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DRAFT FOR CONSULTATION – APRIL 20, 2016privacy concerns associatedwith capturing accountnumbers. This may alsosupport better ways to connectwith the under-banked/unbanked.More convenientcross-border payments:End users highlighted thechallenges of makinginternational payments.Businesses may choose toestablish correspondentrelationships to supportpayments in foreign countries,or, if necessary, will establishaccounts in other countries tofacilitate expeditious payments(processed as “on-us”transfers). Businesseswelcome opportunities toaccelerate the availability offunds, to simplify the processand to reduce transactionexpenses and provide clarityon fees.Consumers are also frustratedby the limited options availableto pay consumers andbusinesses in other countries.Cheques are perceived to beimpractical – they take toolong, and foreign exchangefees borne by the payor canbe substantial. Wire paymentsand use of third party moneytransfer services are said to beinconvenient and can beexpensive. Electronic P2Poptions are available, but itcan take up to five businessdays for funds to reach therecipient.The challenges withinternational payments havebeen recognized bytechnology disruptors (i.e.blockchain solutions) andimproving cross-borderpayments is an area of focusfor the payments industry.Organization-agnosticoversight rules, appliedconsistently based onactivity:Electronic payments is an areaof financial services that isvery attractive to new entrants.Non-traditional players such aslarge technology companiesand nimble “FinTech” start-upsare entering the industry. Amodernized system needs tohave the ability to properlyidentify system participantsand monitor their compliancewith rules/requirements inorder to support a moreconsistent and inclusiveapproach to consumerprotection and enhance overallsafety and soundness of thesystem. This is increasinglyimportant as the pace at whichinnovative products andservices are introduced isexpected to continue toincrease.“Expanding access andencouraging innovation is agood thing, as long asregulations are applied to allplayers in the same way”Regulation aims to protect endusers, and has historicallyfocused on the role played bypayment system participants.4Ecosystem participants seek aregulatory environment wherenew entrants and incumbentsare subject to regulation basedon the services they providerather than the type ofinstitution they are.New entrants are providingservices that traditionally havebeen available only fromfinancial institutions and, asnon-FIs, may be able toprovide these services withoutbeing subject to the same levelof regulation. Similarly,financial institutions may bedisadvantaged in competingagainst new entrants to offerinnovative products andservices due to regulatoryconstraints that financialinstitutions must observe.Open and risk-basedaccess:FinTech players and non-bankpayments service providersenvision a future whereimproved access to coreclearing and settlementsystems is supported bypayment system rules andregulations. However, nonbank payment serviceproviders expressed minimaldesire to connect directly tocore clearing and settlementsystems. Rather, most ofthese entities desire improvedaccess to core paymentsystem functions throughexisting participants, via moretechnologically advancedaccess options and interfaces.Enhanced accessopportunities will promote

DRAFT FOR CONSULTATION – APRIL 20, 20163Canada can benefit from studyingmodernization efforts in other countriescompetition across thepayments ecosystem andrestrict the ability of any onefirm from exercising marketpower to the detriment ofusers of the payments system.Regulators have stated thatthey envision a more levelplaying field in the paymentsecosystem with open, riskbased access rules that areorganization-agnostic.Oversight will continue to beinformed by internationallyrecognized risk managementrequirements, adapted asnecessary to Canada’s uniqueenvironment.Systems that are flexible,adaptable and reduceprocessing costs over time:Financial institutions envisiona future where they are able toeasily introduce and enhanceproducts and services to meetcustomer needs. Theyrecognize that modernizationwill require investment in corenational systems, in addition tosignificant investments in theirown systems. They expectthese investments to deliver aplatform for innovation,decreasing costs anddelivering ongoing efficienciesover the longer term.Also identified wereopportunities to incorporatesupport for select sharedservices with new investmentsin core paymentsinfrastructure. Examples ofpotential shared servicesinclude proxy directories, frauddetection services, AMLtransaction monitoring andcollateral management. Newpayments infrastructure shouldbe accommodating as towhether a shared service ispart of the core system oroffered on a standalone basis,with market forces playing arole in these decisions.Modernization of corepayments systems isoccurring around the globeIn addition to stakeholderconsultation, the CPA hasevaluated modernizationefforts in other countries.There are a number ofcountries that can providevaluable learnings for Canadaas we embark on ourmodernization journey.As the pace of modernizationincreases around the globe,common solution elementsand themes are emerging fromthe most successfulimplementations: Establish a new fasterpayments system ratherthan upgrading existinginfrastructure to supportfaster payments.5 Extend and enhance existinginfrastructure in the shortterm where possible andpractical to meet other userneeds. Consider market solutionsfrom payment infrastructurevendors, rather than buildingnew systems – Severalsolutions have beenimplemented in multiplejurisdictions. Existingsolutions and learnings canbe leveraged, with positiveimplications for costs andimplementation timelines formodernization efforts. Continue to operate existingpayment systems (typicallybatch and high-value) andallow transactions to migrateto new faster paymentssystems over time. Incorporate support for ISO20022. It is becoming theglobal message standardand will support globalinteroperability. Coordinate infrastructureinvestment with FI/industrydevelopments to bring newcommercial products andservices to the market –Ensure one or moredifferentiated products orservices that addressspecific use cases arelaunched to coincide with

