Build It & They’ll Come: Payment Standardization & Modernization

Bruce Schneier of IBM ended his main stage presentation at the Payments Canada Summit by telling the world not to use the blockchain. Although he was speaking from a security perspective, his words were more far-reaching than that. For decades, the payments industry has been plagued by archaic infrastructure, old messaging protocols, batch processes, and institutional players that are long in the tooth. The industry youngsters often wave the blockchain flag with the promise of a better, more efficient world. However, that only works if everyone hops on board to implement a common language for payments, both domestically and internationally.

This year’s Payments Canada Summit in Toronto prominently featured the importance of payments modernization and the need for industry participants to follow a common standard. Nearly every breakout session referred (either directly or indirectly) to Canada’s long-awaited real-time rails (RTR), the ISO 20022 standard – the good, the bad and the unconvinced – and, of course, Open Banking.

Canada has an infrastructure gem that few other countries can claim: Interac. In 2018, Canadians transferred CAD 132 billion over 371 million transactions using Interac’s instant bank-to-bank e-transfer product. For comparison, Venmo’s total payment volume for the same period was CAD 83.5 billion (USD 62 billion).

With the help of Interac’s plumbing, Payments Canada is on a mission to modernize the entire payments infrastructure with the creation of real-time rails, rolled out through a phased approach. In 2018, approximately CAD 6.4 trillion was moved over Canada’s batch Automated Clearing Settlement System (ACSS) via debits, credits, and paper checks. If those funds moved in real-time, rather than nightly, the impact on how consumers and businesses experience financial services is enormous. Online commerce, payroll, corporate liquidity requirements, bill payments, and government payments would change almost overnight. However, the path to get there is a long and difficult one, because it requires industry participants, banks, and regulators to work together to deliver on this euphoria. It also means that Payments Canada needs to plan for global interoperability so that foreign participants can easily plug into the Canadian economy, within the appropriate guardrails.

For that objective to be successful, payment standardization is a key ingredient, one that can take full advantage of the real-time nature of a modernized system. Industry experts debated the merits of ISO 20022 last week in Toronto, and the challenges we faced to adopt a global standard. The issue, of course, is that many countries have non-standard domestic protocols that don’t talk well with one another, and domestic payments bodies haven’t been compelled enough to shake up decades-old infrastructure that moves trillions of dollars reliably. The drive to adhere to the more flexible and robust ISO 20022 standard will only come if the plumbing is being overhauled. Europe led the charge in the standardization mission when SEPA got off the ground, so we have some data on how transactions will ramp up over time.

In reality, the strength of any standard only emerges if it is widely adopted, and when we’re talking about movement of money, the US is a critical player that needs to come on board. However, a significant upgrade to a plumbing network across the US is a massively risky project, mainly because it is very large in scope. Big technology projects fail far more often than small ones.

These are huge issues that not only need a solution but need a crisp execution plan. The implications of a successful overhaul of the Canadian payment rails to enable real-time movement, domestic and cross-border, is a game-changer. The overhaul will kill off old inefficiencies while giving way to the emergence of new capabilities for consumers and businesses that will change the way we interact with money forever. I’m encouraged to see more engagement than ever before from industry influencers who gathered in Canada to get involved. However, on the journey towards real-time rails with global interoperability, I worry that delayed execution will result in a watered down version of the capabilities. We need to keep our ambitions high and be persistent to deliver.


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