Spring 2020 • Volume 8 • issue 1 | www.canadianequipmentfinance.com
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INDUSTRY REPORT Capital spending may hit record
Enabling modernized payments How to achieve corporate sustainability SMEs optimistic about prospects PM40050803
TotalFinance NOVEMBER / DECEMBER 2019
C A N A D A’ S M A G A Z I N E F O R F I N A N C I A L E X E C U T I V E S
REPORT ON SECURITY, FRAUD & PRIVACY From combatting payment card fraud to minimizing data breaches, the experts say it’s time to get serious about security
ALSO IN THIS ISSUE:
❱ LEASING
❱ Preparing for the Unexpected ❱ Canada’s payment standards:
❱ TREASURY
❱ Currency Risk and
❱ CAPITAL MARKETS
ISO 20022
International Payments
❱ OPERATIONS
❱ INSURANCE
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Contents Spring 2020 Volume 8 Number 1
Publisher and Editor-in-Chief Steve Lloyd steve@canadianequipmentfinance.com Editor Brendan Read brendan@canadianequipmentfinance.com Creative Direction / Production Jennifer O’Neill jennifer@canadianequipmentfinance.com Photographer Gary Tannyan
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Capital spending may hit record »4 How to achieve corporate sustainability »8 Yellow signs for U.S. investment »11
Enabling modernized payments »12 Cybersecurity more important than ever »13
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Management Strategy SMEs optimistic about prospects »14
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Industry Report
Capital spending may hit record on-residential construction and machinery and equipment (M&E) capital expenditures are projected to hit a record $275.5 billion in 2020, according to Statistics Canada, from $268 billion in 2019, and surpassing the previous peak of $272.1 billion registered in 2014. The 2020 capital investment intentions data, encompassed in the Capital and Repair Expenditures Survey, also marks four consecutive years of growth. The total capital outlays are expected to rise 2.8 percent in 2020, following a 1.7 percent increase in 2019, but off the torrid 9.8 percent increase in 2018. The $7.5 billion anticipated increase is expected to come from growth in capital construction (+4.5 percent to $178.6 billion). But this strong result will be partially offset by a projected small decline in M&E spending (0.2% to $96.9 billion). Capital spending by public sector organizations will be high, with an anticipated increase of 6.5 percent, following a modest increase of 0.8 percent in 2019. More modest growth in capital expenditures on privately held non-residential tangible assets of 0.9 percent is expected in 2020, compared with 2.2 percent in 2019.
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Transportation and warehousing lead Driving the overall capital spending is a 4
record expected $44.3 billion outlay for the transportation and warehousing sector: 9.3 percent higher than that in 2019. For the first time it will become the leading sector for capital investment, surpassing mining, quarrying, and oil and gas extraction, which had been at the top of the rank since 2001. There are projected gains in capital construction (+10.1 percent) and capital M&E (+7.7 percent). Both private and public entities have been and plan to make investments. The largest contributor to growth is a 25.7 percent (+$2.4 billion to $11.8 billion) anticipated increase in transit and ground passenger transportation investment. Significant increases are also anticipated in air transportation (+$1.2 billion to $4.5 billion) and support activities for transportation industries (+$1.2 billion to $10.5 billion). The expected increases are largely concentrated in Quebec (+39.8 percent to $7.6 billion), British Columbia (+16.4 percent to $13.2 billion) and Ontario (+14.4 percent to $11.9 billion). Partially offsetting growth is reduced spending across the Prairie provinces as major investment projects come to an end.
Utilities, public admin to increase Spending in the utilities sector is expected to increase by 9.1 percent to $33 billion in 2020, driven by increases
CANADIAN EQUIPMENT FINANCE | Spring 2020 | canadianequipmentfinance.com
in the water, sewage and other systems subsector (+30.5 percent to $7.6 billion) as major projects in British Columbia and Ontario get underway. Furthermore, increased investment in electric power generation, transmission and distribution in Alberta and Ontario will more than offset the completion of major projects in Newfoundland and Labrador and in Manitoba. Similarly, capital spending in the public administration sector is expected to grow by 2.3 percent (+$783 million to $34.4 billion): a turnaround from a drop of 0.6 percent in 2019. Spending increases in local, municipal and regional public administration (+$2.3 billion to $18.3 billion) are expected to more than offset declines in federal government public administration spending (-$1.5 billion to $4 billion).
