds in their bank account. The RTR is also designed to enable a variety of individual and business payment use cases that benefit from the use of the richer payment data, data about what that payment is for. With the RTR, that data will actually travel along with the payment itself. In other systems and with other payment methods, this data is often sent through a completely different channel from the one that's used to send the payment, which I'm sure you can imagine, results in all sorts of inefficiencies, particularly for businesses and for business activities like back office reconciliation, cash flow management, customer inquiries about payments they've made but don't show up in their accounts and dealing with complaints over late payment charges.

I think importantly, the RTR differs because it offers a platform for innovation in the payment space. It's a central infrastructure that financial institutions and payment service providers can leverage to deliver faster data-rich payments and new services to their customers, whether they are retail customers, individuals, or businesses. These players can also provide competitive services supported by the RTR, services that can improve the customer experience in a wide range of payment scenarios and other bells and whistles outside of that core functionality of the system. Things like invoicing and bill payments, social media payments, QR code payments. I think the full potential of these services is really yet to be imagined.

Cyrielle Chiron:
Yeah, so that's key here. It's not only about faster payments, but it's also the data for efficiency. I think the word efficiency is kind of explained to us just now. So the RTR is about more than introducing faster payments. That must also be a key difference between the RTR and Interac e-transfers, right?

Janet LaLonde:
I think that we're in a unique position in Canada as we already have an in-market service that has many of the characteristics of a real time system. And Canadian consumers are already familiar with that service and familiar with sending payments that are received by the beneficiary really very quickly. The RTR is going to build on this foundation. The Canadian economy depends on the exchange of billions of dollars each day, and Payments Canada is responsible for the clearing and settlement infrastructure that is critical to those transactions. Last year in 2020, Payments Canada systems cleared and settled over $107 trillion, that's more than $420 billion every business day. So because of that, the RTR system needs to implement a very robust risk management framework behind those payments. And this will include complying with risk management standards that are set for us and established for us by the Bank of Canada. From day one, we've designed the RTR with those risk management standards in mind.

Cyrielle Chiron:
Yeah. So just a tiny little amount that we are clearing settling. So definitely, we need something that is robust. Can you tell us a little bit more about that, about this framework that you're talking about?

Janet LaLonde:
Sure. So to put it simply, the financial risk for participating in the RTR is going to be greatly reduced for participating financial institutions because RTR payments, and you know as we talked about, they're going to clear and settle in real time. Today, this doesn't happen in any of our other retail payment systems in Canada. But real time clearing and settlement means that each payment going through the RTR needs to be fully covered from a credit risk perspective with funding provided in advance by the participating financial institution. So that there will be zero risk that if a financial institution defaults on their settlement obligation, that anything could happen in terms of that payment being unwound. Every payment is processed, line by line by the RTR, which means that every transaction goes through the system and is subject to risk controls, and that will ensure safety and security.

Cyrielle Chiron:
Okay. So that's really cool, when you think about it actually. So everything you just talked about, the RTR is more than just a payment system. It's a payment system that will safely and securely clear and settle payments 24/7/365, right? And it's a platform that will allow more options and more competition in the payment space. So that's actually pretty cool.

Janet LaLonde:
Yeah. And I think that's one of the main benefits of our more robust risk model as well, right? That it's going to facilitate access to a broader set of participants with diverse risk profiles ranging from traditional financial institutions like we have today to new players like fintechs and other non-bank payment service providers. That is, once they're regulated and permitted to become members of Payments Canada under the legislative changes that are currently underway and initiated by our Department of Finance. But it balances an important objective of facilitating broad access to a wide range of participants and the risks that they may present to our system and to other participants.

Cyrielle Chiron:
So Janet, you talk about creating more options, more competitions that will lead to more opportunities. But when you talk about opportunities, opportunities for who? Is it for businesses or everyday people like you and me? Where does the opportunity lie and who will benefit from this new system?

Janet LaLonde:
The RTR is designed to enable a wide range of both individual and business payment use cases. All of those types of use cases can benefit from a real time payment system, increased availability of remittance information, faster payments and irrevocability. I think that there are some important potential use cases that we've thought of that would be prime candidates for using the RTR, the Real-Time Rail when that comes into effect. And one is just emergency payments. We've seen in the past situations where the government needs to distribute emergency funds to Canadians, and they need to do it quickly because people are in need. And with the RTR, the government won't have to worry about cutting paper checks and mailing them, or they won't need to necessarily worry about whether they have arrangements set up to pay individuals already by direct deposit. They would be able to use the RTR to send payments in a matter of seconds.

