CPA Draft Long-Term Payments Strategy VISION 2020

Draft Long-Term
Payments Strategy
VISION 2020
A message from
the President and CEO
Canada’s payment system is central to our country’s financial system. It may not be top of
mind in discussions on the state of the Canada’s financial sector but the payments clearing
and settlement system in Canada has indeed showed its resilience throughout the economic
turmoil of the past 12 months.
The payments environment in which Canadians, businesses and governments operate is
certainly a dynamic one. Consumers continue to demand more payment options. Technological
innovations will continue to foster the development of new payment products and services.
Encouraging this innovation is at the core of the Canadian Payments Association’s legislated
mandate. Over the last few years we have been actively engaged in the promotion of
electronic payments. The CPA has revised and implemented new rules for pre-authorized
debits, conducted consultations on a proposed clearing framework for chip-based PIN-less
Point of Sale debits and is well on its way in its review of enhancements to the bill payment
clearing framework.
As the custodians of our national clearings and settlement systems, the Canadian Payments
Association will continue to play a leadership role in providing a safe and efficient clearing
and settlement system to meet the current and future payment needs of Canadians.
Payment system users are demanding more in terms of payment services, here in Canada but
also around the world. Retailers want faster and more cost-effective payments. Consumers
will continue to demand more convenience and more payment options. Billers want an easier
and faster way of compiling the information required with payments to enable straight-through
processing. As more and more companies do business overseas, we also need to ensure
regional interoperability and integration of payments systems becomes the standard.
These are but some of the issues that are at the heart of the CPA’s new consultation process
and Long Term Payment Strategy.
The CPA’s Payments Strategy will continue to evolve over time, based on the input of the
users of our systems. I encourage you as stakeholders to take part in our consultation process
and to take part in building a renewed payments system for Canada.
VISION 2020 02
As part of our consultation and outreach activities we will organize a series of
web-based seminars in June, followed by townhall meetings across the country in order to
secure your feedback and opinions.
I know all of us at the CPA look forward to working with our members and stakeholders
as well as all the users of our national payments systems to build a payment strategy for
the future.
Guy Legault
President and CEO
Canadian Payments Association
03 VISION 2020
Contents
I – EXECUTIVE SUMMARY:
DEVELOPING THE STRATEGY 6
II - BACKGROUND: THE EVOLUTION OF THE CPA’S BUSINESS AND CHANGE DRIVERS 10
III - CPA: MANDATE & VISION 16
CP
A MANDATE 17
CP
A VISION 17
IV – CPA STRATEGY 18
CPA STRATEGY STATEMENT 19
CPA PAYMENTS STRATEGY OBJECTIVES 19
CPA FOUR-POINT PAYMENTS STRATEGY 20
V – THE SOLUTION PATH 28
VI - THE SOLUTION PATH TIMELINES 33
GLOSSARY AND APPENDICES 34
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05
Executive Summary:
Developing the Strategy
07
“The CPA’s vision
is to play
a leadership role
in providing
a safe and efficient clearing and settlement system
to meet the current
and future
payment needs
of Canadians.”
In 2008, the CPA embarked on a comprehensive exercise to develop a long term strategy for its payment systems. The purpose of such introspection is to monitor payment system developments and related issues in Canada and internationally to ensure that the framework for clearing and settlement continues to serve the needs of all participants and the Canadian public.
In this regard, benchmarking surveys were conducted with the CPA’s international counterparts, including payment organizations in Australia, Ireland, Japan, Netherlands, South Africa, the United Kingdom, and the United States. In addition, a needs assessment survey was conducted with CPA members and strategic planning sessions were held with members and stakeholders. Further, the Board’s work in this area has identified themes to be further explored. These combined findings serve as the basis for defining the CPA’s future direction.
The purpose of the CPA’s long term payments strategy is to build on the CPA’s mandate and provide a framework for the innovation and progress of payments cleared and
settled through the Association’s systems.
More specifically, the Payments Strategy aims to:
Promote• greater efficiency in the payments system by facilitating further growth of electronic payments. In doing so, the CPA plans to review current policies and rules, identify obstacles or gaps, and where appropriate, adapt the rules to address new developments in these areas;
Provide • a common foundation of interoperable standards to facilitate members’ sending and receiving of payments with domestic and international partners;VISION2020
08
• Modernize the CPA’s regulatory
framework to embrace changing market
participants, innovative payment methods,
while maintaining safety, soundness and
efficiency of clearing and settlement in
the interests of all users;
• Enable the efficient, responsive, secure,
cost effective delivery of clearing and
settlement arrangements via CPA core
systems; and
• Enhance the CPA’s value proposition
to members by providing value addedservices
to fill gaps in the payments
market place.
The CPA’s Payments Strategy will
continually evolve over time – with this
document being reviewed and updated on
a regular basis. At this stage, the Strategy
includes statements of principle, specific
actions, and a number of tightly focused
reviews of key issues. The reviews are
consistent with the CPA’s commitment
to move forward on the basis of an
objective evaluation of the facts and full
consultation.
Over time the CPA will “block in” firm
objectives identified following the approval
of position papers and business cases, in
accordance with the CPA’s strategic lifecycle
methodology. The CPA is committed
to keeping its Board, members and
stakeholders informed as progress on the
Payments Strategy evolves.
