Fintech Investments — Prime Time for Real-Time Payments and the Economic Opportunities
Opinions expressed are solely my own and do not express the views or opinions of my employer or any other institution.
Payment Systems are the arteries that carry the lifeblood of finance. Systems that efficiently transfer money across financial institutions, either within or between countries, are essential to the operations of a financial system and to maintaining a healthy economy. Payment systems enable payments to be initiated, cleared, and settled and are thus a key part of the financial infrastructure. Every country typically has an official payment system for domestic transactions, often managed by the central bank or some branch of the national government.
Payment systems can be classified into 3 categories
- Retail — cash, debit, credit cards, cheques, and electronic transfers. These payments between household consumers and businesses are transactions involving goods, services, and assets.
- Wholesale (interbank) — payments between banks and other financial institutions, typically operated by a “Real-time Gross Settlement System (RTGS)” in most countries by their national central bank
- Cross-border — payments necessary for trade and financial transactions across countries
What am I covering in this article?
- What are real-time payments?
- How are real-time payments different from the current system?
- Who is behind real-time payments technology and what are they called in North America?
- Real-time payment systems — US 🇺🇸 & Canada 🇨🇦
- Canada 🇨🇦 — “Real-Time Rail (RTR)” payment system — Key Features
- Notable movements in the Canadian fintech landscape
- “Real-Time Rail (RTR)” payment system — Economics Opportunities
What are real-time payments? 💸
Real-time payments are “instant”. It is a network or a service that will be integrated by organizations (banks, government, technology companies) to allow users to initiate and receive payments instantly, any time of the day or night, 365 days per year. Real-time payments are irrevocable, meaning they are final and cannot be undone.
Real-time payments offer enormous economic opportunities and many countries like India (IMPS, UPI system), U.K (Faster Payment System by Pay.UK), Singapore (PayNow), China, and Brazil (PIX payment system) are leading the rest of the world in its adoption (see image below).
April 2022 — link to growth highlights from ACI Worldwide Report.
How are real-time payments different from the current system?
- ACH payments — ACH stands for Automated Clearing House, a financial network used for electronic payments and money transfers. Also known as “direct payments,” ACH payments are a way to transfer money from one bank account to another without using paper checks, credit card networks, wire transfers, or cash. ACH payments are processed in batches, three times a day, and can take several days to process a settlement. It also runs the risk of a payment failure with the sender having insufficient funds. You’ll also find EFT payments (Electronic Funds Transfer) as a term that is used interchangeably with ACH payments. They both describe the same payment mechanism. ACH is suitable for account-to-account transfers, credit-push, and debit-pull transactions.
- Wire transfers — Wire transfers are processed in real-time, as opposed to ACH payments. They are also more expensive than ACH payments. They are immediate, but you can only send them during business hours.
- Other transfers — These instant transfers are typically Peer2Peer (P2P) and are more focused on consumer-to-consumer instant payment options. A few examples are Venmo, Mastercard Send, Visa Direct, etc. They generally have lower limits and only allow smaller amounts to be transmitted.
Who is behind real-time payments technology and what are they called in North America?
The US 🇺🇸
“FedNow” Service by The Federal Reserve Banks
- The Federal Reserve Banks are developing the FedNow Service to facilitate the nationwide reach of instant payment services by financial institutions — regardless of size or geographic location — around the clock, every day of the year. Through financial institutions participating in the FedNow Service, businesses and individuals will be able to send and receive instant payments at any time of day, and recipients will have full access to funds immediately, giving them greater flexibility to manage their money and make time-sensitive payments. Access will be provided through the Federal Reserve’s FedLine® network, which serves more than 10,000 financial institutions directly or through their agents. For more information, visit FedNowExplorer.org
- FedNow will use the international ISO 20022 messaging standard to make it interoperable with other payment systems.
- Federal Reserve updates FedNow Service timing to late July 2023. For the latest updates, visit Explore.fednow.org & FRBservices.org.
Other real-time payment services competing with the “FedNow” Service in the US
- Zelle — an easy way to send money directly between almost any U.S. bank account typically within minutes. With just an email address or mobile phone number, users can send and receive money with others, regardless of where they bank in the U.S. Zelle is a digital payments network owned by Early Warning Services, LLC, a private financial services company owned by multiple banks.
- The Clearing House (TCH) — The Clearing House is a banking association and payments company that is owned by the largest commercial banks and dates back to 1853. Its own real-time payments (RTP) network was launched in 2017 to offer instant payment ability for financial institutions. RTP service adoption has been slow among the smaller banks and credit unions as they have been reluctant to use a network that was created by the big banks and would prefer to rely on the FedNow Service by The Federal Reserve Banks.
