Real-Time Rail is a soon-to-be-released electronic payment system that facilitates “real-time” payments: in other words, instant payments, usually within seconds. Rails will be a massive improvement for Canada compared to the currently available systems, which are limited to either small amounts of money or slow delivery windows. Interac e-Transfers are typically limited to under $2000, while EFTs can take up to 3 days to complete.
The new rails system is going live in 2022. The system is the culmination of the Canadian government’s commitment, via the Canadian Payments Association (CPA), to modernize the flow of electronic funds. In addition to facilitating instant payments, it is expected that the platform will allow for further innovations.
Key Stakeholders
The CPA will operate the system, on behalf of the government, under the brand name “Payments Canada.” The CPA was established in 1980 under the Canadian Payments Act. The system will be regulated by the Bank of Canada. The exchange solution provider for Real-Time Rail is Interac Corp, appointed to the role by Payments Canada in March 2021.
Interac is seemingly well suited to the role given that they already have payment exchange relationships with some 300 banks and financial institutions, are heavily invested in the sector, and have served Payments Canada for some 30 years now.
Payments Canada President and CEO Tracey Black, quoted on the Payments Canada website back in March 2021, said that Payments Canada foresees that “The Real-Time Rail will be the foundation for faster, data-rich payments and act as a platform for innovation.” She claims that “Participants… will be able to connect and develop new and exciting ways for Canadians to pay for goods and services, transfer money and better compete nationally and internationally.”
Equally upbeat at the time was Mark O’Connell, Interac’s President and CEO, who was quoted on the website as saying, “Working with Payments Canada to support the build of the Real-Time Rail represents a significant opportunity to enable consumers and businesses to take full advantage of digital payment solutions,” and he says will “…foster increased innovation and efficiency.”
Current Payment Systems Drawbacks
The two types of interbank funds transfer are cheques, EFT, and Interac e-Transfer. Each method has its drawbacks.
Cheques
The mainstay of the banking world for hundreds of years, they face myriad issues, including widespread fraud, the inability of the receiving party to verify funds, and frequent chargebacks.
Electronic Funds Transfers or EFTs
Those who remember the world before the introduction of EFTs will appreciate what a tremendous improvement they were. Suddenly wait times were reduced to between one and three days between major banks or up to four with credit unions and other lower-tier institutions. EFTs were introduced primarily to enable banks to transfer funds between themselves.
Now EFT payments are accepted just about everywhere, for purposes ranging from mortgage payments and rent to gym memberships. While cheap for the banks to operate, EFTs are slow, which is a problem for time-sensitive transfers like getting payday loans on the weekend when waiting three days for the EFT to complete is an intolerable delay. Even during the business week, waiting a whole day for a transfer is an undesirable burden.
Credit Cards
Credit cards seemingly offer instant payments, but behind the scenes, settlements take time. Whilst faster than Efts, credit cards are considerably more expensive. The attraction of credit cards is the two giant global networks that underpin them – Mastercard and Visa. There is hardly a place on earth where these two behemoths don’t reach. Credit cards require an intense level of security and vast data storage capacities.
These are factored into their costs which are paid by both cardholders, in the form of monthly charges and debit interest, as well as by businesses that are charged up to 5% of a transaction by the credit card companies. Another drawback of credit cards is the rigidity of their admin processes. Even though they are faster than Efts, the costs and rigidity are clear drawbacks.
Visa Direct
The Visa Direct method of payment allows for near real-time domestic and international fund transfers for business to business, business to consumer, and person to person transactions. The Visa network platform enables debit or prepaid card payments to reach the beneficiary’s account within 30 minutes. Though relatively fast, the drawback is that Visa Direct is not global and hasn’t penetrated the whole of Canada yet.
Visa Debit/ Interac Debit Cards
These can be used online like credit cards as they access separate networks which enable instant payment from one bank account to another. Whilst fast and the charges are lower than credit cards, and both the direct and debit cards are backed up by more than adequate data storage, Visa Debit cards are also not global.
Theory
One of the early movers in the rails space is Zum Rails Inc, which expects that rails will unite all payment methods on one platform. Their aim is then to automate as many payments as possible. The advantages are numerous. Hiring cars or equipment, for example, will be much faster, as will be bringing new customers into the fold.
Issuing loans will be quicker too. Moreover, there will be less opportunity for fraudulent transactions, fake proof of payment notifications, and RD cheques. Instant payments give businesses an opportunity to collect funds before having to pay suppliers, thereby easing the strain on cash flow.
Zum Rails are not alone in this space. Scotiabank Digital Banking Lab’s Payment Rails, with its API-first payout platform, ensures that payments are made in real-time to businesses and individuals in any currency, using multiple payment methods in more than 220 countries. Their platform offers companies substantial efficiency gains through automating payouts and the associated tax compliance processes.
Improved competitiveness
Nothing moves in the economy unless money has changed hands or until there is a legally binding promise for money to change hands once goods or services have been provided. Payments then are the linchpins or cornerstones of any economy.
Quick and efficient payments allow, if not the economy, then certainly companies to act faster. It is in acting faster that a company can gain a competitive edge. Slow payments, on the other hand, require more administration and need to be followed up.
Slow payments also have to be underwritten by a company’s cash flow, which ties up capital. Using capital as a rotating credit facility to underwrite slow payments stunts growth. It will be interesting to see what statistics the Bank of Canada will be publishing post-launch.
Hopefully, the launch of Real-Time Rails means the rails are for a bullet train rather than a steam engine.