DRAFT FOR CONSULTATION – APRIL 20, 20164The time is right to proceed withmodernizationthe introduction of newfaster paymentsinfrastructure.Most recently, the UnitedStates announced theintroduction of same day retailclearing and settlement in2016, and the introduction of areal time payment systemoffered by The Clearing Houseis planned to support real timepayments in early 2017.The majority of Canada’strading partners are well alongin their efforts to upgrade corepayments infrastructure.Canada will need to considerthese international approacheswhen determining its strategyfor modernization. It isimportant that the paymentsecosystem in Canada remainglobally competitive; the costsof falling behind could besignificant, especially forCanadian businesses.The potential impacts ofmodernization aresignificantPreliminary estimates indicatethat enhancing Canada’s corepayments infrastructure couldaddress the potential migrationof up to 1 billion AFT, cheque,cash and wire transactionseach year to a faster data-richpayments platform.The migration of thesetransactions should createsignificant operational savingsfor large and small businesses(including government),consumers and FIs.Modernization should alsoresult in benefits for end usersby reducing friction andincreasing access to productsand services. Additionalbenefits include the improvedmanagement of workingcapital and broader macroeconomic benefits fromproductive reinvestment ofefficiency gains.For financial institutions andother payment serviceproviders, a modernizedpayment system will deliverongoing transactionprocessing efficiencies and willreduce risk through theprovision of ‘good funds’payments.The creation of a vision hasconfirmed that end-user needsand expectations are evolvingto include faster, data-rich,cost-effective payments.Although safe and secure,existing CPA core systems arelargely outdated (as are manyFI legacy payments systems)and struggling to match thepace of change in the industry.Core payment infrastructuremodernization is occurringglobally, and it is importantthat Canada remainscompetitive. At a minimum, aroadmap is needed to supportthe implementation of ISO20022, and access to fasterpayments for consumers andbusinesses. Over the longerterm, the ability to supportpayments in seconds with24/7/365 availability will be arequirement for Canada toremain globally competitive.Upgrading existing or buildingnew core paymentsinfrastructure should create aplatform for product andservice innovation that willallow ecosystem participantsto compete and partner evenmore effectively to meetevolving end-user needs.What are the next steps formodernization?Canada must determine howfaster, data-rich paymentscan be best deliveredOnce business requirementshave been completed, solutionoptions can be defined and6A modernization initiativetypically consists of severalphased activities. For Canada,the next step is to translatestakeholder/ user needsidentified in the vision intobusiness requirements.

DRAFT FOR CONSULTATION – APRIL 20, 2016evaluated to prepare aconceptual solution design.This will include a thoroughreview of existing capabilitiesin-market as part of thesolution design exercise, toconfirm if and where existingcapabilities can be enhancedand integrated to reduce costand accelerate speed tomarket.As part of modernizationactivities, the CPA will workwith FI participants to identifypossible shorter termmodifications to existingsystems, CPA rules andstandards that could addressselect business requirements.The impacts, costs andbenefits of capturing theseopportunities will need to beconfirmed.For modifications requiringgreater effort, a case forproceeding will be preparedthat outlines the impacts, costsand benefits of implementingthe recommendedmodernization solution to meetthe defined requirements.The CPA will work closely withmembers and industrystakeholders to definerequirements, identify solutionoptions and prepare the case7for modernization. It isexpected that these activitieswill be completed by early2017.Upgrading or replacing coreinfrastructure to support faster,data-rich payments will requireconsiderable investment and amulti-year, multi-phaseimplementation plan based ona prioritized roadmap. Aschanges are introduced it willdeliver substantial value forusers, deliver cost efficienciesfor industry participants, andprovide a platform for on-goingproduct and serviceinnovation.

