"Going completely digital would save the country billions.”
August 25, 2015 – Reforming the Canadian payment system would save businesses and consumers billions of dollars each year, according to a new C.D. Howe Institute report. In “Money in Motion: Modernizing Canada’s Payment System,” author John Chant argues that getting rid of cheques should be the first priority in modernizing the Canadian payment system.
“Canada’s payment systems need some timely maintenance,” remarked Chant. “A good place to start is cheques. Canadians write about 800 million of them per year, which, on a per capita basis, ranks us only behind the French and Americans. Going completely digital would save the country billions.”
A variety of systems make up the Canadian payments landscape: cash, credit cards, debit cards and cheques among others. Most prominent in terms of volume and value are the clearing and settlement systems operated by the Canadian Payments Association (CPA). For example, the CPA’s Automated Clearing Settlement System, which is used heavily by businesses, governments and individuals for a large share of their payments, processed almost seven billion transactions in 2014 with a total value of $6.7 trillion, or three and a half times the size of Canada’s GDP.
According to the author, however, the CPA’s systems are now long in the tooth, forcing users to deal with technologies from the 1980s and 1990s. The tremendous advances in information technology since then allow for systems that are faster, cheaper and better able to meet users’ needs. Some countries have already dispensed with paper payments transactions and replaced them with digital payments.
To replace the current cheque processing with digital methods, the author recommends that the CPA reorganize its clearing and settlement systems as a hub-and-spoke, instead of the current “spaghetti bowl” of bilateral transactions between institutions, replacing payee-pull cheques (where the payee’s institution submits the transaction to the settlement system) by payer-push digital payments (where the payer’s financial institution submits the transaction). These steps can be facilitated by a commitment to financing the CPA’s major capital projects through borrowing and recouping the costs through future dues. The success of this modernization will depend on an extensive effort to educate consumers and businesses, especially small businesses, of the benefits of a payer-push electronic payment system, says Chant.
Additionally, the author argues that the modernization of the CPA’s payment systems should not stop with eliminating cheques. There is also a need for enhanced information to accompany payments transactions so as to allow seamless end-to-end processing from payer to payee and for real-time processing to limit payment-system risk.
Chant concludes: “An efficient payment system can contribute to the competitiveness of a country’s economy. It is critical that Canada’s payment system be modernized.”
The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. It is Canada’s trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review. It is considered by many to be Canada’s most influential think tank.
Click here for the full report.
For more information contact: John Chant, Professor Emeritus of Economics, Simon Fraser University; 416-865-1904, or email: kmurphy@cdhowe.org.