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Key Steps
2008
• Benchmarking surveys
conducted with
CPA’s international
counterparts
• Needs assessment
conducted with CPA
members
• Strategic planning
sessions held with
members and
stakeholders
• Board identification of
themes to be further
explored
Spring 2009
• Publication of Vision
2020
• Launch of consultation
Summer/Fall 2009
• Ongoing consultation
with stakeholders
09
“The CPA is committed
to keeping its
Board,
members and stakeholders
informed
as progress on the
Payments Strategy
evolves.”
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08
Background:
The Evolution of the CPA’s
Business and Change Drivers
11
At the CPA’s inception in 1980, Canada’s retail clearing systems were mostly paper-based and performed by a handful of chartered banks and other non-bank deposit-taking institutions (i.e. trust companies, credit union centrals) – these players formed the CPA’s membership, as per legislation. As a result, the CPA’s rules and governance structure were developed on a basis of mutual trust between a few homogeneous members, most of which faced similar market conditions and risks and were regulated financial institutions.
With the technological developments of instant communication and the changing
attitudes of consumers in managing their own funds, market entry barriers to the payments marketplace have been reduced. Over the last decade, these change drivers have led to the fragmentation of the payments value chain. As CPA member institutions looked to new payment service providers (PSP’s) to out-source traditional lines of payments business, this created an incentive for non-traditional payment participants to emerge, which gave rise to the introduction of innovative products and services that challenged traditional payment models.
The Payments System Historically
Front end(originate)Payments(validate)Application(capture info)ExchangeClearingSettleMembers in competition with PSPs(CPA does not participate)Members in competition with PSPs(CPA has limited policy role)CPA partnership with membersCPA owns and operatesOriginateValidateCaptureinfoExchangeClearingSettleHistorical FI business
The Payments System Today
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It is important to note that some schemes operating in Canada only fall partially inside the scope of the CPA’s by-laws and rules. In the case of Interac and some third party payment processors like Internet giant PayPal, the systems operate separately but rely on the CPA’s systems for clearing and settlement; as such, payments flowing through these systems are subject to specific provisions of the Association’s rules and standards. In other cases, such as for credit cards and foreign exchange through the Continuous Link Settlement (CLS), the CPA is only used for Large Value Transfer Settlement (LVTS) settlement. For on-us transactions, the CPA is not involved.
“On-us transactions” involve two accounts held at the same FI, whereby funds move from one account at the FI to another account at the same FI and therefore do not enter the clearings.
Today, based on CPA members’ anecdotal evidence, the CPA clears roughly 35% of all payments initiated in Canada.VISION2020
The CPA Clears Roughly 35% of all payments initiated in Canada
USBE
System
ACSS
System
LVTS
System
USBE
System
CPA Domain
Stored Value
Scheme, e .g.
Dexit
Interac
ATM/POS
e.g.
PayPal
Interac Online
Securities
(CDS)
Foreign
Exchange
(CLS)
Credit Cards
On-us transactions
13
The Payments Landscape
in 2020
“Globally, the highest growth is expected in electronic payments, which are expected to grow to about 85% of all non-cash payments.”
Growth of Electronic
Payments
From 2000 to 2010 global payment volume is expected to increase to 330 billion, with the growth not expected to spread evenly across payment types.1 The highest growth is expected in electronic payments, which are expected to grow globally to about 85% of all non-cash payments – with consumer use of payment cards representing the highest increase. Cheque volumes over the same period are predicted to be down nearly 70% globally.2 From 1999 to 2010, Canadian payment card activity is expected to have doubled to about 67% and electronic payments are projected to be approximately 90% of all non-cash payments; cheque volumes are projected to be down 37%.3 Some nations, such as the Netherlands, have already mandated the virtual elimination of cheques, while others, like the United Kingdom (UK) and Australia have outlined broad strategies to manage the decline – and eventual demise – of cheques.
Interoperability Standards
At the same time, the global economy continues to drive efficiencies in both domestic and international payments systems. International trade expansion is growing the demands for international payments and putting traditional international payments models under pressure. Many countries are moving towards the adoption of new international standards and technology to become more integrated and to permit more efficient cross-border payments.
1 TowerGroup, Global Payments: Trends, Opportunities, and Impact on the Canadian Payments Industry, February 2008
2 Payments Industry Environmental Scan 2007- CPA, June 2007.
3 Global Payments: Trends, Opportunities, and Impact on the Canadian Payments Industry –
TowerGroup, February 2008.
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Modern Framework and
Systems
“The CPA expects that the
Canadian payments landscape
will evolve over the next
ten years towards highly
automated, highly secure and
highly interactive payments
clearing and settlement
processes and systems.”
Further, increasing standardization and
competition is expected to continue
commoditizing payments. Canada’s
Automated Clearing and Settlement
System (ACSS), as well as the framework
of rules that underpins it, is being run as a
series of bilateral arrangements. As such,
Financial Institutions operations should
recognize and be prepared to cope with
the ever-increasing transaction loads of
the growing electronic payment trend.
More efficient centralized architectures, as
utilized in most nations with large electronic
funds transfer (EFT) volumes, should be
carefully considered in light of the ongoing
changes in this industry. 4
Finally, developments in payments
processing (i.e., clearing and settlement)
are expected to be much more responsive
to the requirements of users. Consumers
and corporate clients will wield increasing
levels of market power with financial
institutions and payment service providers
in satisfying their payment needs.