Non-renewable resource extraction outlays to drop Capital outlays in the mining, quarrying, and oil and gas extraction sector are anticipated to continue their decrease, albeit at a slower rate. Statistics Canada reports that it expects to see 1.4 percent decline (-$636 million to $43.7 billion) in 2020, after reporting drops of 8.3 percent (-$4 billion) in 2019 and 4.3 percent (-$2.2 billion) in 2018. The anticipated decline in 2020 is
Industry Report largely attributed to lower spending intentions in the metal ore mining subsector (-$1.1 billion). In contrast, the oil and gas extraction subsector, which represents about 77 percent of the anticipated spending in 2020 for the sector, reported an expected increase of 1.3 percent. Within this subsector, the non-conventional oil extraction industry anticipates gains of $1.1 billion in capital spending, which is partially offset by the expected decrease of $633 million in the conventional oil and gas extraction industry.
Manufacturing outlays to increase
anticipated declines in Alberta, Manitoba and Ontario.
Manufacturers anticipate a 1.2 percent increase in capital spending in 2020 to $22.4 billion, due to a 3.1 percent increase in spending on capital M&E. Non-residential capital construction is anticipated to decline 3.6 percent in 2020, following increases of 14.5 percent in 2019 and 47 percent in 2018. Out of 21 manufacturing subsectors, 11 reported an expected increase in total capital outlays for 2020, compared with 12 in 2019 and 17 in 2018. Quebec is expected to increase its spending by $474 million (+9.8 percent) in 2020, offsetting
B.C. to lead, Newfoundland and Labrador to fall British Columbia is among the provincial leaders contributing to the national increase anticipated in 2020. New capital spending is expected to increase $3 billion (+7.8 percent) for a total of $41.8 billion. Notable advances in investment also took place in 2019 (+21.1 percent) and 2018 (+10.5 percent). Increased spending is nothing new for British Columbia, said Statistics Canada;
Capital spending on non-residential tangible assets, industrial sectors 2017
2018
2019
2020
2019 to 2020
millions of dollars
millions of dollars
millions of dollars
millions of dollars
% change
Total, non-residential construction and machinery and equipment
239,906.4
263,396.9
267,973.3
275,499.9
2.8
Total, private capital expenditures
156,106.7
172,203.8
176,009.8
177,574.3
0.9
Total, public capital expenditures
83,799.7
91,193.1
91,963.5
97,925.7
6.5
7,733.2 50,565.6 31,525.2 6,244.8 15,366.8 3,600.5 6,607.9 28,953.8 12,496.7 3,617.9 13,387.8 2,448.1 548.9 1,681.8
8,942.6 48,399.5 28,923.0 6,987.1 21,219.0 4,629.6 6,544.5 35,588.6 13,423.1 3,167.5 16,519.1E 2,901.6 1,014.1 2,052.4E
8,826.8 44,376.4 30,197.4 7,605.3 22,147.8 4,892.7 5,993.0E 40,500.7 13,688.4 3,635.1 17,508.5E 2,907.9 1,119.3 2,072.5
7,894.8 43,740.6 32,955.9 8,121.5 22,420.3 4,762.5 5,983.0 44,260.9 13,847.4E 3,508.2 17,122.5E 3,090.3 1,186.8 2,400.9
-10.6 -1.4 9.1 6.8 1.2 -2.7 -0.2 9.3 1.2 -3.5 -2.2 6.3 6.0 15.8
10,582.9 8,114.8 2,610.7 3,610.9 1,073.5 29,134.3
11,950.1 8,664.6 2,876.1 4,188.7E 1,635.4E 33,770.2
11,413.8 9,453.1 3,096.4 3,732.2 1,236.7E 33,569.2
11,204.4 10,311.2 2,902.4E 4,192.0E 1,242.2E 34,352.0
-1.8 9.1 -6.3 12.3 0.4 2.3
Industrial sectors Agriculture, forestry, fishing and hunting Mining, quarrying and oil and gas extraction Utilities Construction Manufacturing Wholesale trade Retail trade Transportation and warehousing Information and cultural industries Finance and insurance Real estate and rental and leasing Professional, scientific and technical services Management of companies and enterprises Administration, support waste management and remediation services Educational services Health care and social assistance Arts, entertainment and recreation Accommodation and food services Other services (except public administration) Public administration E use with caution. Note(s): Data may not add up to totals as a result of rounding. Source(s): Statistics Canada, Tables 34-10-0035-01 and 34-10-0037-01.
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CANADIAN EQUIPMENT FINANCE | Spring 2020 | canadianequipmentfinance.com
Industry Report Capital spending on non-residential construction and machinery and equipment, provinces and territories 2020 (millions of dollars) plus 2019 to 2020 % change
Canada 275,499.9 2.8% Yukon 540.8 -13.3%
British Columbia 41,822.8 12.9%
Northwest Territories 843.1 15.3%
Nunavut 1,099.9 -35.6%
Alberta 59,563.2 7.8% Saskatchewan 15,043.4 0.4%
Newfoundland and Labrador 6,436.5210.9 -11.8%
Manitoba 9,000.6 -7.3%
Quebec 46,442.2 7.3%
Ontario 86,146.8 4.1%
Nova Scotia New Brunswick 4,202.2 1.4% 3,846.1
Note(s): Data may not add up to totals as a result of rounding. Source(s): Statistics Canada Table 34-10-0035-01.
