In the 14 years since the Task Force for the Payments System Review made its final recommendations on how to modernize the way Canadians pay for goods and services, Canadian banks have clearly shown their unwillingness to transform their industrial-age technology to move into the digital age. This inability has cost Canadian consumers billions.
Payments Canada recently announced that the new Real-Time Rail (RTR) system has entered system integration testing and will be ready for industry-facing testing by early 2026. Even when fully implemented (late 2026/early 2027), the RTR does not guarantee more cost-effective, information-rich payment services for Canadian consumers and small businesses. The ambition to simply get the RTR in place is a low bar; bolder action is required. But first we need to understand the critical role that the payments system plays in the economy and how it must evolve to compete in the digital age. It is not just some arcane plumbing of the financial system; it is a platform for innovation and sovereignty, as seen in other countries that are further ahead in its implementation.
The delays in implementing the RTR have cost consumers and businesses immensely and are a direct result of accommodating banking’s legacy systems, such as Interac e-transfer. There has been little incentive for the banks to push for speedier RTR implementation because about 40 percent of their profits come from payments-related activities. More importantly, the RTR strategy is built on a hub-and-spoke model dominated by the banks and does not recognize that a modern financial system is a complex network.
Interac is essentially a gatekeeper in the system and, not surprisingly, a designated system by the Bank of Canada.
Effective payments systems and their governance need to be network-oriented to embrace expanded competition, the issuance of public and private money (central bank digital currency, stablecoins, bitcoins and tokens), and the adoption of permissioned and permissionless blockchain technology. They also need to both be low-cost and have expanded offerings for fintech customers.
Further, when the RTR is implemented, all non-bank providers will have to use the Interac messaging system to notify their customers about their deposited funds. Interac is essentially a gatekeeper in the system and, not surprisingly, a designated system by the Bank of Canada. Participants will have no choice but to use Interac, even though its decisions may not be in their best interests. Witness, for example, the lack of transparency regarding its initial volume-based fee structure, which greatly benefited large players. It is only recently that Interac has begrudgingly moved to a flat-fee structure. At the same time, incumbent banks’ dominance of Interac’s board of directors means that there is little incentive for Interac to create more favourable conditions for prospective future competitors.
So, how can the Canadian government ensure an effective modern payments system is implemented?
First, instead of Payments Canada connecting to Interac, make Interac connect to Payments Canada. It is unusual (to put it mildly) for a payments system to have two operators, a for-profit Interac and a not-for-profit Payments Canada. This move would facilitate the development of anti-money laundering and fraud detection capabilities that protect all Canadian payment service providers. It would make the Bank of Canada the primary regulator of these providers, eliminating unnecessary bank regulation for non-banks. It would put new entrants and incumbents on a level playing field and deliver the lowest cost per transaction.
It would also ensure that the ISO 20022 standard for data collection (which Interac does not support) is adopted by all. This underappreciated standard is globally accepted and necessary for collecting the data that drives innovation (including artificial intelligence technologies) and digital business models, which are fundamentally changing the world of finance and leading to new offerings for consumers.
Second, implement an inclusive governance approach such as the one the payments task force recommended more than a decade ago. This structure would include a participatory decision-making process that enables dialogue among central bankers, intermediaries and end-users, helping ensure that Canada stays abreast of the best ways to use technology and innovation to foster prosperity for all Canadians. It would also ensure that vested interests do not control the evolution of the system.
Most importantly, this would mean that money and payments remain under the control of the government, not the commercial bank oligopoly. Long before internet technology changed the money and payments landscape, Prime Minister William Lyon Mackenzie King recognized the importance of this: “Until the control of the issue of currency and credit is restored to government and recognized as its most conspicuous and sacred responsibility, all talks of the sovereignty of Parliament and of democracy is idle and futile.”
Third, the government should mandate that the Bank of Canada lead the development of a modern, network-based, information-rich payments system. The Brazilian experience is instructive. Like those in Canada, Brazilian incumbent financial institutions had little incentive to increase payments efficiency and effectiveness. After trying and failing to get the private sector to build a modern payments system, the government mandated that the central bank build one, resulting in the creation of its low-cost (free to consumers and small businesses) instant payments system called Pix. This implementation took less than two years and US$10 million in software development. Pix has been adopted by more than 80 percent of the population and has attracted more than 650 new payment service providers. Contrast this experience with the endless delays, increasing costs and inaccessible data in Canada.
The federal government and the Bank of Canada must work together to deliver a modern digital payments system that allows Canadians to participate fully in the global digital economy. Continued delay will further erode our standard of living and international competitiveness. Canada can, and must, do better.