In summary, the CPA expects that the
Canadian payments landscape will
evolve over the next ten years towards
highly automated, highly secure and
highly interactive payments clearing and
settlement processes and systems.
4 Tower Group, ibid
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The Changing Landscape
In just 10 years, from 1999
to 2010, Canadian payment
card activity is expected to
have doubled to 67%, and
electronic payments are
projected to be 90% of all
non-cash payments.
Cheque volumes are projected
to be down 37%.
15
“In Summary, the CPA expects
that the Canadian payments landscape
will evolve over the next ten years towards
highly automated, highly secure and highly interactive
payments clearing and settlement
processes and systems.”
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CPA:
Mandate and Vision
17
The Canadian Payments Association (CPA) is a not-for-profit statutory corporation primarily responsible for establishing and operating Canada’s payments clearing and settlement systems, as well as facilitating the development of new payment methods and technologies. Through a network of committees that bring together representatives of CPA members and stakeholder groups, the CPA develops and implements the rules that apply to the clearing and settlement of different types of payments between its member financial institutions. As per the CPA’s public policy mandate, these rules and the related processes ensure that the Canadian payment system is safe, sound, and efficient, and takes into account the interests of users.
CPA MANDATE
(a) To establish and operate national systems for the clearing and settlement of payments and other arrangements for the making or exchange of payments;
(b) To facilitate the interaction of its clearing and settlement systems and related arrangements with other systems or arrangements involved in the exchange, clearing or settlement of payments; and
(c) To facilitate the development of new payment methods and technologies.
In doing so, the Association will promote the efficiency, safety and soundness of the clearing and settlement systems and will take into account the interests of users.
CPA VISION
“The CPA is to play a leadership role in providing a safe and efficient clearing and settlement system to meet the current and future payment needs of Canadians.”
In support of its vision, the CPA embarked on a comprehensive exercise to develop a long-term strategy for CPA payments. The CPA developed a strategy based on key values it seeks to provide to its membership, including cooperative industry forums, forward looking objectives in step with the payments industry evolution, and flexible payment frameworks to foster competition amongst payment service offerings.
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CPA Strategy
19
CPA STRATEGY STATEMENT
“The CPA provides a common foundation to enable its members to competitively deliver modern payments services and offerings to Canadians.”
Increasing standardization and competition is commoditizing the payments clearing and settlement infrastructure. As payment technology and products become closer to the end-user customer, competition between FIs increases for product differentiation and value-added services related to front-end products. This is where investment in competitive products and services is applied. Collaboration and a common foundation for the underlying payments infrastructure can thus be an effective tool in driving greater efficiencies and economies of scale in members’ down-stream front-end product offerings.
The CPA will continue its focus on the collaborative development of rules and standards and a national approach to the development of a safe, sound and efficient payments infrastructure that best serves the Canadian public. This allows for a more standardized processing in members’ back offices, leaving the payment delivery channels to end-user customers, as the point of differentiation and competition between financial institutions.
CPA PAYMENTS STRATEGY OBJECTIVES
“The CPA Payments Strategy seeks to establish and articulate a dynamic plan that systematically addresses CPA payments evolution ten years into the future.”
To enhance the value-added proposition of a robust and efficient common foundation infrastructure for payments clearing and settlement, the CPA Payments Strategy seeks to establish and articulate a dynamic plan that systematically addresses CPA payments evolution ten years into the future, in order to:
(a) Keep CPA payments systems and framework relevant, accommodating, and modern;
(b) Promote continued CPA payment streams innovation and growth; and
(c) Provide efficient and unencumbered payments systems that enable reliable, secure, convenient, and competitive payment types.
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CPA Four-Point Payments Strategy
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1
2
3
4
Electronic Payments
Enabling Framework
and Systems
Domestic and International
Value Added Services Interoperability Standards
Strategic Statement:
The CPA provides common foundation
to enable its members
to competitively deliver modern
payments services and offerings to Canadians
21
The CPA’s Strategy Objectives are anchored in four pillars of work initiatives, as illustrated to the left. When the projects under the four pillars are implemented the CPA will enhance its relevance and provide improved clearing and settlement-related services to members. Specifically the CPA will strengthen its sphere of influence by:
Promoting modern, innovative, safe and sound frameworks to support the continued growth of electronic payments – which are expected to grow globally to about 85% of all non-cash payments;5
Driving efficiencies in both domestic and international payments systems by moving towards the adoption of industry-recognized payment and remittance standards, and integrated frameworks that permit more efficient cross-border payments for the CPA’s members;
Modernizing the CPA’s regulatory framework and supporting core systems to reflect new clearing arrangements and business models, and consider new market participants and innovative payment products
Seeking new value added service to allow the CPA to formally share its knowledge of payments with the industry and work with its members in meeting the needs of payment system participants in this dynamic marketplace.
5 Tower Group, Global Payments: Trends, Opportunities, and Impact on the Canadian Payments Industry, February 2008VISION2020
1
2
3
4
22
“The CPA plans to promote
the migration of paper
payments to electronic
payments by researching
viable alternatives to
cheques, enhancing the
existing electronic payments
framework, and facilitating
new and emerging electronic
payment instruments in its
framework.”