2020 marks the fifth consecutive year spending is set to increase. Gains in the transportation and warehousing sector (+$1.9 billion) and the utilities sector (+$861 million) will easily offset, it said, reduced spending in the agriculture, forestry, fishing and hunting sector (-$185 million) and the mining, quarrying, and oil and gas extraction sector (-$109 million). Meanwhile capital investment in Quebec has been growing since 2014 and shows no signs of slowing down, with a planned spending increase of 7.3 percent to $46.4 billion in 2020. Spending in the province is anticipated
Prince Edward Island 737.9 -2.3%
-2.2%
to increase by $3.1 billion in 2020, with $2.2 billion coming from the transit and ground transportation subsector. The manufacturing, utilities and accommodation and food services sectors are also expecting increases in 2020. In Ontario, capital spending is expected to increase by 4.1 percent to $86.1 billion, following an increase of 1 percent in 2019 and an increase of 18.6 percent in 2018. Spending is anticipated to increase in several sectors, namely transportation and warehousing (+14.4 percent to $11.9 billion), utilities (+10.1 percent to
$11.8 billion) and public administration (+6.7 percent to $12.7 billion). But the manufacturing sector is expected to decline to $102 million (-1.2 percent) in 2020, after a decrease of $489 million (-5.3 percent) in 2019. In sharp contrast, Newfoundland and Labrador is anticipating the largest provincial decline in spending in 2020 (-$834 million to $6.2 billion), following an increase in 2019 (+$396 million to $7 billion). Utilities (-$475 million) and the mining and quarrying, except the oil and gas subsector (-$389 million) represent the majority of the decrease expected for 2020.
canadianequipmentfinance.com | Spring 2020 | CANADIAN EQUIPMENT FINANCE
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Industry Report
How to achieve corporate sustainability By Patricia Voorhees
orporate sustainability is broadly defined as how an entity has a positive impact on the environment and society in which it operates. In an era of climate change and changing investor expectations, corporations are concerned with sustainability and assess their impact through environmental, social and governance (ESG) reports communicating progress in each of these critical areas. Corporate sustainability and associated ESG related risks are beginning to be considered by rating agencies when assessing corporate risk. What’s more, new generations of investors are demanding that their investment dollars are in companies and funds considered to be socially responsible investments (SRIs). The quest for corporate sustainability has become a national and international imperative, as well, with initiatives underway that are of interest to the equipment finance industry.
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Sustainability actions The United Nations Global Compact — the largest corporate sustainability initiative in the world — has established 17 sustainable development goals (SDGs) for 2030. A few of them speak specifically to matters relevant to industrial equipment. Goal 9 is to build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation. Goal 11 is to make cities and human settlements inclusive, safe, resilient and sustainable. And Goal 12 aims to ensure sustainable consumption and production patterns. In Canada, the federal government’s 8
Expert Panel on Sustainable Finance has issued 15 recommendations [see box] designed to spur market activities, behaviours and structures needed to bring sustainable finance into the mainstream. As part of that effort, the Institute for Sustainable Finance had unveiled the establishment of the Canadian Sustainable Finance Network (CSFN), which is an independent and diverse alliance of academics, researchers and educators. “The Institute for Sustainable Finance aims to create the most credible and robust body of sustainable finance knowledge in the country. Establishing the CSFN as a critical resource for Canadian leaders is one way we can help guide the massive transition to a sustainable economy,” the announcement noted.
Assets are getting smarter with embedded IoT technology. Sustainability and equipment finance What exactly characterizes a sustainable equipment finance offering that might contribute to achieving the UN’s SDGs and Canada’s goals? Certainly, a winning argument can be waged that equipment leasing and finance has, in fact, been offering sustainable solutions for decades. Concerns about asset efficiency and total cost of ownership have been at
CANADIAN EQUIPMENT FINANCE | Spring 2020 | canadianequipmentfinance.com
the forefront of conversations between equipment lessees and lessors across asset types. Asset valuation, end of lease refurbishment and remarketing remain the life blood of lessors, offering fair market value (FMV) lease products in order to drive returns and cascade assets for another use in the secondary market. For an industry already steeped in asset efficiency and reuse what then might the next generation of sustainability look like? Assets are getting smarter with embedded Internet of Things (IoT) technology, coupled with machine learning and artificial intelligence (AI), while end user demand for asset usagebased finance options and sustainable solutions continues to build. As a result, new models are emerging across industries that leverage these smarter assets and deliver usage-based offerings promoting sustainability.