Within the U.S. ecosystem, FedNow’s competitive RTP service will be available to any bank in the Fed system, as opposed to the participants of The Clearing House (TCH) only. Big banks have lobbied against FedNow using the concern that a singular service is a risk to economic security if it becomes unavailable due to any technical or unforeseen issues. In addition, for the settlement model, FedNow will leverage participating banks’ existing master accounts at the Federal Reserve while the TCH’s real-time payment rail will require participants to have a separate pooled account for liquidity at The Clearing House (TCH). Based on the current information, it seems like FedNow will launch as more of a back-end network available to banks at a low operational cost. Initially, FedNow may only be accessible to banks in the Fed System, participation will be voluntary, consumer fees will be discretionary, and added functionality will be built by its participants.
Image source: FTP (Jan 2024) — Real-time payments vs. selected other U.S. Payment Rails —
Canada 🇨🇦
The “Real-Time Rail (RTR)” payment system is operated by Payments Canada and overseen by the Bank of Canada
- The Real-Time Rail (RTR) will allow Canadians to initiate and receive payments within seconds, any time 24/7, 365 days a year. Leveraging the ISO 20022 data standard, the system will support payment information traveling with every payment. The RTR was expected to fully launch in 2022 but the latest information from Payments Canada now shows 2023.
- Canada’s RTR payment system was built using multiple technologies but the two main enabling technologies used to move funds securely are Interac and Mastercard — Vocalink.
RTR payments system consists of two components -
- A clearing and settlement component provided by Mastercard — Vocalink. They were selected through an extensive procurement process by Payments Canada that included the Bank of Canada and the Department of Finance. Official press release, November 2020, Payments Canada selects Mastercard’s Vocalink as the clearing and settlement solution provider for Canada’s new real-time payments system, the Real-Time Rail.
- Exchange Component (Exchange Solution Provider) provided by Interac. The partnership will leverage Interac’s existing infrastructure in Canada’s payment ecosystem and its existing connectivity to nearly 300 financial institutions. Official press release, March 2021, Payments Canada selects Interac Corp. as the exchange solution provider for Canada’s new real-time payments system, the Real-Time Rail.
Payment modernization — explainer video — https://youtu.be/3cTl8_zGYno
In addition to the RTR payment system, Payments Canada will also offer “Lynx”, Canada’s high-value payment system —
According to Mike Hoganson, Director of Lynx, at Payments Canada — Lynx is Canada’s high-value payment system. Based on the real-time gross settlement (RTGS) model, Lynx processes large-value, time-critical payments with real-time settlement finality. Relative to its predecessors, it is rich in terms of the data that is provided to participants. It will be fully aligned with SWIFT’s ISO20022 protocols by the end of 2022. From the point of view of the Bank of Canada, Lynx is a systemically important payment system under the Payment Clearing and Settlement Act. Lynx makes possible the safe sending of large-value payments. It is also a critical part of the infrastructure through which the Bank of Canada executes monetary policy. For these reasons, Lynx plays an absolutely central role in the economy.
Expected to also have its 2nd release in 2022, you can learn more about Lynx here — https://payments.ca/systems-services/payment-systems/high-value-payment-system-lynx
Lynx — explainer video — https://youtu.be/Lp7lQnyy6BY
“Real-Time Rail (RTR)” payment system 🇨🇦 — Key Features
According to Payments Canada —
- Fast: Payment message exchange and transaction processing, including settlement, completed within 60 seconds.
- Easy: 24/7/365 real-time payment status notifications, providing transparency and certainty for end-users.
- Secure: Accessible to direct participants that meet strict requirements.
- Final: Funds are irrevocable and will provide finality of payment for the Payor and Payee.
- Account Number-Based Routing: Payment messages will route using account numbers to support a wide range of payment needs.
- Ubiquitous Reach: Widespread payment initiation and receipt, with the ability to reach nearly every deposit account in Canada.
- Risk-Based Access: All Payments Canada members will be eligible to participate provided they meet the risk-based access criteria.
- Risk Management: Safety and soundness are ensured by the Bank of Canada’s Prominent Payment System risk management.
Notable movements in the Canadian 🇨🇦 fintech landscape —
It is important for me to share that, the “Real-Time Rail (RTR)” payment system is a path to building and operationalizing value-added products and services for the participants. In the UK, the Central Bank allowed access to the real-time payment network to non-bank payment companies and it resulted in many innovative financial services. But here in Canada, we don’t know how the access may evolve from the current Payments Canada members and stakeholders to other companies outside of the financial industry.
Payments Canada has published some resources for the developer community. You can access, the Developer Portal to preview the RTR’s capabilities in the Sandbox Real-Time Rail APIs (Fact Sheet) — https://developer.payments.ca/
To be able to take advantage of real-time payment opportunities and comply with various rules and regulations in Canada, it is important for fintech companies to get involved with Payments Canada. From the list of members and stakeholders, you will notice that players like Koho, PayPal, Square, Wise, etc. are already working closely with Payments Canada. However, I would like to highlight that WealthSimple is positioned better than others because of its Super App (multiple offerings) approach.