1. Promote Electronic Payments
To promote greater efficiency in the payments
system, the CPA is seeking to facilitate further
growth of electronic payments.
In doing so, the CPA plans to review current
policies and rules, identify obstacles or gaps,
and where appropriate, adapt the rules to
address new developments in these areas.
The CPA plans to promote the migration of
paper payments to electronic payments by
researching viable alternatives to cheques,
enhancing the existing electronic payments
framework, and facilitating new and
emerging electronic payment instruments in
its framework.
The CPA Member Needs Assessment Survey
showed that initiatives to migrate paper
payment forms to electronic – particularly for
businesses – are the highest priorities for CPA
members. Overall members proved to be in
favour of modernizing the CPA framework in
relation to electronic payments, enhancing
current electronic payment instruments,
and developing viable electronic payment
alternatives to business and consumer
cheques.
In Canada, some 70-80% of all commercial
payments are initiated as cheques, a practice
predominantly supported by mid-sized
businesses. Large corporations already
see the advantages of automation and are
increasingly adopting electronic payments.
However, the need for integrated remittance
and payment data is still strong and an
essential element in providing a tighter and
more cost effective method of payment
reconciliation.
What Other Countries
are Doing
Australia’s “Pay Anyone” is a
banking facility that enables
one-off direct credits to be
initiated over the phone or
online that can be paid to
other accounts held at virtually
any financial institution in
Australia.
In the U.K., the “Faster
Payments” system offers bill
payments, credit transfers, and
one-off payments (including
person to person) that are
settled the same day or faster.
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From the consumer perspective, the cards industry is continually seeking new methods of payments initiation to migrate traditional cash and person to person payments to the debit networks.
Based on the International Benchmarking research, other countries are also actively involved in growing the use of electronic payments and reducing paper payment volumes. Many countries have made strides in this regard such as Australia with its “Pay Anyone” system and the UK’s “Faster Payments” .
“The CPA is seeking to provide interoperable standards to facilitate members’ sending and receiving of payments with domestic and international partners.”
2. Domestic and International Interoperability Standards
As standards for payments messages are significant enablers in innovation, global interoperability, competition, efficiency, and cost reduction, the CPA will facilitate the progressive move to message standards alignment for domestic, North American, and global interoperability and play an active role in payments standards development.
The CPA Member Needs Assessment Survey demonstrates that straight through processing (STP) and interoperability are high industry priorities. Addressing STP for Automated Funds Transfer (AFT) payments and for Large Value Transfer Systems (LVTS) payments were both rated highly as key industry objectives. Members also recognized that developing STP could be an important part of a cheque reduction strategy.
Growth in global trade by companies and international transactions by consumers has resulted in more cross border payments being demanded at continually decreasing costs. For stakeholders, moving towards interoperable standards and common remittance standards can lead to improved efficiencies in back-office payment processing and reconciliation practices, and increased possibilities for straight-through-processing (STP).
The development of standards for other types of domestic payments has been established as a goal for many countries. Similarly, cross-border interoperability for low-value payments is a goal for most countries and is being pursued through international projects like Single Euro Payments Area (SEPA) and the International Payments Framework (IPF).
The CPA will study opportunities for developing an STP strategy for domestic and international payments, focusing on both retail and wholesale payment systems.
23VISION2020
The CPA is seeking to provide interoperable standards to facilitate members’ sending and receiving of payments with domestic and international partners. Such interoperable standards would take into consideration the International Standards Organization (ISO) 20022 (adopted mainly in Europe) and the United States (US) Electronic Payments Network (EPN)-driven STP 820, and would leverage international efforts such as the International Payments Network (IPF).
“The CPA will modernize the CPA’s regulatory framework – through the review of its Rules, By-laws and legislation – to reflect new clearing arrangements and business models, innovative payment products, and to consider new market participants.”
3. Enabling Framework and
Systems
The robustness and flexibility of the CPA framework of rules and processes will be enhanced in order to address the dynamic payments landscape and the needs of its users. The CPA will enhance its current clearing and settlement core systems and develop a long term system evolution and renewal plan in keeping with evolving electronic payments and interoperability standards.
The CPA will modernize the CPA’s regulatory framework – through the review of its Rules, By-laws and legislation – to reflect new clearing arrangements and business models, innovative payment products, and to consider new market participants (e.g. Payment Service Providers and money service providers). These issues will be reviewed with a focus on ensuring the efficiency, safety, and soundness of the CPA’s clearing and settlement system framework. It is anticipated that the basis for the CPA’s proposed amendments to the government in the coming financial legislative reviews will be driven by its strategic direction.
The International Benchmarking research showed a trend towards increased flexibility in clearing arrangements for direct and indirect clearers, as well as, in certain cases, openness to new market players’ participation in clearing and settlement systems. For stakeholders, modernizing the CPA’s enabling framework may mean more flexibility in payment processing arrangements and enhanced transparency in payment processing practices.
In addition, the CPA will continue to enable the efficient, responsive, secure, and cost effective delivery of clearing and settlement arrangements via the CPA’s core systems. In doing so, the CPA is conducting a health check of its current systems which will be leveraged as part of the core system renewal plan moving forward.
24VISION2020
In the CPA Member Needs Assessment Survey, most CPA members have indicated that it is important for the industry to develop faster payments and reduce clearing and settlement times. Internationally many countries studied already have or are working towards same-day or faster settlement of certain payment types.
