Canadian banks and credit unions are preparing for real-time payments with a test drive for businesses.
Thirteen of the country's financial institutions are launching an instant business-to-business payments service more than a year ahead of the rollout of the country’s fast payments system, the Real-Time Rail.
The companies will run the service on the existing Interac e-Transfer platform, but they’ve added features such as fraud vetting and the global ISO 20022 payments messaging standard in an effort to wean more companies off paper checks and wire transfers. The new features are meant to address the limitations of e-Transfer, a next-day settlement system which is popular with consumers but hasn’t achieved significant business adoption.
Banks including BMO Financial Group, Royal Bank of Canada, Scotiabank and TD Bank Group as well as the credit unions Meridian Credit Union and Vancity are among the financial institutions that have already rolled out e-Transfer for Business to their customers. Additional Canadian financial institutions are expected to launch the service in the coming months.
Canada, which has far fewer financial institutions than the United States, is a test case for the benefits of data-rich real-time payments using ISO 20022. The messaging standard is gaining adoption globally as a core component of instant payment schemes.
In the U.S., the Clearing House’s RTP scheme already uses ISO 20022 and the Federal Reserve’s FedNow system will incorporate the standard. So mainstream adoption of ISO 20022 is on the horizon in the U.S. for domestic business payments, and, due to Swift’s endorsement, the standard is expected to be used for international payments.
To be launched in late 2022, the RTR will be managed by the Canadian clearing and settlement systems operator Payments Canada, which has selected debit scheme
The RTR will leverage the existing Interac e-Transfer technology platform, which is connected to nearly 300 Canadian financial institutions — but has seen slow adoption among businesses so far. In 2020, businesses received 10% of the total 763.7 million e-Transfer payments, with most e-Transfer business usage conducted by small and midsize companies. e-Transfer is the leading peer-to-peer payment platform in Canada, according to Payments Canada
Anurag Kar, Interac’s associate vice president of money movement products, hopes that businesses will see e-Transfer for Business as an efficient and cheap payment option and a means to replace checks, which still play a significant role in Canadian B2B payments. Checks accounted for 40% of Canadian commercial transactions in 2019, according to Payments Canada.
As the new service offers higher transaction limits of up to C$25,000 (compared with C$10,000 previously), e-Transfer for Business transactions have the potential to displace upwards of 200 million checks written by Canadian businesses for values below C$25,000 ($19,653.50 U.S.), Kar said. Also, business payments that use wire transfers or Payments Canada’s legacy electronic funds transfer system can migrate to e-Transfer for Business, he said. While EFT payments have lower fees than wire transfers, they take two days to process.
“The volume of business payments below C$25,000 is sufficiently high for e-Transfer for Business to create a meaningful shift from paper-based to digital payments, especially within the business-to-consumer payment space,” said Ramesh Siromani, RBC's senior vice president of enterprise payments.
Interac’s existing business payments services, Interac e-Transfer Bulk Payables and e-Transfer Receivables, which respectively enable companies to make payouts to multiple payees and send multiple payments requests, have also been upgraded with the capabilities offered by e-Transfer for Business.
The new e-Transfer for Business service allows payments to be made to payees’ bank account numbers as well as to email addresses and mobile phone numbers — the existing e-Transfer service only allows transfers to email addresses and mobile phone numbers. “The ability to send money to account numbers is critical, as many businesses already have their suppliers’ bank account numbers on file and are used to making payments to their bank accounts,” said Kar.
A key feature of e-Transfer for Business is that it supports the ISO 20022 messaging standard, which will be a core part of the RTR. ISO 20022 enables structured remittance information to accompany transactions in order to minimize manual reconciliation processes. The information can include invoice and reference numbers or the purpose of the payment.
“The new service enables real-time reconciliation and automation of account payables and receivables and working capital as well as enhanced payment tracking from end to end,” Siromani said.
Another important aspect of the new service is the automation of risk assessment to speed up payments. Although traditional Interac e-Transfer transactions are near-real-time, sending financial institutions may delay e-Transfer payments depending on the risk profile of a transaction.
“Interac and participating [financial institutions] use a risk-detection model to analyze real-time payments fraud risks before e-Transfer for Business transactions are sent,” Siromani said. This enables all e-Transfer for Business transactions to be processed in real-time with funds arriving in recipients’ accounts within seconds.
RBC is running an educational campaign about the service, targeting markets such as insurance firms that need to optimize their claims payments, with documents and payments being sent together. “Over time, as suppliers and buyers get to know e-Transfer for Business, there will be a network effect in terms of adoption, with users bringing in new users,” Siromani said.
To help its clients adapt their ERP and AP systems for the rich data provided by e-Transfer for Business, RBC plans to partner with financial software firms. “These firms can help our clients integrate rich payment data in their financial systems,” Siromani said.
