Canada Needs A Faster, Better Payments System

By C.D. Howe Institute —— Bio and Archives November 20, 2014

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Canada needs a better and faster payments system, according to a report from the C.D. Howe Institute. In “A Speedier and More Efficient Payments System for Canada,” author Mati Dubrovinsky finds that the Canadian economy would benefit from an upgraded payments system that creates lower financial risk, lower payment-processing costs for businesses and, as a consequence, makes Canadian businesses more competitive globally.

“The two most recent reviews of the Canadian payments system – by the federal Task Force for the Payments System Review (2011) and the Canadian Payments Association (2008) – have found that the needs of payments’ system users, especially businesses, are not being adequately met,” says Dubrovinsky. “Specifically, internal payments processing and accounting reconciliation for businesses tend to be costlier and less automated than what might be expected, given the current state of technology.” The report explains how of Canada’s two main payments systems, the Large Value Transfer System (LVTS) has some standardized accounting data, while the Automated Clearing and Settlement System (ACSS), used for lower value transfers, is more limited. The problem is that the latter of these two systems doesn’t tell suppliers who pays for what item in many cases. “The ACSS provides information on direct clearers’ net-debit positions only at the end of the business day and, therefore, does not produce adequate information or tools for clearers to control their exposure to troubled institutions.” This implies considerable losses in case one financial institution defaults on its obligations. Dubrovinsky recommends that the Canadian Payments Association, with oversight by Finance Canada, should channel all inter-bank transfers through the LVTS, and discontinue the low-value ACSS. This would:

• Reduce financial risk for participants
• Lower business payment-processing costs
• Increase competitiveness for Canadian business

The report’s author concludes that with all low-value payments flowing over the LVTS, businesses’ payment-processing costs will fall. Banks will have little incentive to delay the availability of funds, allowing businesses to conduct more profitable transactions and investments. All these developments would make Canadian businesses more productive and more competitive globally. For more information contact: Mati Dubrovinsky, Senior Policy Analyst, C.D. Howe Institute; or Alexandre Laurin, Director of Research, C.D. Howe Institute; E-mail: amcbrien@cdhowe.org.