A revitalized and competitive payments infrastructure should allow members to provide corporate and consumers’ cost effective, rapid and easily accessible Electronic Funds Transfer (EFT) network and help further manage the transition from paper cheques to electronic transactions.
“In looking to enhance its value proposition to members, the CPA could provide value added-services such as payments training and education and potentially fraud monitoring to fill current gaps in the payments market place.”
4. Value-Added Services
Given the increasing complexity of payments processes and arrangements and as a result, risk, the CPA will seek to more formally share its knowledge and expertise with members and stakeholders to enhance the understanding of the national payments system.
In looking to enhance its value proposition to members, the CPA could provide value added-services such as payments training and education and potentially fraud monitoring to fill current gaps in the payments market place. In the CPA Member Needs Assessment Survey members identified payments training and education and monitoring fraud and security issues as desirable CPA value added services.
In reviewing the activities of comparable payment organizations abroad, fraud monitoring was identified as an initiative undertaken by the Australian Payments Clearing Association (APCA), Irish Payment Services Organization (IPSO), and the UK’s Payments Council. It is also common for payment organizations to provide education in their areas of expertise.
CPA education initiatives could include Canadian payments education and training for members and stakeholders on CPA rules, systems, payments, and services. Some education efforts could also be directed specifically to end users to help inform them on payment instruments available to them. It is believed that fostering informed users will help promote electronic payments.
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For more information on the CPA’s research, please visit the CPA’s
website for:
 International Comparator Survey Results: Governance,
Funding & Membership
 International Comparator Survey Results: Core Systems and
Interoperability International
 International Interoperability Environmental Scan
www.cdnpay.ca
An overview of these documents is provided as Appendix 1, 2 and
3, respectively.
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27VISION2020
The Solution Path
Project Name
Description
End Dates
1- Electronic Payments
1. Paper to Electronic
Migration (B2B and
Consumer)
(Strategic)
Promote the clearing and settlement of electronic alternatives as substitutes
to cheques.
Cheque use is in decline. That decline • needs to be actively managed; although viable alternatives exist for cheques, in many areas “gaps” continue to exist. Conduct research on these gaps to identify viable alternatives.
Domestic standards for remittance • data are imperative to moving paper payments to electronic forms. This initiative is detailed in section B.
Research & identify new potential uses • for AFT Payments.
Member decision in 2010
2. Enhancing Electronic
Payments Framework
(Tactical)
Promote use of electronic payments, and facilitate and integrate innovation
into CPA framework.
Pre-Authorized Debits•
POS Rule E1 enhancements (i.e. • Pre-funded Debits Products and chip amendments)
Electronic Bill Payments Framework•
2009•
2009
•
Member decision in • 2010
3. Facilitation of Emerging
Payments
(Strategic)
Increase application and significance of CPA’s framework to emerging payment products or new payment instruments.
Mobile Payments Research Paper•
PIN-less POS Payments•
chip applications research•
2009•
2010•
Member decision in • 2010
2011•
29
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Project Name
Description
End Dates
2 - Domestic and International Interoperability Standards
1. Domestic Remittance
Data Standards (Tactical)
Provide a framework for interoperable standards to facilitate the capture of payment and remittance details to enable members to offer complete
automated processing of payments without the need for re-keying and
reformatting data.
Remittance Data standards review
•
Straight-Through Processing (STP) study • for wholesale payments
STP study for retail payments•
Member dicision in 2009•
Member decision in 2011•
Member decision in 2011•
2. Adopting Global
Standards
(Strategic)
Provide a common foundation of interoperable standards to facilitate members’ sending and receiving of payments to international partners.
Global to domestic standards Mapping • (i.e. CPA standards to ISO 20022, EPN 820)
International Payments Framework•
Member decision in 2009
•
2012•
3- Enabling Framework and Systems
1. Modernize CPA Legal
and Regulatory
Framework (Strategic)
Modernize CPA regulatory framework to address changing market participants, innovative payment methods, while maintaining safety, soundness, and efficiency.
Multiple Clearing Arrangements•
Multiple FI numbers•
Default Rules – Phase I•
Payments Industry Competitive • Landscape Assessment
Credit Union Framework Review•
2009•
2009•
2009•
Member decision in 2009
•
2010•
(continued on next page)
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Project Name
Description
End Dates
3- Enabling Framework and Systems (continued)
1. Modernize CPA Legal
and Regulatory
Framework (Strategic)
Direct Clearer /Group Clearer/Clearing • Agent & Tiered Structure/Membership Review
Default Rules – Phase II•
Review Membership, Governance and • Funding
Principled-based Framework
•
2011
•
2011•
2012
•
Member decision in 2012•
3. Government’s
Financial Legislative
Review
(Tactical)
Contribute to the CPA’s long term plan by identifying, assessing, and recommending legislative amendments to the Canadian Payments Act in preparation for the Government’s 5-year financial legislative review
2012 Financial Legislative Review•
2017 Financial Legislative Review•
2010•
2015•
3. Enhancing the CPA’s
Current Clearing and
Settlement Systems
(Tactical)
Enable the efficient, responsive, secure, cost effective delivery of clearing and settlement arrangements via CPA core systems.
