The global payments landscape is currently undergoing significant and disruptive change. For companies, new technologies, products and communication channels, as well as increased competition between banks, FinTechs and service providers, are opening up ever new ways of making and orchestrating payments, but they are also forcing regulators and governments to keep pace with this rapid change and enact corresponding sets of rules and laws.
What is interesting is how individual countries and regions are dealing with this, what initiatives are currently underway, and where the differences are.
Today, we would like to venture a look across the pond to Canada and have a look at the latest developments in payment transactions there, while at the same time comparing them to the EU and the efforts made by the EU Commission.
The comparison with Canada makes sense, because there, too, securing the competitiveness and future viability of payment traffic is a key and essential priority in order to avoid falling behind on an international level.
Originally conceived in 2015, the idea of modernizing Canadian payments across the country resulted in a tangible vision in 2016: the establishment of a national system that would be fast, flexible, and secure in driving innovative payment operations to strengthen the country's global competitiveness.
The vision comprised eight pillars that would underpin the future system:
The rationale behind this national initiative was to meet the needs of businesses and customers for quicker and more secure payments and straight-through processing, supported by appropriate oversight and regulation from the government. However, this entailed modernizing and adapting infrastructure, rules and standards to enable technical innovation by providers and their services in the market.
The centerpiece of the initiative since 2016 has been a new set of rules that addresses current developments and progress made, providing a balance between flexibility and compliance. The set of rules intends to simplify the interoperability of all parties involved in the payment process and to facilitate the development of new payment methods. A logical goal of the new rules is to promote innovation, ensure compatibility with different clearing and settlement systems, and create a legal basis for a broad range of services, while at the same time ensuring security and reliability at all stages of the value chain.
Since the initiative's launch, a further building block has also been the modernization of Canada's retail payment system to allow faster and same-day transfer of funds, as well as an alignment with international risk management best practices and standards.
As part of this, a new credit risk model was introduced in 2018, which enabled transfers to be automated and available more quickly. In this regard, the ISO20022 standard for AFT (Automated Funds Transfer) payments was also introduced.
Naturally, the standardization of payment formats (brought about with the help of ISO20022) plays a central role, just as it also does internationally. Canada has been involved in the step-by-step implementation of this standard since 2019 as part of the AFT payments.
The next expansion stage of the retail system, known as "Real-Time Rail," is expected to enable routing of ISO20022 payments in real time (24/7/365) based on account numbers starting in 2022. In doing so, the planned instant payments will be able to be sent and received in a final and irrevocable manner. Retailers will have the possibility to receive payments social media and QR code payments.
Similarly, Canada plans to introduce a new Lynx system in 2021 for high-value payments, establishing a real-time processing system that can keep up with both national and global risk and messaging standards. This should not only provide the required flexibility in terms of interfaces and APIs, but also security, stability and protection against cybercrime.
As mentioned above, this initiative's fundamental benefits include improved payment processing efficiency through real-time payments and increased transparency, a standardized format (ISO20022), enhanced interoperability between the parties involved in the payment process and internationally compatible protocols, and last but not least, strengthened security because modern risk and privacy management methods are used.
The initiative targets not only companies, banks, financial institutions and service providers or the government, but also consumers, who will benefit from faster and more secure payments as well as a significantly improved payment experience when shopping in their daily lives.
Just what is going on in Europe and the EU at the moment? Where does the EU stand in comparison? What can we learn from the Canadian approach?
The EU Commission is also looking at a new strategy for regulating, modernizing and digitizing the financial sector and retail payments in Europe.2
As things currently stand within the EU, there is the single SEPA standard for payments, but beyond that there are numerous separate initiatives, such as the European Payment Initiative (EPI) that 16 large banks all across Europe are looking to implement or the European Payments Council3 that intends to define common rules and regulations for payment operations.
And yet, even years after the introduction of SEPA, there still exist only a few digital solutions that can actually be used consistently across Europe in e-commerce and the retail sector, as national idiosyncrasies and cross-border obstacles still exist even within the EU (keyword "IBAN discrimination").