I have identified before that WealthSimple is one of the ONLY forward-looking fintech in Canada. They focus on offering an exceptional customer experience and innovate faster than other fintechs. WealthSimple is focused on delivering products with deeper customer value and typically releases 1 or 2 major product updates a year to stay ahead of the competition. If you follow them closely, you will learn how they plan and solve complex financial industry requirements ahead of time. Here are some key steps they took in 2022 so that their teams can start innovating in the payments space now —
- July 2022 — Hanna Zaidi, Chief Compliance Officer (Payments) joined Payments Canada’s Membership Advisory Council
- A month ago (approx. Sept 2022) — Michael Katchen, CEO announced Wealthsimple was welcomed as a member of Payments Canada because of their securities dealer status. (see LinkedIn post image below)
- 18 Oct 2022 — a new LinkedIn post (image below) by Michael Katchen confirmed that WealthSimple became the first non-bank/credit-union to be approved by the Bank of Canada for a direct settlement account, giving them direct access to the “Real-Time-Rail (RTR)” payment system.
“Real-Time Rail (RTR)” payment system 🇨🇦 — Economics Opportunities
Overall, the FedNow (US) and Real-Time Rails (Canada) payment systems are the right direction for the industry but it is only the first step for the fintechs to operationalize any valuable applications. There is a need for an infrastructure layer that will connect apps and services to send the payments over the rails.
According to the ACI Worldwide report, in Canada, real-time transactions are set to rise to $1.5 billion in 2026, and net savings for consumers and businesses are forecasted to climb to $315 million. That would help to generate an additional $1.1 billion of economic output, equivalent to 0.05% of the country’s forecasted GDP.
Here are some of the latest updates on payment methods and trends reported by Payments Canada —
- Canadian Payment Methods and Trends 2022 report — which analyzes 19.7 billion payment transactions made in 2021, totaling $10.8 trillion, and highlights trends that are transforming the Canadian payment landscape. The report reveals that the total Canadian payment market grew by four percent in volume and 15% in value from 2020, representing a rebound to pre-pandemic levels.
In Canada 🇨🇦 the incumbent banks are working on modernizing their infrastructure layer to integrate the “Real-Time Rail (RTR)” payment system. Many countries around the world have already made investments in modernizing their infrastructure (see the image below). Mostly all incumbent banks are members and stakeholders of Payments Canada, so they have been closely aligned to the product roadmaps of both RTR and Lynx payment systems. They can only offer us real-time payments on the new system once the integration is fully tested and released in 2023 to make any noticeable economic impact in Canada.
Economic Benefits: With the use of the RTR payment system —
- Businesses can get paid immediately without needing to wait for funds to settle, offer instant rebate payments, save on wire transfer fees, improve their cash flows, and make instant employee payroll, and expense payments at any time.
- Employees can get their wages faster on an on-demand or flexible schedule
- Consumers can pay their bills instantly, make urgent money transfer, avoid late fees, make instant tax payments, and self-serve any payment inquiries
- Governments can bundle multiple social service disbursements into a single payment with relevant information and distribute relief funds instantly to citizens during emergency
- Industry can eliminate the chargeback risk for a merchant because the funds are immediately transferred and irrevocable
Of course, the growth in economic opportunity and many of the benefits that I have listed above are only possible if both incumbent banks and fintechs are able to offer innovative financial services using the “Real-Time Rail (RTR)” payment system. We hope both Payments Canada and the Bank of Canada will take that into account and accelerate the participation of new entrants.
Updates
- June 2023 — FedNow Service’s launch planned for late July 2023 — Federal Reserve Names Organizations Certified as Ready for FedNow® Service
- Feb 2023 —PayNow — UPI linkage provides a convenient (24/7), fast (near real-time), secure, and cost-effective means for customers of participating Banks and Non-Bank Financial Institutions (NFIs) in Singapore and India to perform cross borders transfers. In essence, Singapore’s PayNow and India’s *Unified Payments Interface (UPI) users will be able to send money instantly and securely across the two countries. https://www.abs.org.sg/consumer-banking/pay-now
Useful Links
- Bank of America — announcing the launch of an expanded CashPro® Payment API — https://developer.bankofamerica.com/CPODevPortal/apidocs/public/#/custom/news/Expanded-Payment-API — 350 payment types in 38 markets globally and 7 real-time payments schemes and services, such as Zelle® in the U.S., and Pix in Brazil
- https://www.federalreserve.gov/newsevents/pressreleases/other20220829a.htm
- Payments Canada, press release , October 4, 2022 — Canada experiences rebound in transaction volume and value in 2021 — https://payments.ca/canada-experiences-rebound-transaction-volume-and-value-2021
- Payments Canada, October 11, 2022 — Q3 Delivery Roadmap update — https://payments.ca/q3-delivery-roadmap-update
- https://www.vocalink.com/
- https://www.nexigroup.com/en/ and IBM participating with Payments Canada
- https://www.earlywarning.com/ parent company of https://www.zellepay.com/
- https://www.aciworldwide.com/
- https://www.businesswire.com/news/home/20220425005219/en/India-Surges-Ahead-as-the-Worlds-Leader-in-Real-Time-Payments-%E2%80%93-Boosting-Economic-Growth-%E2%80%93-ACI-Worldwide-Report