LVTS 7.0, Alert Monitoring, & Remote • Access
Health Check for all systems•
ACSS Version 12 (Government 799 • Processing)
LVTS Priority Payments•
End-to-end LVTS payment timeframes
•
More Frequent LVTS Settlement for • Electronic Payments
LVTS Collateral Requirements
•
2009/2010
•
2009•
2010
•
2010•
Member decision in 2010•
Member decision in 2010•
Member decision in 2011•
(continued on next page)
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32
Project Name
Description
End Dates
3- Enabling Framework and Systems (continued)
4. Long Term System
Evolution Plan – Faster
Clearing & Settlement
(Strategic)
Enable payment exchanges betweens FIs to be made more quickly than is occurring today with current business arrangements and technology. For example, some payment types could be exchanged on a same-day, intra-day, or real-time basis.
Inter-day Settlement Review
•
ACH Review
•
CPA clearing and settlement renewal • plan
Member decision in 2010•
Member decision in 2011•
Member decision in 2012•
4- Value-Added Services
1. Fraud Monitoring
(Strategic)
CPA to enhance value-proposition to members by monitoring security issues/
fraud trends in relation to payments.
Member decision in 2012
2. Payments Education/
Training (Strategic)
CPA to enhance value-proposition to members by providing educational and/or
training sessions on payment clearing and settlement systems and related
issues.
Member decision in 2012
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The Solution Path TimelinesVISION2020
The Gantt chart below includes all the projects currently underway and planned as part of future payments strategy activities.
Glossary of Terms
35
Business-to-business (B2B)
A term commonly used to describe transactions between businesses, as opposed to those between businesses and other groups, such as business-to-consumers (B2C). For the purposes of this document B2B transactions include business-to-government transactions.
CPA regulatory Framework
The CPA regulatory framework comprises its governing Act, Regulations and by-laws, as well as its framework rules and standards.
Clearing & Settlement Core Systems
The CPA “systems” may be defined as any electronic service or offering that either facilitates or operates the clearing and settlement of payments, including the system operating rules and standards. Examples include the Automated Clearing and Settlement System (ACSS), Large Value Transfer System (LVTS), and the U.S. Bulk Exchange (USBE).
Compliance
CPA Member adherence to CPA objects, including its governing Act, by-laws, rules and standards.
End-to-End Processing Times
Once a payment is initiated by the payor, the total processing time required for the funds to become available to the payee.
EPN STP 820
This standard was developed by the Electronic Payments network (EPN), one of two ACH processors in the United States. The objective is to standardize the use of ten remittance fields to ease payment file integration. This standard is approved by the American National Standards Institute (ANSI), and is a derivation of the electronic data interchange (EDI) X12 820 standards commonly used for payment files within the United States.
Faster Clearing and Settlement
Payment exchanges between Financial Institutions can be made more quickly than is occurring today with current business arrangements and technology. For example some payment types could be exchanged the same day or in real-time.
Financial Legislative Review
Every five years the Federal Government of Canada embarks on a review of financial legislation.
Global Interoperability
Describes a situation in which payment instruments belonging to a given payment scheme may be used in other countries and in systems installed in separate schemes. Interoperability requires technical compatibility between the systems, but can only take effect where commercial agreements have been concluded between the schemes concerned.
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Governance
Payment System Governance arrangements may be defined as encompassing the set of relationships which exist between a payment system’s owners, governing body, management and other payment system stakeholders. These arrangements provide the structure through which a payment system’s overall objectives are set and achieved, how risk is monitored and assessed and how performance is optimised.1
ISO 20022
This is an extensible Markup Language (XML) schema for the development of financial messages. The schema is driven by payments industry bodies including SWIFT and the Treasury Workstation Interface Standards Team (TWIST). ISO 20022 is being adopted as the framework for payments messaging under SEPA rules throughout Europe, and for the new SWIFT MX message category.
International Payments Framework (IPF)
The International Payments Framework (IPF) concept establishes a membership organization providing rules, standards (ISO20022), operating procedures and guidelines to improve non-urgent cross-border payments through a member service agreement binding members to the operating rules.
The rules will enable interoperability between existing domestic or regional payment systems (AFT in Canada), the ability to exchange transactions in multiple currencies and settlement procedures leveraging existing practices. The rule-making body of the IPF would provide an overlay structure that enables interoperability between Clearing and Settlement Mechanisms (CSMs) and banks, with bank members providing transaction volume.
Non-FI payment providers
In today’s payments environment there is no longer a simple array of direct clearers and indirect clearers that interact to accommodate Canadian payments. There are a variety of non-FIs that may be involved with payments such as connection service providers, acquirers, third-party payment scheme operators, and non-bank payment service providers that may play a role in facilitating the capture, processing, clearing, and settlement of payments.
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1 Bank of International Settlement (BIS), Core Principles for Systemically Important Payment Systems, p.9
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Retail Electronic PaymentsFor the purposes of this document, retail electronic payments are mainly consumer payments or payments that are of a low value. In general terms, these payments are not made through the CPA’s Large Value Transfer System (LVTS).
Risk Management
A systematic process that involves identifying and assessing risks, evaluating risks against the organization’s stated risk tolerance, communicating those risks and developing strategies to prevent any negative event from occurring and contain or minimize potential harm, while providing reasonable assurance regarding the achievement of the CPA’s objectives.2
Strategic
The formal pro-active consideration of an organization’s future course or direction.
