Treasury teams in Canada have been clamouring for a real-time, central payments infrastructure run on the global standardised model for years. Finally, it’s about to arrive.

Life has returned to normal after the pandemic, and in the height of summer, central Toronto bars, cafes, theatres and sidewalks are filled with people. A less visible re-building, years in the making, is also gathering momentum and spluttering into life. Canada is in the process of modernising its antiquated payments system, dating from the 1970s and based on a patchwork of scattered formats. A new, real-time central payments infrastructure that runs on a standard model and able to integrate into global jurisdictions and international clearing systems in countries like Sweden, the US, UK and Singapore, is beginning to emerge.

Canada’s new payment rails will transform treasury processes across the country. From Toronto, home to Canada’s largest treasury community and most corporate headquarters, the country’s financial hub and largest talent pool. North into French-speaking Quebec and the province’s largest city Montreal, also with a significant business presence. West to Calgary in Alberta, where oil and gas groups dominate the business skyline and onto Vancouver, the bustling west coast seaport in British Columbia, amongst Canada’s densest, most ethnically diverse cities but with fewer corporate headquarters.

International connectivity; real time rails

ISO 20022 XML file formats comprise the backbone to the new infrastructure, explains Cal Fryer, Director, Cash Management at TD Securities in Toronto and recent President & Chair of Treasury Management Association of Canada – Toronto. Although the ISO file format still allows country uniqueness, most of its fields are standardised in a global format. “If a Canadian business wants to pay a company overseas it currently needs to prepare a wire using SWIFT. Under ISO 20022 XML framework, alternative electronic payment channels will become available, and the two systems will talk the same language, allowing the delivery of both the financial transaction and electronic remittance data on a near real time basis.”

Using ISO file formats will allow treasury teams to see and attach more data to accompany payments, providing a framework to settle multiple invoices in automatic, straight through reconciliation, streamlining payment processes and delivering billions of dollars of savings through operational efficiency. Treasury teams will be able to click on payment and remittance information and see details of the transaction beneath, explains Fryer. “Back office teams have lacked the remittance information that accompanies a receivable and rely on manual processes. Corporations have been wanting to improve their reconciliation processes for decades and this will be one of the key enablers of that goal.”

Although corporations have been clamouring for change for years, Canada’s banks have often dragged their feet, reluctant to re-configure and disrupt existing processes. But now the country’s oligopolistic banking sector where just five banks dominate around 80% of transactions are fully on-board. The Canadian payments association, Payments Canada, and tech partners including IBM went live with the wire aspect of the modernisation programme in 2021 and are now targeting introducing real-time rails that will allow Canadian banks to exchange instant payments by 2023. “There are no specific pain points other than slow progress and slow implementation,” explains Ian Argue, Director, Corporate Treasury Services at PwC in Vancouver. “Payment solutions are hard to pull out and enacting change takes a long time. Because it is an evolution, it always takes time to move to the point where people realise the benefits.”

Desperate to benefit from the value-add modernisation promises, treasury teams are pushing ahead with getting their own systems up to speed. Migrating to the new format; adjusting to work on different files and integrating them with their ERP systems and TMS, all the while ensuring consensus to invest from their organisations. “Companies are focused on how to adapt their treasury operations to the changing payments landscape,” explains Maureen Jarvis, Managing Director, Head of Global Transaction Services Canada at Bank of America in Toronto. She describes a climate of keen scrutiny and analysis amongst Canada’s treasury community of what different treasury teams are doing when it comes to integrating change; what ERP systems they are upgrading and how best to build the agile technology environment that works alongside banking partners to optimise the opportunity for innovation.

Fintech

Travelling west out of Toronto along the Toronto-Waterloo Region Corridor passes through the largest tech cluster in North America outside Silicon Valley. It supports 15,000 tech companies from Google to Shopify; 5,200 start-ups and hosts 200,000 tech workers. The corridor is also gaining a reputation for deep tech, focused on innovations such as AI.

Perhaps one of the most important consequences of Canada’s payments modernisation will be its impact on the burgeoning fintech scene housed in the cluster given the fact non-bank payment providers will also have access to the new system of 24-hour, real-time, low value payments. “It will lead to more innovation,” enthuses Argue who predicts that alongside more fintech and bank partnerships, a new payments system will catalyse a swathe of new B2B and B2C payment solutions driven by fintech innovators. “Expect more services in support of reconciliation and information flows, or even payments to new market segments.”

Open banking

Canada’s fintech community will also get a boost from open banking regulation in the pipeline. Although less advanced than payments modernisation, new rules and technology offering secure ways to share financial data with fintech promises far reaching change. It will drive innovation and expand consumer access to the growing variety of financial services such as budgeting and savings tools. It will also benefit small businesses by helping to streamline operations and by providing faster access to credit.

The Canadian government has appointed an open banking lead, tasked with engaging stakeholders to develop an accreditation framework, setting up a common set of rules and technical standards. “The government is moving in the right direction,” says Jarvis. “The open banking movement has already introduced a number of innovative consumer solutions globally, and the treasury community can look forward to real-time, market-driven benefits that help improve working capital and customer experience.”

Wider picture

Canada’s payments revolution and open banking push are part of a wider narrative around technological change that is transforming treasury in Canada and driving efficiency. Manual processes are giving way to automation and AI is providing new insights on data, giving treasury new forecasting capabilities. It is an area where BofA’s Jarvis is noticing particularly strong client demand. “Banks are really focused on helping clients use their data appropriately,” she explains. “Corporates want to know what the data is signalling, how to make their operations more efficient; they are looking at the data to forecast trends and want to use data to help guide transformational change.” She adds that companies are especially looking to their banks to offer insights on the corporate data they hold. “Companies are looking to their banks and saying you hold our data, how do we get insights into that data and make use of it?”

In another trend, many corporate treasury teams are adopting cloud-based technology within their IT environment. “We are seeing significant resources being dedicated to new technology projects for large corporations that involve migrating ERP/TMS platforms to the cloud,” says Fryer, who notes treasury’s adoption of new technology continues to be driven by three key priorities: centralisation, rationalisation and automation. “Treasury teams are rationalising, working out how they can improve and create efficiencies, exploring where technology is available to automate manual components and introduce robotic elements.”

Macro themes

Like treasury the world over, Canadian teams currently have a wary eye on the macro landscape. Historically low interest rates have come to an end as Canada’s central bank struggles to keep inflation under control. The benchmark interest rate is now 1.5% and a further 150 basis points are factored in by year end with key implications for treasury. On one hand, investments will do better; on the other it will expose the level of corporate debt companies loaded up on when money was free. “Lots of debt has been added to corporate balance sheets and companies are going to have to think about how they deleverage,” says Fryer. “It’s an interesting time for corporates to think about where value creation lies.”

Share buybacks, deleveraging and dividend increases to shore up stock valuations and return value to shareholders in volatile equity market could be on the cards. “Companies want more certainty around cash forecasting,” adds Argue. “Access to liquidity is a priority and corporates are centralising it as much as they can.” One group of corporates in a fortunate position are Canada’s oil and gas giants in Alberta, buoyed by US$100 a barrel crude oil prices, now able to repair their balance sheets, beef up dividends and invest in production.

Lastly, experts reflected on another pervasive treasury challenge in Canada’s post-pandemic economic landscape: scarce and expensive treasury talent. “There are so many job openings; companies must pay up because it’s an employees’ market,” concludes Fryer.