Modernizing payments in Canada

Payments modernization is at the forefront of transformation for many industries, particularly within the financial services and retail sectors in Canada. A recent survey by KPMG International reveals that 93% of Canadian financial institutions (FIs) report either having a payments modernization program planned or are currently implementing one.¹ Furthermore, a KPMG poll indicates that 72% of FIs recognize the urgency of modernizing Canada’s payments infrastructure, stating that "the world is moving at lightning speed and Canada cannot afford to stand still”.² This reflects a widespread priority to adapt to evolving customer expectations and regulatory demands, including the implementation of Real-Time Rail (RTR) which is designed to improve transaction efficiency.

In this article, we’ll discuss key priorities for modernization programs and present an overview of the strategic business advantages Canadian FIs can expect when using innovative technologies to modernize their payment systems.

A fundamental driver for payments modernization rests with customer expectations. Institutions must focus on understanding the nuances of client needs – after all, increasingly tech-savvy customers demand seamless, secure, and rapid payment solutions. Institutions prioritizing direct engagement with customer sentiment may discover that personalized service offerings are preferred. A recent KPMG poll found that 64% of Canadian financial institutions said open banking, digital identity systems and real-time payment rails are not mere upgrades – they are the bedrock of a resilient, competitive, and inclusive economy.² By employing tools such as customer feedback loops, identity verification technologies, and advanced data analytics, organizations can tailor offerings that resonate with their customer's preferences.

Canada is preparing for the launch of RTR and banks have concerns around operational and fraud-related risks. While instant payments promise notable advantages like faster transaction processing and improved customer convenience, their real-time nature introduces new challenges. Specifically, the compressed timeframe for fraud detection amplifies the risk of scams. To address these vulnerabilities, FIs must adopt highly adaptive and advanced risk management frameworks, integrating tools like real-time Anti-Money Laundering (AML) and sanctions screening mechanisms.

As innovation accelerates, institutions must evolve their processes and policies to ensure that modernization efforts do not come at the cost of security or trust. While this is a global challenge, in Canada, it is intensified by adherence to stringent regulatory frameworks, including ISO 20022 standards, AML measures, and anti-terrorist financing regulations overseen by FINTRAC and OSFI. Compliance is non-negotiable, but it can also act as an enabler rather than a hindrance to innovation. Canadian FIs can turn regulatory deadlines into springboards for growth by using these obligations to enhance operations and provide better value to their clients

ISO 20022 introduces a new level of "data richness," which can unlock opportunities to refine product offerings and significantly enhance organizational efficiency. This demonstrates how compliance initiatives, when approached creatively, can serve both operational and strategic goals. Canadian FIs should aim for an integrated approach where compliance not only protects the institution but also drives innovation and sustainable growth.

While Canadian financial institutions anticipate starting their modernization programs within a range of 3 to 6 months, challenges such as system integration could lead to delays.¹ Many respondents cited integration of multiple systems as a key challenge, indicating the need for careful planning and resource allocation. In a KPMG survey, 58% of participating Financial Institutions said that "if Canada's new government does not implement open banking soon, our competitive position as a country will continue to deteriorate".²

Institutions should consider optimizing their workforce to manage business-as-usual operations alongside modernization efforts. This includes appropriate training for staff and the establishment of agile teams that can flexibly address immediate responsibilities while working on long-term goals.

While both financial institutions and retailers expect to enhance customer experiences through modernization, attention must be directed towards specific technologies that can deliver these benefits. Innovations such as mobile payment solutions, biometric verification, and real-time transaction capabilities are emerging as crucial components that customers now expect.

In Canada, 61% of FIs identified "faster transaction processing" as a top anticipated benefit of modernization.¹ To compliment this, Canadian retailers must explore integrations such as loyalty programs and dynamic payment options, which are pivotal in elevating user interactions. While debit cards and cash transactions maintain popularity, the rise of more advanced payment mechanisms is reshaping user habits and expectations.

To accurately assess the effects of modernization efforts, FIs and retailers need to establish clear indicators of success, encompassing metrics like transaction efficiency, operational costs, and overall customer satisfaction. Data analysis will reveal insights into customer behavior, directly informing future operational strategies.

The expectation is that modernization efforts will yield an elevation in customer satisfaction, with 61% of financial institutions foreseeing enhanced retention and loyalty as key outcomes of their efforts.

The financial commitment to modernization is substantial, with Canadian FIs expected to invest an average of $19.4 million per institution.¹ Decision-makers must ensure that these resources are allocated effectively. Prioritizing integration of new technologies, training personnel, and outsourcing functions where applicable can yield significant returns on investment.

Investments directed toward improving security and fraud prevention are increasingly necessary. As institutions implement new systems, ensuring that security measures are robust will protect customers and enhance overall trust.

Engagement from both government leaders and industry stakeholders will be crucial in advancing initiatives such as open banking and real-time rail (RTR). Our recent poll results indicate that 65% of Canadian FIs said as Canada faces significant economic threats, the financial system and payments infrastructure must be modernized immediately to enable open banking, digital identity and real-time payments.² Government entities can provide guidance and support for regulatory compliance while helping to shape the overall financial infrastructure in Canada.

As the market navigates toward a future characterized by digital transactions, Canadian FIs will need to align their product offerings with modern consumer demands, thereby ensuring competitive longevity.

Payments modernization is not a one-time project but an ongoing process that requires continuous adaptation. As markets evolve, FIs must embrace agility in their operations. The landscape of digital payments is expected to transform significantly over the next five years, providing ample opportunity for innovation and competitiveness.

Leaders in Canadian financial institutions should commit to lifecycle management, consistently evaluating their payment strategies to meet both regulatory demands and customer expectations effectively.

The modernization of payments in Canada presents both a challenge and an opportunity for financial institutions and retailers alike. By prioritizing customer needs, balancing regulatory compliance with innovative practices, and consistently measuring success, Canadian organizations can effectively navigate this transformation and maintain a competitive edge in a rapidly changing landscape.

Here are some key takeaways on how Canadian financial institutions can leverage compliance-related modernization into strategic business advantages:

1. Customer-centric focus: Understand and prioritize customer needs to drive successful modernization efforts.
2. Balance innovation with compliance and risk management: Embrace regulations as opportunities for innovation rather than burdens.
3. Data is the new frontier: Establish clear metrics to evaluate the impact of modernization efforts, focusing on transaction speed and customer satisfaction.
4. Strategic stakeholder engagement: Collaborate with stakeholders to advance innovations, particularly in government collaborations on emerging initiatives.

Dive deeper into the Canadian data:

At KPMG, we understand the complexities and challenges associated with payments modernization. We’ve worked with some of the world’s leading banks and retailers to deliver modernized payment environments. Our team can help your organization by:

• Leveraging our extensive knowledge in payment systems, we can help institutions navigate regulatory requirements while simultaneously striving for innovation. Whether it's aligning with ISO 20022 or implementing new technologies, we provide tailored strategies that ensure compliance without sacrificing creativity.
• Assisting in technology vetting and crafting and implementing strategic modernization roadmaps. We take a holistic approach to support our banking clients through their modernization journeys.
• With expertise in risk management, resource allocation, and performance measurement, we can help financial institutions maximize their investments and achieve measurable benefits from their modernization efforts.