With this in mind, the European Commission has launched a new strategy to match the rapid pace of technological development and to elevate future payments to a new level of security by reducing risks through adequate regulations and legislation.
As in Canada, the aim here is to enable, support and secure the rapidly advancing innovations in payment solutions across Europe, thus strengthening Europe's economic and financial sovereignty and ensuring its competitiveness.
In this respect, a modernized infrastructure enabling digital solutions and real-time payments, as well as international interoperability, is just as decisive as the updating of applicable directives and laws.
A major building block would be the broad and standardized use of instant payments, which the EU Commission describes as the "new normal.”
As far as instant payments are concerned, which have so far been rather slow to catch on among European companies, a general system will be introduced by the end of this year in order to make instant payments both more accessible and cost-effective.
It goes without saying that the PSD2 directive currently in force will also have to be updated as part of this process. In particular, the right to refunds and fees (consumer protection) for instant payments as well as further options for electronic authentication, for example, must be incorporated into the directive.4 Forcing payment service providers to implement the "SEPA Instant Credit Transfer (SCT Inst.) Scheme " is also being examined. Making joining compulsory could then be initiated as early as the end of 2021.
But since a comprehensive review and revision of PSD2 is not expected until the end of 2021 and a new legal framework will probably not be drafted until mid-2022, the issuing of guidelines and framework conditions to enable a faster and more secure implementation of the existing technical innovations and services is trailing even further behind.
However, there is some positive news: measures are planned by the EU Commission for an efficient new payment system. Among them are the consistent implementation of the ISO20022 standard across the EU by the end of 2022 and the use of SWIFT GPI for cross-border payments. In addition, European systems such as TARGET2 should be connected better to other countries, and national standardization promoted, for example, through the widespread use of the SCT Inst. scheme. This should improve the interoperability between clearing systems and help avoid inefficiencies. It is also planned to promote e-money institutions with their direct access to payment systems, cutting out indirect routing through banks in the future.
A comparison of the Canadian initiative to modernize payment transactions with the EU Commission's current endeavors to revamp its European counterpart reveals that the motivation and goals behind the two regions' respective initiatives are very similar. The innovation of technological developments and the rapid transformation of global payment systems require new infrastructures, but more importantly adequate laws and regulations, thus creating a solid and secure basis for these across the board - both with respect to secure transactions (payment fraud) and legal certainty when it comes to implementing new solutions at companies, financial institutions, and service providers.
There are, however, additional challenges within the EU: currently existing fragmentation should be eliminated, thus preventing the risk of inconsistencies between countries and "future action should be placed within a single, coherent and overarching policy framework”, taking into account the general political direction.5
In addition to the use of uniform formats and standards such as ISO20022 or SEPA, the key elements here are, for example, the provision and general acceptance of instant payments, e-money and QR code payments, complete with their standards and APIs that are as normed as possible.
With regard to a revision of the PSD2 directive or an adaptation of the SEPA regulation (among others for the mandatory inclusion of theble amount of time, from the evaluation, to the presentation and reconciliation of the proposals SCT Inst. scheme or "Request to pay"), obviously, such changes always require a considera of all delegates, to the adoption and subsequent implementation. This is especially true since the PSD2 directive is only a Europe-wide guideline that has yet to be enacted into national law before companies can reliably decide on projects.
These initiatives nevertheless show that, although technical innovations and new solutions will always necessitate (re-)adjustments to regulations, guidelines and laws in order to remove existing obstacles and prevent misuse, they will inevitably continue to drive change in national and international payment traffic.
One thing we can learn from the Canadian initiative is this: tackle the issue holistically and present and explain it plainly, concisely and transparently on a separate website for everyone to understand.
This way, users have a single source for the latest information and developments at all times and no longer have to waste time searching for information, with the risk of missing out on important content.
Source: KPMG Corporate Treasury News, Edition 110, April 2021
4 EU Retail Payment Strategy, Section III, A, 2.
5 EU Retail Payment Strategy, Section I, page 4