Straight-Through- Processing (STP)
The capture of payment and trade details directly from front-end trading systems and complete automated processing of confirmations and settlement instructions without the need for re-keying and reformatting data.
Tactical
The formal consideration of “how” to implement an organization’s direction.
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2 Canadian Standards Association, Risk Management: Guidelines for Decision-Makers - A National Standard of Canada (CAN/CSA-Q850-97), 2002; IRGC, An Introduction to the IRGC Risk Governance Framework, 2008; Presidential/Congressional Commission on Risk Assessment and Risk Management, 1997; Treasury Board of Canada Secretariat, Integrated Risk Management Framework, 2001; Committee of Sponsoring Organizations of the Treadway Commission (COSO), Enterprise Risk Management - Integrated Framework, 2004; KPMG LLP, Best Practices in Risk Management: Private and Public Sectors Internationally, 1999.
Appendix 1
International
Benchmarking Survey
Results
- Governance, Funding &
Membership -
Executive Summary
The efficient functioning of payment clearing and settlement systems, allowing transactions to be completed safely and on time, makes a key contribution to national economic performance. Correspondingly, their ongoing development and governance, specifically collective decision-making processes, is crucial to continued economic and financial well-being.
The Canadian Payments Association’s (CPA) has embarked on a comprehensive exercise to develop a long term plan for its payment clearing and settlement systems. In support of the comprehensive exercise, the CPA conducted an international benchmarking survey with comparable payment organizations abroad to investigate how these entities are dealing with key areas of strategic importance, including governance, funding and membership. Based on the responses received, the CPA conducted a comparative assessment of itself against eight (8) international payment 1, organizations with the following results:
Governance: Oversight, Mandate & Stakeholders
The CPA’s model is common compared to the majority of the organisations reviewed in that:
Public policy objectives form part of the CPA’s mandate.⇒
The CPA ensures stakeholder engagement by establishing a self-sponsored consultation ⇒ process.
The CPA’s model is uncommon compared to the majority of the organisations reviewed in that:
The Minister of Finance, rather than the central bank, has assumed primary oversight ⇒ responsibility for retail payment clearing and settlement systems.
The CPA’s retail payment clearings are ⇒ not separated into distinct clearing schemes, with a specific and separate governance structure and funding model for each, which can allow direct and indirect participants the flexibility to opt in and out of certain clearing
1 � � � � � � � � � � � � � � Australian Payments Clearing Association (APCA) – Australia; Association for Payment Clearing Services (APACS) – United Kingdom; Payment Association South Africa (PASA) – South Africa; Irish Payment Services Organisation (IPSO) - Ireland; NACHA – United States; The Federal Reserve Bank (FRB) – United States; Equens – Netherlands; Japanese Bankers Association (JBA) – Japan.
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schemes and/or have different clearing arrangements from one scheme to the next (e.g. join as a direct or indirect participant depending on the clearing scheme).
The CPA maintains a dual role as a system operator and policy maker. The majority of ⇒ the organisations reviewed retain only one role, with the bulk of these acting as a policy maker.
The CPA’s mandate is set explicitly in legislation.⇒
Governance: Board Structure
The CPA’s model is common compared to the majority of the organisations reviewed in that:
Though membership classes and the allocation of seats to each may vary, representation ⇒ on the CPA’s Board of Directors is based on membership classes, with non-transaction based voting entitlements at the Board.2
Independent directors are appointed to the CPA’s Board – a practice more commonly ⇒ employed where non-transaction-based voting rights are utilized.
The CPA’s model is uncommon compared to the majority of the organisations reviewed in that:
Central banks do not generally retain an ex officio right of representation and vote on the ⇒ Board.
The trend is for the President and CEO to serve as an ex officio Director on the Board.⇒
The Chair of the Board is generally an elected member Chair or an Independent Chair.⇒
2 Non transaction based voting: A practice whereby one director is entitled to one vote, rather than to a percentage of the vote based on the percentage of total volume his/her institution clears through the payment system.VISION2020
Membership
The CPA’s model is common compared to the majority of the organisations reviewed in that:
Like the countries reviewed, tiered arrangements are leveraged to grant access to the ⇒ CPA’s retail payment system, the Automated Clearing Settlement System (ACSS), to both direct and indirect members. No trend is discernible within the sample of organisations reviewed in regards to the formal/informal tiering practices of systems.
Informally tiered arrangements are leveraged to grant access to the CPA’s wholesale ⇒ payment system, the Large Value Transfer System (LVTS), whereby only direct participants are recognized in the systems’ rules.
The CPA’s model is uncommon compared to the majority of the organisations reviewed in that:
With only one retail payment clearing and settlement system in Canada and multiple ⇒ clearing arrangements under review3, the CPA does not provide direct and indirect participants the flexibility to have different clearing arrangements for various payment types cleared through the CPA.
The CPA’s membership eligibility remains by and large limited to deposit-taking financial ⇒ institutions4, whereas some of the organisations reviewed allow payment system operators and third-party service providers to become members.
3 The CPA’s policy and rules on multiple clearing arrangements is currently under review. It is anticipated that by Q1 2009, multiple clearing arrangements will be permitted for all electronic payments.
