An Economic Perspective on Payments Migration

Consumers, businesses and banks make millions of payments each day using a variety of instruments, such as debit cards, cheques and wires. Canada is currently developing three new systems to process these transactions: Lynx, Settlement Optimization Engine (SOE) and Real-Time Rail (RTR). These new systems will replace the existing Automated Clearing Settlement System (ACSS) and Large Value Transfer System (LVTS). In this paper we examine the expected migration of payments using the ACSS and LVTS into RTR, SOE and Lynx.

We compare the convenience, speed, safety and privacy, functionality, costs and acceptance of the different payments processed in the current and future systems. We then assess how the future systems differ from each other from the perspective of banks. Our focus is on how much liquidity these systems require and how fast they can transfer money.

We conclude that a substantial portion of payments could migrate to RTR for more convenience, speed and functionality. Also, large LVTS transactions could migrate to RTR or SOE. This could increase fraud and credit risks since a different oversight and credit risk regime applies to RTR and SOE than to Lynx. This raises important policy questions, such as whether RTR and SOE payments should have a maximum transaction value.