Cyrielle Chiron:
So that would've been good for COVID, right? The COVID time to be able to get money.

Janet LaLonde:
Yeah, there's lots of that would've been great for COVID, it would've been great for the floods in Calgary a few years back. There's been, I'd say numerous examples where this would have had a meaningful impact for Canadians. Other examples may be where a business wants to pay an employee or a contractor for the work that they've completed immediately after their shift. We see the economy transitioning more and more to gig workers and this type of payment system will provide flexibility for that type of business model and those kinds of hiring practices. And then another example, maybe just receiving disbursements from your insurance company, might be a really good prime area for the use of real time payments in the future.

Cyrielle Chiron:
Yeah. And actually talking about the gig workers, we saw as well that the number of people who turn to that type of economy really increased with COVID. And with the research that we put, they were saying that they want to be paid by cash or not because I guess they like it, but because it was the fastest way to get money in their hands. So I think that the RTR will definitely help-

Janet LaLonde:
It would.

Cyrielle Chiron:
... in this industry.

Janet LaLonde:
It would, and the beauty too is that often workers that gravitate to that kind of work are often those consumers that also gravitate to the use of technology. And so would really benefit from some of the cool features that might come along with that as well.

Cyrielle Chiron:
So I think there's three keywords here. Obviously there is the immediacy faster, but there's three other ones, just like choice that you mentioned, security and then innovation. I think these are the really three good things, and this is going to be a very big deal, right, really for businesses and consumers. You'll be able to have a lot of different services and products offered to you. So kind of a basic question here, but is there anything that businesses and consumers should be doing now? I know you're working on it. I know you said that the Department of Finance is working on it, but is there anything that we should be doing now to get ready for it?

Janet LaLonde:
So it is going to be a big deal and it is going to be a big change, I think, for a lot of Canadians, particularly for business customers that are going to have to get ready and prepare themselves to take advantage of some of the new opportunities. I think that both consumers and businesses can... it's not too early to start having conversations with their financial institutions, with other payment service providers to find out what they're doing to get ready for real time payments in Canada and what's on the horizon in terms of new service offerings that may leverage the RTR system. I think it's a really super exciting time in payments right now and the opportunities are endless.

Cyrielle Chiron:
Well, cool. That's good that you're excited because I want to follow up with questions about this. I'm excited too, but I'm always excited, so that doesn't count. We can talk about real time payments for hours, because it is a kind of really key innovation that is happening in payments around the world. But one final question for you, talk about excitement. So when you think about the future of payments, what are you the most excited about?

Janet LaLonde:
I would almost want to divide that question into two parts, Cyrielle. I mean, if I'm-

Cyrielle Chiron:
Go for it.

Janet LaLonde:
... if I'm allowed that [crosstalk 00:15:01].

Cyrielle Chiron:
You're allowed.

Janet LaLonde:
But I think in the near term, I'm just most excited about seeing this system go live. It's been a lot of work. It's been a combination of a lot of teamwork across the industry, and I'm just really excited to see the system go live and provide that platform. And then looking out more into the future, I think I'm really very excited to see how financial institutions and payments service providers are going to use the platform. Because I talked about some examples of things, but I have no doubt that things are going to evolve in a way that maybe we didn't even imagine or envision. So I'm really excited to see what's going to happen in the future, and Payments Canada is really excited as well to collaborate with folks out there on the ideas that they have for using the RTR.

Cyrielle Chiron:
That's good. It is a big project. It's not every day that you modernize the payment system of a country. So it is a lot of work behind, I can testify for that. And I know, so I think you're right, you're providing a platform for innovation and you don't know what's coming out of it. And I think that's really, really cool as well, to be able to see, okay, what are the new things that Canada will have thanks to this platform that you and the team are working on. So Janet, thank you so much for joining me today. It was a pleasure talking to you and hearing from a real-time payments expert.

Janet LaLonde:
Thank you so much, Cyrielle. I had a lot of fun.

Cyrielle Chiron:
When we hear about real-time payments, the first thing we think of is speed, but when it comes to the Real-Time Rail, faster payments are only a part of the story. The RTR will be more than just a payment system, but the platform for innovation that will benefit consumers and businesses from across the country. Visit the payments.ca to sign up for the exchange, the Payments Canada's newsletter to stay connected to the latest news in payments. I'm Cyrielle Chiron, thanks for tuning in.