DRAFT FOR CONSULTATION – APRIL 20, 20161. IntroductionRecently, domestic and international developments have created the need for Canadianpayments ecosystem participants to develop a long-term plan to ensure the needs of itsconstituents continue to be met. From magnetic stripe to EMV and from plastic card to mobilephone, the payments landscape is evolving rapidly. With the ubiquitous availability and use ofinternet and smart phones, consumers and businesses increasingly expect to be able to pay andbe paid for anything, anytime and anywhere.Payments modernization is a global trend. At time of writing, 17 countries have implementedinfrastructure enhancements that support faster payments, decreasing the time span betweenpayment initiation and the availability of funds from days to minutes, and even seconds. ISO20022 is emerging as the preferred international messaging standard and is being, or has beenimplemented in over 30 countries 1.Canada is known internationally as a payments leader – both in payment functionality andsecurity. Canadian financial institutions have invested in new solutions and Canadians are quickto adopt new methods of payment being offered including contactless (“tap and go”) for both debitand credit cards, mobile cheque deposit or using their mobile device to pay for purchases.However, legacy core payment infrastructure is largely outdated and requires investment toensure these core systems remain compliant with regulatory requirements designed to preservefinancial stability. Existing systems lack flexibility and present challenges from a technology andoperations perspective for incumbents and new players to introduce innovative products andservices.Canadian regulators are carefully monitoring global developments to ensure that payment systemattributes in Canada continue to evolve in order to meet the stated public policy objectives (PPOs)of safety and soundness, efficiency and protecting end user interests.The Canadian Payments Association (CPA) is a public purpose corporation that establishes andoperates Canada’s core national payments infrastructure (including associated systems), allowingmember financial institutions to clear and settle payments made between themselves and theircustomers. Along with operating payments infrastructure, the CPA develops, implements andupdates the rules and standards that govern the clearing and settlement of payments between itsmembers. (Please see Exhibit 1 for more detail.) The CPA’s wider mandate also includes theresponsibility to support regulator PPOs in the provision of its services.To address drivers for change and provide a next generation of payments infrastructure to bettersupport the payment needs of Canadians, the CPA has embarked on a multi-year initiative tomodernize its infrastructure.1More information on ISO 20022 standard is available at www.iso20022.org8

DRAFT FOR CONSULTATION – APRIL 20, 2016Exhibit 1: CPA’s current role in the ecosystemAs one of the first critical steps in its modernization, CPA has taken the initiative to consult withend users, members and industry and government stakeholders to develop a vision for theCanadian payments ecosystem. This vision reflects the stated needs and priorities of multipleconstituents: end-users of the payment system (consumers, business and government);traditional and new payments product and service providers; and regulators.The vision has been developed at an industry level to generate alignment between constituents,identify the required features and functionality of the ecosystem, and evaluate if there is a strongcase to proceed to the next phase of modernization – framing the CPA’s role in enabling keyaspects of the vision and developing the conceptual design and solution options for newinfrastructure and other associated changes. For added clarity, the vision does not address thefuture role of the CPA in the payments ecosystem, or contemplate specific solutions to deliver theproposed features and functionality.Exhibit 2 summarizes the relationship between the vision and the next phase of the CPA’sModernization initiative.9

DRAFT FOR CONSULTATION – APRIL 20, 2016Exhibit 2: Relationship between vision and CPA modernizationThis paper presents the results of the vision effort, and is organized as follows: Overview of the drivers and context for modernizing the Canadian payments infrastructure Summary of findings on user/stakeholder needs, and comparisons with globalmodernization initiatives Impact and implementation considerations, including potential value associated withproceeding with addressing user/stakeholder needs Summary of the case for proceeding to the next phase (planning/analysis and conceptualdesign)10

DRAFT FOR CONSULTATION – APRIL 20, 20162. Context for modernizationThere are a number of forces contributing to the accelerated pace of payments evolution inCanada and around the world. Advances in technology are impacting payments both from a userexperience perspective, as well as in the provision of products and services. New entrants areidentifying and targeting opportunities that are requiring incumbents to react quickly. Globalstandards are emerging for payment messages, providing opportunities for improvedinteroperability for payment exchange and processing both within the ecosystem and acrossborders. The increasing presence of new players in the payments ecosystem is creatingawareness of the nee

available from other payment options like wires." The ability to include important data about the payment with the payment can facilitate the continued shift to digital domestic and international payments. ISO 20022 is a global message standard designed to support the exchange of robust payment-related information as part of a payment. ISO 20022