The Digitalization of Canada’s Financial System: What you need to know about the Real-Time Rail Payment System (RTR)

Canada is in the process of modernizing its payments system in a way that few countries have before. The incoming Real-Time Rail (RTR) payment system, which is set to be implemented by mid-2023, presents exciting opportunities for business, consumers, financial institutions, and governments. However, without a broad understanding of the system it also presents significant risk.

RTR will allow for instantaneous and irrevocable payments of any size to be made at any time of day, any day of the year. In other words, RTR allows for the clearing and settling of payments in real-time. This promises to change the way Canadians make payments, including for large transactions. The benefits of this incoming system are significant and span across sectors well beyond financial services. For example, the real estate sector is set to change immediately upon its implementation as prospective homeowners will be able to instantly close on a property through a single electronic payment. This is a stark departure from the previous process where buyers would need to receive a bank draft from a financial institution and deliver it to the seller who would then have to wait for the payment to go through a lawyer’s trust account. This instantaneous payment reduces the friction of transactions, allowing for a more seamless experience.

From a consumer perspective, this provides greater predictability and a better customer experience with everything from paying bills or rent to paying taxes. From a business perspective, corporations will experience real-time invoicing and billing allowing them to better manage their business and facilitate easier payroll transactions, retail refunds, payment confirmations, cash management, and more. There are also prospective benefits for governments across Canada, who will be able to distribute emergency resources or social service payments instantaneously.

As these benefits are realized with the implementation of the RTR system, there is also the promise of innovation in the future. Competitive services operating on the system will create an opportunity to develop new and innovative products that will bring enhanced efficiency to Canadians as they pay and transfer money.

With these expansive benefits for consumers, businesses, financial institutions, and governments across various sectors, there also comes risk. With the RTR system on its way to implementation by mid-2023, the development of the system is outpacing the legal and regulatory framework that oversees it.?As such, there is significant uncertainty coming with the almost overnight change of our payment system. A legal and regulatory framework that ensures compliance while fostering innovation will need to be built alongside the technological infrastructure that includes rules, standards and best-practices across sectors.

The absence of a robust regulatory framework for this new payments system brings significant risk. At present, financial institutions’ processes and controls from anti-money laundering and anti-terrorist financing to data protection and other compliance mechanisms are built for a system that in a year’s time will be obsolete. The current and soon-to-be archaic system relies on the lag time built into the system to oversee and correct errors, and intervene when necessary. In the new system, this lag will not exist, bringing challenges to the oversight of payments across the country. Oversight mechanisms that employ data analytics which can detect and report suspicious activity in the new system will need to be built and employed across the payments landscape.

Despite these risks, the Real Time Rail System can also bring the opportunity of enhanced regulatory oversight. RTR provides clear data on who is sending and receiving payments, which is currently not the case with the wire payment system. This provides an opportunity for improved oversight, yet we don’t yet have a clear understanding of the actions being taken by regulators and government agencies to ensure compliance within the payments system.

Another challenge is the lack of understanding across the country of the implications for this sea-change. As previously discussed, the modernization of Canada’s payment system will touch every corner of the economy. As such, stakeholders such as government agencies and financial institutions will need to build out robust public education plans to educate the sector at large on the impending changes. To date this has been largely absent.

Canada’s adoption of Real-Time Rail comes with opportunities for an improved financial system, business environment, and customer experience. However, these potential benefits also come with a myriad of questions that remain unanswered as the implementation approaches. These questions require greater scrutiny and attention to the potential ramifications across sectors than is currently being paid to this monumental shift. The challenge, however, is that in many cases we don’t know what we don’t know. With this uncertainty there will be the need to build partnerships across the private sector and with government stakeholders to provide greater clarity for what this sea change means for businesses.

Written by Global Public Affairs' Senior Counsel, Neil Parmenter, ICD.D and Consultant, Isaac Crawford-Ritchie