After decades of comparative stability, financial infrastructures around the world have been plunged into a still-ongoing transformation by digitization and the mobile computing revolutions. But while the rate and scope of innovation by financial institutions, equipment vendors, retailers, app makers, and others have been both breathtaking and exciting, national and international payments systems require unifying structures in order to truly fulfill their potential in making the transfer of money almost frictionless and an accelerator of commercial activity.
As a digital payments pioneer with more than three decades of experience in connecting financial institutions to each other, to merchants, and to consumers, as well as the builder and operator of a payments network trusted by millions of Canadians and thousands of Canadian businesses, Interac Corporation have designed a network, platforms, and services with a set of core principles always in view – principles that will underlie the next iterations of our offerings just as they have today’s. And because we believe that collectively, the industry will make faster progress to the extent it pools its best thinking, we’ve decided to provide an overview of our own guiding principles.
Principle #1: Good funds is the better model
Most traditional methods of money transfer – whether physical, as with cheques, or digital, as with electronic funds transfers (EFTs) – have been built on a promise-to-pay or risk-based model. The depositor of a cheque (for instance) will not have irrevocable access, or perhaps any access, to the money promised by that cheque until their financial institution has cleared the cheque with the payor’s financial institution. In a fast-tempo economy, this kind of delayed access to funds results in harmful knock-on effects, as the recipient defers the payment of other bills and postpones purchases until the clearing process is complete and they’re sure the money is now theirs.
By contrast, a good funds model – in which a payor’s funds are immediately removed from their account upon making a payment or transfer – is inherently delay free, because although inter-bank settlement may still require some time to occur, no funds are at risk. A financial institution can confidently and irrevocably credit the payee’s account upon receiving the payment instructions. Our money transfer service, Interac e-Transfer®, was designed on this basis, and this is why we are able to offer transfers in 30 minutes or less – and even instantly*, for those transfers meeting a financial institution’s limit thresholds.
This approach has a variety of benefits for Canada’s economy. By eliminating the risk of unfunded payments, it reduces working capital required by financial institutions. For individuals, it improves cash flow (something that many households today are hard-pressed to manage) and reduces the need to use costly debt instruments like credit cards to bridge the gap between payments and funds availability. And it promotes commerce by reducing the trust required between parties who have never done business together before, and making “on the spot”, anonymous transactions possible without requiring physical cash.
Principle #1: Good funds is the better model
Most traditional methods of money transfer – whether physical, as with cheques, or digital, as with electronic funds transfers (EFTs) – have been built on a promise-to-pay or risk-based model. The depositor of a cheque (for instance) will not have irrevocable access, or perhaps any access, to the money promised by that cheque until their financial institution has cleared the cheque with the payor’s financial institution. In a fast-tempo economy, this kind of delayed access to funds results in harmful knock-on effects, as the recipient defers the payment of other bills and postpones purchases until the clearing process is complete and they’re sure the money is now theirs.
By contrast, a good funds model – in which a payor’s funds are immediately removed from their account upon making a payment or transfer – is inherently delay free, because although inter-bank settlement may still require some time to occur, no funds are at risk. A financial institution can confidently and irrevocably credit the payee’s account upon receiving the payment instructions. Our money transfer service, Interac e-Transfer®, was designed on this basis, and this is why we are able to offer transfers in 30 minutes or less – and even instantly*, for those transfers meeting a financial institution’s limit thresholds.
Principle #2: Ubiquity should be a payment network’s natural destination
An economy thrives to the extent that its participants are able to do business with one another, and so digital payment systems – just like physical currency and cheques – create the most value when they connect all individuals and all businesses to each other, allowing anyone to make payments or transfer money to anyone else. Ubiquity has additional value, too, in that a single payment network minimizes the friction involved in using or transferring money. In a multi-network payments system, inter-network interfaces, differing protocols, and opacity or incompleteness of transaction and customer information all conspire to increase friction, limit trust, and slow money movement; conversely, the more comprehensive, unified, and information-rich the system, the more that friction is reduced.
The Interac e-Transfer payment system is as comprehensive as they come, seamlessly connecting over 250 financial institutions, an estimated 120,000 businesses, and 5 million monthly active users. Since the more a payments network connects, the more it will get used – every time a user or business joins it means that everyone already on the network can now transact with them, and in more situations – it’s no surprise that almost $175 million is transferred between parties on our network every day. What’s more, since the marginal costs of a network tend to decline as it grows and as more transactions are made on it, Canadian individuals and organizations can expect to join and move funds and make and accept payments more easily and inexpensively every year. Finally, a network that connects almost everyone can offer valuable shared services to its participants at low cost. Consider our directory services, for example: a central database of proxy identifiers that maps each user to the email address they use to accept money transfers from others – not only creating a streamlined and secure experience for users, but also eliminating the need for financial institutions to maintain their own databases of customers and their counterparties at other institutions.
