COMMENTARY: ISO 20022: The Foundation for Payments Modernization in Canada

Today, Canadian businesses and financial institutions employ several different standards or “languages” to make and receive payments across systems, financial markets and borders. Payments are also lacking valuable data, such as invoice or remittance information – which is key to automated processing and electronic payments. To mitigate these issues, labor-intensive processes and manual intervention are required in the form of translation and reconciliation, not to mention the hassle of maintaining multiple standards. This lack of efficiency in the payment clearing and settlement process results in higher costs to businesses and Canadians. It also hinders the possibility of newer, more efficient and innovative payment methods.

That’s why Payments Canada is bringing the ISO 20022 Payments Standard to Canada as part of the modernization of Canada’s payments system.

Payments Canada’s modernization program is a multi-year initiative to develop a modern payments system that is fast, flexible and secure, promotes innovation and strengthens Canada’s competitive position in the global economy. In fact, Canada’s modernization is considered to be the most ambitious payments transformation in the world. To get there, we have developed a comprehensive roadmap that includes five key priorities: building a new core clearing and settlement system (called Lynx), establishing real-time payments capability, enhancing automated-funds transfers or “batch payments”, as well as aligning with global risk management standards and revamping our policy framework and rules to support these changes, including ISO 20022 across all systems.

ISO 20022 is an international standard, designed to exchange and simplify global business communication. It enables efficient payments among financial institutions around the world through the use of a common language. Through implementation of the standard, Canada will be better positioned to originate and receive cross-border payments, and that will empower Canadian businesses to become more competitive in the global economy. The use of a common language will also bring efficiencies to payments made within Canada, as payments system users will no longer need to manage or support the multiple standards currently used for domestic clearing and settlement.

The ISO 20022 Payments Standard also allows for more data to travel along with the payment message. That means more information, such as information from multiple invoices, can be sent within a single payment. This will streamline and expedite business processes— particularly in terms of payment reconciliation—by reducing the need for manual intervention and error-correction, resulting in significant cost savings for Canadian businesses.

The ability to exchange more information will also bring attractive electronic payment options, reducing the use of less efficient paper-based options like checks or drafts. And that means big savings for Canada: Payments Canada research indicates that cost savings from the adoption of ISO 20022 could be as high as $4.5 billion (Canadian) over five years from the reduction of check volume alone, and that number does not begin to quantify the additional benefits that the standard will bring.

These are just a few of the reasons that the ISO 20022 Payments Standard has emerged as the global payments messaging standard and is considered an essential component of any payments modernization plan. To date, 30 countries—including the U.S., the Eurozone and Japan—are adopting ISO 20022, and Canada is benefitting from the experiences and lessons learned from each of those programs. We have to get this right, any standard that allows flexibility brings also a danger of quickly becoming a non-standard. Various countries are engaging in harmonization initiatives to ensure that we can leverage all the benefits ISO 20022 can bring.

Significant value of our modernization program will be delivered through ISO 20022’s capability for payment-related information to travel together with a payment through a secure channel, in addition to global interoperability and broader adoption of electronic payments. While we still have a lot of work to do, we look forward to what we know will be an incredible transformation of Canada’s core clearing and settlement system to drive innovation in the competitive space, and position Canada well for the future.

—Jan Pilbauer is executive director for modernization and chief information officer at Payments Canada, Ottawa.