The Need for Speed: The Benefits of Faster Payments and How to Achieve Them

In this study, we estimate the efficiency gains associated with the introduction of the Real-Time Rail (RTR), Fast Payment System (FPS) in Canada. In a benchmark scenario, we estimate that these gains will amount to $3.24 billion over the first five years after introduction of the system. These gains will arise mainly from: 1) the displacement of inefficient means of payment such as cheques and, to a certain degree, cash, which will lower the aggregate operational costs of retail payments; and 2) the reduction of float, which arises because of the delay in payments processing, meaning consumers and businesses do not have access to these funds for a certain period of time. These gains should more than offset the additional costs for payment service providers to adjust their systems and connect to the RTR, especially since its infrastructure will be built by leveraging the existing Interac e-transfer system. The gains increase substantially in an optimistic scenario, where stronger adoption of the RTR by consumers and businesses leads to much larger gains of $7.01 billion over five years. In our pessimistic scenario, where RTR adoption is weaker, the gains are lower, at $1.65 billion. However, RTR will do more than just introduce faster payments and enable data-rich payments. Its introduction will catalyze competition and innovation through new entrants, which will add to efforts already under way by incumbents. We identify three key ways to accelerate the introduction and adoption of the RTR. First, on the technology side, there have been delays in the introduction of a real-time settlement engine. This is a surprise, given that some countries have been able to quickly implement such a system. Operationalizing the settlement engine must have priority. Second, make it easier to challenge incumbent payment methods by promoting a level playing field among them. The RTR will already challenge income earned by financial institutions on float caught up in the system. To facilitate competition further, we hope RTR will cause merchants to be more transparent with pricing for different payment methods. Absent that, regulators should take a look at regulating interchange fees related to credit card transactions. The outcome of both of these competitive dynamics will redistribute income toward the end users of retail payment systems. Third, the Department of Finance should ensure that the RTR agenda moves ahead with a clear and holistic regulatory approach to retail payment systems. We recently saw a first step in the direction of making the RTR the centrepiece for creating competition and innovation, with the Fall Economic Statement announcing the government’s intention of opening up direct access to the retail payment system for new payment service providers and local credit unions.