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A Road Map to Payment Systems

About 30 million financial transactions take place in Canada daily. Ranging in size from a few cents to billions of dollars, they add up to more than $210 billion—each day, every day. That’s a lot of traffic on our payment grid.

Payment systems transport your money

In short, payment systems keep money moving in the economy, the same way a network of roads, highways and bridges move traffic through cities and across the country.

Just like you rely on road and transit systems, you rely on payment systems every day—but they’re easier to overlook. Most people don’t really think about how payment systems work. That’s because when they make a purchase, the transaction is convenient, safe and reliable:

  • Convenient: the method of payment you choose is widely accepted—whether it’s cash, debit or credit, and whether you tap at the till or pay online.
  • Safe: the payment you make is safe and secure—rules and standards guide the process.
  • Reliable: 24 hours a day, 7 days a week, it works pretty much all the time without problems.

Together, these factors give you confidence in payment systems. That’s important for the Bank of Canada because it’s our job to make sure these systems are in good shape. We do that by overseeing them—making sure that the right checks and balances are in place so that buyers and sellers can exchange money smoothly.

Canada has several payment systems

Today, most payments in Canada are digital, but cash and cheques are still important.

Cash transactions are face-to-face—you literally hand over money on the spot to pay for goods and services. Digital payments are different—banks exchange funds electronically on behalf of their customers. To transfer funds between them, banks need a common system. This system includes payment methods, procedures, rules and techonology.

Payments Canada operates the country’s two main payment systems, which are overseen by the Bank:

  1. The Large Value Transfer System (LVTS) processes large, time-sensitive commercial wire transfers; it is used mainly by banks and other financial institutions, such as credit unions and insurance companies. Later in 2021, the LVTS is due to be replaced by a real-time high value payment system, Lynx. It will be more resilient, secure and compatible with other systems.
  2. The Automated Clearing Settlement System (ACSS) settles small-value retail transactions between buyers and sellers that are paid by cheque, debit or pre-authorized payments.

Banks and other financial institutions use the LVTS to make very large payments safely and instantly. For example, if an insurance company makes a large payment to a bank, it would most likely pay by wire transfer through the LVTS. Once the money is sent through this system, the transaction cannot be reversed—no refunds allowed.

When you buy a muffin or coffee with your debit card or pay your phone bill online, your money moves through the ACSS. So does your paycheque when you get it by direct deposit or your mortgage payment when you use pre-authorized withdrawals.

The Bank oversees the LVTS and the ACSS

Because these systems are so important to Canada’s economy and financial system, the Bank keeps an eye on them—we make sure they are safe and well run.

The Bank doesn’t currently oversee other retail payment systems that are considered to have less potential for disrupting the overall financial system or the Canadian economy if something were to go wrong. But as payment systems develop, they can grow in importance. So, we regularly monitor how these systems evolve to determine whether they meet the criteria to be overseen by us.

Technology is driving change

Over the past 40 years, advances in technology have changed the car you drive a lot. They have also changed payment systems—from paper money (now polymer!) to all the digital forms of payment available today.

New payment technologies give Canadians more choice, and the options are getting faster, easier to use and more convenient. Likewise, payment systems now offer more speed; and more than ever, they’re globally connected and easy to access.

On the road or in payment systems, traffic jams are a nightmare. But unlike our roads, our payment systems can avoid congestion thanks to redundancies. Simply put, the Bank of Canada invests in backup systems to ensure our operations are smooth and resilient, even in the face of disruptive events.

COVID‑19 offers one example. The pandemic has disrupted every aspect of our lives, and payment systems are no exception. Amid concern that bank notes could carry the virus, many stores stopped accepting cash. Other shops were forced to close their storefronts. A lot of shopping moved online, where many retailers accept only certain forms of payment, such as credit cards and PayPal.

This shift away from cash and toward online shopping made it difficult for people with limited payment options to buy their basic needs. So we asked retailers to continue accepting cash for in-store transactions. We also saw the use of e-transfers become more popular. In response to physical distancing measures, businesses and Canadians are finding different ways to exchange money smoothly.

The pandemic may also increase the risk that a financial institution could be temporarily short of funds or face operational challenges because essential staff are working remotely. Since payment systems are interconnected, if one institution can’t settle what it owes on time, that could affect the financial strength of other institutions. To prevent this, we have controls in place to make sure that all participants meet their payment obligations.

With innovation come new benefits and new risks

All this new technology makes life easier.

But as payment systems become more complex, they involve more things. For example, paying with your smartphone involves an app, a telecommunications network and your bank. That’s a lot more complicated than handing over cash. More things can break down. Different players also face different levels of scrutiny, depending on the role they play in the transaction chain.

That’s why the Bank of Canada is working hard to understand how innovation is changing the way you pay for things. We want to make sure the financial system is safe. This way, you can use your favourite method of payment with confidence.

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