What is a Payments System?

Canadians use various "payment instruments" to purchase goods and services, to make financial investments, and to transfer funds from one person to another. These instruments include cash, cheques, debit and credit cards, and e-money.

Except for cash, payment instruments involve a claim on a financial institution, such as a bank, credit union, or caisse populaire. Financial institutions therefore need arrangements to transfer funds among themselves, either on their own behalf or that of their customers. A payments system is the set of instruments, procedures, and rules used to transfer these funds.

The Canadian Payments Association (CPA)

The Canadian Payments Association is a not-for-profit organization created under the Canadian Payments Association Act. Its mandate is to establish and operate national systems for the clearing and settlement of payments. Learn more . . .

How are Payments Processed?

Payments go through two steps: first they are cleared, then they are settled. Clearing is the daily process by which CPA members exchange deposited payment items, and the net amounts owed to each other are then determined. Settlement is the procedure by which CPA members use funds on deposit at the Bank of Canada to fulfil their net obligations to all other members.

There are two systems in Canada through which all non-cash payments settle:

  • Large Value Transfer System (LVTS): The LVTS is an electronic wire transfer system that processes large-value or time-critical payments quickly and continuously throughout the day.

    In 2010, the LVTS handled an average of 24,000 payments—worth an average total of $149.4 billion—each day.

  • Automated Clearing Settlement System (ACSS): The ACSS handles most ordinary payments, such as regular cheques, automatic bill payments, and debit card transactions.

    In 2010, the ACSS handled an average of 23.9 million payment items per day, with an average total value of $20.4 billion. Paper items accounted for 15.4 per cent of the volume and 55.9 per cent of the value cleared and settled, while electronic items made up about 84.6 per cent of the volume and 44.1 per cent of the value.

Payments systems also play a role in clearing and settlement transactions involving assets such as securities, derivatives, and foreign exchange. For example, CDSX, operated by the Canadian Depository for Securities Limited, clears and settles trades in Canadian-dollar-denominated debt securities. The LVTS is used to make payments from those participants in CDSX with end-of-day net payment obligations and to make payments to those participants with end-of-day net claims.

The Bank of Canada's Roles

Beyond its oversight responsibilities under the Payment Clearing and Settlement Act, the Bank of Canada plays several other important roles in Canada's payments systems.

One such role comes in settling the positions among the participants in the LVTS and the ACSS. There are about a dozen financial institutions in these systems that have "settlement accounts" with the Bank. At the daily settlement times, the systems calculate the net amounts owing among the institutions, and those amounts are settled via entries to the institutions' accounts at the Bank. In the case of the ACSS, participants that have net funds owing fund their ACSS settlement account with an LVTS payment.

Another important Bank role is to lend funds overnight to any institution that is a direct participant in the LVTS and has net funds owing in the LVTS at settlement time.  This is referred to as "providing liquidity."

Unlike central banks in many other countries, the Bank of Canada neither owns nor operates any of Canada's major payments systems. However, the Bank of Canada has a keen interest and involvement in these systems, for several reasons:

  • The safety and stability of payments systems contributes to the Bank's broader objective of promoting a safe and sound financial system in Canada.
  • Unsafe or unsound payments systems could impair the Bank's ability to implement monetary policy effectively.
  • As the ultimate source of liquidity to the financial system, the Bank is naturally concerned about the safety and soundness of Canada's systems. Poorly designed systems could generate significant liquidity and credit risks for their participants.
  • Final settlement of payment obligations among the participants in the systems takes place through the transfer of funds held in their settlement accounts at the Bank.
  • The Bank is a participant in the LVTS and the ACSS, settling amounts owing to or from itself and to or from the Government of Canada.
  • The Bank has strong links to the Canadian Payments Association, which operates Canada's national payments systems.
  • The Bank participates in international groups – particularly the Committee on Payment and Settlement Systems – that set risk management principles for payment, clearing and settlement systems.