Money in Motion: Modernizing Canada’s Payment System

Payment systems, like plumbing, do not attract much attention when they are working well. A failure, on the other hand, is cause for alarm: as a broken pipe can flood a basement, broken payments can disrupt the financial system. Subpar performance short of a crisis, though less apparent, can also be damaging. Backed-up plumbing causes much inconvenience in familiar ways. A strained payment system also can be very costly. In that regard, Canada’s payment systems need some timely maintenance. A variety of systems make up the Canadian payments landscape: cash, credit cards, debit cards and cheques among others. Most prominent in terms of volume and value are the clearing and settlement systems operated by the Canadian Payments Association (CPA). But the CPA’s systems are now long in the tooth, forcing users to deal with technologies from the 1980s and 1990s. The tremendous advances in information technology since then allow for systems that are faster, cheaper and better able to meet users’ needs. Some countries have already dispensed with paper payments transactions and replaced them with digital payments. An efficient payment system can contribute to the competitiveness of a country’s economy. A first step toward modernizing the Canadian payment system would be replacement of current cheque processing with digital methods. This step alone should save Canadian businesses several billions of dollars per year. It will require reorganizing the CPA’s clearing and settlement systems as a huband-spoke and replacing payee-pull cheques (where the payee’s institution submits the transaction to the settlement system) by payer-push digital payments (where the payer’s financial institution submits the transaction). These steps can be facilitated by a commitment to financing the CPA’s major capital projects through borrowing and recouping the costs through future dues. The success of this modernization will depend on an extensive effort to educate consumers and businesses, especially small businesses, of the benefits of a payer-push electronic payment system. Modernization of the CPA’s payment systems should not stop with eliminating cheques. There is also a need for enhanced information to accompany payments transactions so as to allow seamless end-to-end processing from payer to payee and for real-time processing to limit payment-system risk.