4 In addition to deposit-taking financial institutions, the following are eligible for CPA membership: securities dealers, insurance companies, and money market mutual funds.
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Funding
The CPA’s model is common compared to the majority of the organisations reviewed in that:
The CPA functions on a not-for-profit basis.⇒
The CPA membership dues are primarily based on clearing system volumes.⇒
The CPA derives its revenue almost exclusively from member dues.⇒
For the full report, please visit the CPA’s website at www.cdnpay.ca
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Appendix 2
International Research
& Benchmarking Survey
Results
- Core Systems -
01
Executive Summary
The efficient functioning of payment clearing and settlement systems, allowing transactions to be completed safely and on time, makes a key contribution to national economic performance. In this regard, the Canadian Payments Association’s (CPA) has embarked on a comprehensive exercise to develop a long term plan for its payment clearing and settlement systems. In support of the comprehensive exercise, the CPA conducted an international benchmarking survey with comparable payment organisations abroad to investigate how these entities are dealing with key areas of strategic importance, including governance, funding and membership. Based on the responses received, the CPA conducted a comparative assessment of itself against eight (8) international payment organisations1.
The core system research generally revealed that countries around the world are continuing to evolve and improve their payments systems. The countries studied are innovating and addressing domestic and international obstacles to enhance and expand their payments service offerings.
The research supports a widely held notion that European countries, with their need to amalgamate multiple countries and markets, are leaders in payments systems innovation. The research also shows that a surprising number of non-European Union (EU) countries are keeping pace with the European payments system evolution. Countries such as the United States (US), the United Kingdom (UK), Australia, and South Africa have shown their payments industries are motivated to continually invest in and enhance their core systems.
The research on central clearing systems makes a case that the current Canadian Automated Clearing Settlement System (ACSS) features and processes should be reviewed to ensure that Canada does not fall behind international norms. Some countries studied are progressing in areas of development such as faster payments, automated and faster clearing and settlement, and developing viable electronic alternatives to cheques. Given the short-term plans the countries surveyed have for improving their clearing systems it is timely that Canada is beginning to research developing plans of its own.
1 Australian Payments Clearing Association (APCA) – Australia; Association for Payment Clearing Services (APACS) – United Kingdom; Payment Association South Africa (PASA) – South Africa; Irish Payment Services Organisation (IPSO) - Ireland; NACHA – United States; The Federal Reserve Bank (FRB) – United States; Equens – Netherlands; Japanese Bankers Association (JBA) – Japan.
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The Canadian Payments Association (CPA) could consider conducting further research to explore the feasibility and potential costs and benefits of some new clearing system options.
Concepts for consideration include same day clearing and settlement, separate clearing schemes for some retail payments, providing greater remittance information, and expanding research for interoperability and interoperability standards.
In addition the survey provides evidence that as part of a systems review the CPA may want to study the benefits of adopting a multilateral model [such as an automated clearing house (ACH) model] for clearing and settlement. There is some circumstantial evidence presented that suggests multilateral systems may be linked to greater system flexibility and innovation. The countries with a multilateral model were more likely to report that they are developing more efficient systems built around automated settlement and closer international integration.
The wholesale payments system research demonstrated that Canada’s Large Value Transfer System (LVTS) is currently in line with most of the other countries surveyed. Other countries continue to work and invest in improving and modernizing their wholesale payments systems. To keep pace the research suggests that the CPA should continue to pursue straight through processing for business-to-business payments and interoperability with other countries.
For the full report, please visit the CPA’s website at
www.cdnpay.ca
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Appendix 3
Environmental Scan
- International
Interoperability Standards -
Executive Summary
Standards for payments messages have been touted as significant enablers in innovation, global interoperability, competition, and efficiency and cost reduction. The implications for payment system participants, whether they are corporate clients, financial institutions (FIs) or large infrastructure providers, means that these must be looked at closely from a business perspective as well as technological. New developments in standards create opportunities, and risks, for businesses.
Projects such as the Single Euro Payments Area (SEPA) have pushed European payments players to adopt a new standard based on the ISO20022 framework, which takes full advantage of the flexibility and convenience of internet technology. In the United States (US), some larger FIs have moved to adopt the ISO-based standard to ensure interoperability with players abroad; while others have moved to the domestic Electronic Payments Network (EPN) STP 820 standard. This standard is based on a “lighter” version of the full Electronic Data Interchange (EDI) standard. Despite the popularity of the “EDI-light” standard, organisations such as the US’ Fedwire and NACHA are responding to business demand to improve the ability of payment messages to carry invoice detail by considering global interoperability with the new ISO 20022 standard.
Canada has yet to make a decision on which standard to align itself against. Developing the short term business case for standards alignment presents challenges – not the least of which is spending money to replace existing payments message types and technology that may currently meet users’ needs reasonably well. Often the long term view is not taken into consideration which can lead to significant and costly band-aid solutions being applied at a later stage.
There is therefore an even greater need for strategic decisions regarding message standards alignment to incorporate both local and global interoperability. Domestically, Canada needs to consider and plan for the future of message standards with both retail and wholesale payments.
This document provides an overview of Canada’s more common current cross border payment arrangements between Financial Institutions, as well as the leading standards currently being adopted to enhance global interoperability of payments.
For the full report, please visit the CPA’s website at
www.cdnpay.ca
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