To us, the equation is simple: more connections makes for a simple and unified network, which means faster money movement at the least possible cost – for everyone.
Principle #3: Data abstraction improves individual privacy and security
In an era in which identity theft and privacy are (rightfully) major concerns not only for citizens but also for organizations who collect and store private information about their customers and users, we believe that the more “data abstraction” in the payments system, the better. By abstraction, of course, we mean the use of unique but reasonably public identifiers (like a payee’s email address or mobile phone number) to replace unique but much more private identifiers (like a payee’s bank transit and account number) in order to complete a digital payment or money transfer.
Interac e-Transfer does exactly that today. By maintaining a highly secure directory of proxy identifiers, Interac e-Transfer requires no bank account information, and no personal financial information of any kind, to move money between people or businesses – only the recipient’s email address or mobile phone number, and a security question (to which only the recipient will know the answer). In fact, with the implementation of an upcoming service enhancement, a recipient who enables “auto-deposit” for a given payor (such as an employer) will not even require a security question, while another enhancement (“Money Request”) will make it easy to collect payments without requiring banking information.
This means that individuals’ private financial information will no longer be unnecessarily propagated from payees to payors across the country. Employers won’t need employee banking details to make payroll deposits, nor will landlords have to require post-dated cheques (with account numbers stamped on them) from their tenants. It’s also another way of encouraging transactions in the economy, as the friction from filling out tedious account detail forms goes away, and as the need for trust (“will my counterparty actually keep my private information private?”) declines significantly.
Principle #4: Embrace standards
ISO 20022 is a global standard for payments messaging (as well as a variety of other business message types), and its adoption will allow Canadian businesses to pay other businesses, collect money from customers, and ultimately sell to and buy from U.S. and international customers and vendors with greater ease and – because of the richer remittance data it provides – with higher levels of trust than ever before. And because it is an agreed standard, it will facilitate the integration of payments networks with accounting systems, enabling organizations to reap the efficiency and cash-management benefits of straight-through processing. Finally, by standardizing messaging protocols, ISO 20022 will increase incentives for innovation in software and services, as well as improving the industry’s ability to respond to future regulatory or market changes.
Despite its clear economic benefits, adoption of ISO 20022 in Canada has been slowed by the difficulty of upgrading legacy systems to use the new protocol.
Our “payment rails”, however, were developed to use XML-based messaging – the same formatting standard used by ISO 20022. Not only that: later this year we’ll be making Interac e-Transfer messaging fully interoperable with ISO 20022 and launching an ISO-compliant third-party gateway interface, and more broadly we will be ensuring that ISO 20022 compliance is a feature of all services where it would add significant value, including bulk transfers, cross-border payments, and settlement instructions.
As a result, Interac partners have a much easier path to upgrade to ISO 20022 – and will be able to capture the benefits of using it that much sooner. In addition, because our real-time rails is message agnostic, the industry does not have to migrate to ISO 20022 in a coordinated fashion: customers of financial institutions that have not yet upgraded to ISO 20022 can transact easily with customers of financial institutions who have made the upgrade, so all participants can select the timing that works best for them and for their clients.
Principle #5: Closed divides, but open unifies
It is no secret that the technology sector has been the site of an ongoing battle between those who believe that consumers are better served by “closed” products, in which a single vendor ensures quality by controlling the design and features, and those who believe that “openness” offers a more robust and innovation-encouraging way to proceed. In regard to payment systems – which must after all enable transfers of money between as many people and organizations as possible – we believe that openness has the stronger argument.
Our embrace of standards like ISO 20022 is a natural fit with this philosophy, as it means that a wide variety of vendors can confidently invest in applications that comply with this standard – and can innovate further with the standard providing a solid foundation – knowing that their software will interoperate seamlessly with our Interac e-Transfer service.
Sharing is another form of openness, and the shared services we offer to our member institutions – like fraud detection, or the directory of proxy identifiers described above – allow resources that are of value to all to be accessed by all, and at the same time enable those resources to be much more effective because they can be located at the centre of the network, and can leverage pooled rather than siloed data.
We’ve also begun an open API initiative to allow third-party developers to connect their applications to our platforms and services, which we believe will both spur the creation of innovative new offerings – enhancing and broadening the ability of individuals to access and work with their money – and boost the growth of a domestic financial technology ecosystem. The Canadian financial system is already internationally respected for its soundness; we think it’s time it became known for its technological and creative edge as well.
Conclusion
In the midst of rapid technological and regulatory change, we rely on these guiding principles to help us make decisions about what to research and which capabilities to build. Canadians and Canadian organizations deserve a twenty-first century payments system that is both an integral part of a fast, convenient, and secure financial infrastructure – extending from account to smart phone – and a supporting layer in our country’s growing fabric of financial innovation. Looking back on this era twenty years from now, we think we’ll be happy with the choices we made.