Improved utilization models Someone who works in a hospital is likely familiar with the sight of unused equipment lining hallways and storage areas, such that average 30 - 40 percent utilization rates for surgical equipment comes as no surprise. Those in the construction industry know idle equipment (and their theft) at job sites is commonplace. In both cases this underutilization may not be novel, but it is costly and detrimental to sustainable use and consumption. In response, and as examples, Cohealo in the healthcare space and EquipmentShare in construction are among companies delivering solutions for asset underutilization. Each leverage technology for usage-based asset sharing. EquipmentShare empowers construction equipment owners to efficiently manage their equipment and/
Industry Report
Expert Panel sustainability recommendations In April 2018 the federal government announced the creation of the Expert Panel on Sustainable Finance, charged with developing a set of recommendations to scale and align sustainable finance with Canada’s climate and economic goals. After extensive consultations the Expert Panel sent an interim report to the federal government in October 2018, which accepted the panel’s final report in June 2019. There are 15 recommendations in the final report, grouped into three mutually reinforcing pillars, as outlined in its executive summary.
Pillar I: The Opportunity Canada should put forward a renewed long-term vision for its transition, with focused policies to help businesses and investors of all sizes effectively respond to the economic opportunity. Mapping Canada’s climate goals into clear industry competitiveness visions and capital plans would spell out the size and horizon of the investment opportunity. Meanwhile, an incentive for Canadians to make climate-smart investments would drive demand for financial products and services that promote sustainable outcomes. Recommendation 1: Map Canada’s long-term path to a lowemissions, climate-smart economy, sector by sector, with an associated capital plan. Recommendation 2: Provide Canadians the opportunity and incentive to connect their savings to climate objectives. Recommendation 3: Establish a standing Canadian Sustainable Finance Action Council (SFAC), with a cross-departmental secretariat, to advise and assist the federal government in implementing the Panel’s recommendations.
Pillar II: Foundations for Market Scale Canada’s public and private sectors should invest in the essential building blocks needed to scale the Canadian market for sustainable finance to mainstream status. These foundations include authoritative and decisionuseful climate information, effective climate-related financial disclosures from businesses and investors, legal clarity around the obligations of investment fiduciaries, financial regulation that addresses climate risk and a supportive and climateinformed ecosystem of professional services providers. Recommendation 4: Establish the Canadian Centre for Climate Information and Analytics (C3IA) as an authoritative source of climate information and decision analysis. Recommendation 5: Define and pursue a Canadian approach
to implementing the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD). Recommendation 6: Clarify the scope of fiduciary duty in the context of climate change. Recommendation 7: Promote a knowledgeable financial support ecosystem. Recommendation 8: Embed climate-related risk into monitoring, regulation and supervision of Canada’s financial system.
Pillar III: Financial Products and Markets for Sustainable Growth Recognizing Canada’s unique economic make-up, the Panel has identified several opportunities to develop and scale up market structures and financial products that would have particular impact in facilitating Canada’s transition and adaptation. These opportunities align closely with Canada’s PCF [PanCanadian Framework on Clean Growth and Climate Change] and support the financing needs of critical segments of the Canadian economy such as clean technology, oil and natural gas, infrastructure, buildings, and electricity generation and transmission. Recommendation 9: Expand Canada’s green fixed income market and set a global standard for transition-oriented financing. Recommendation 10: Promote sustainable investment as ‘business as usual’ within Canada’s asset management community. Recommendation 11: Define Canada’s clean technology market advantage and financing strategy. Recommendation 12: Support Canada’s oil and natural gas industry in building a low-emissions, globally competitive future. Recommendation 13: Accelerate the development of a vibrant private building retrofit market. Recommendation 14: Align Canada’s infrastructure strategy with its long-term sustainable growth objectives and leverage private capital in its delivery. Recommendation 15: Engage institutional investors in the financing of Canada’s electricity grid of the future. “We encourage governments at all levels, regulators, businesses and investors to consider these recommendations in charting Canada’s course toward a sustainable, prosperous, and resilient future,” concluded the report’s executive summary.
canadianequipmentfinance.com | Spring 2020 | CANADIAN EQUIPMENT FINANCE
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Industry Report or offer it for rental during idle periods. The company’s Track platform technology connects every piece of equipment on the job site, regardless of the original equipment manufacturer. Tracking and monitoring elements note where equipment is, their utilization and they perform diagnostics for maintenance or repair. Track also promises to combat theft and unauthorized use of equipment through geofencing features that disable equipment and send alerts when equipment leaves its designated site. Cohealo saves health systems money by sharing equipment between facilities, increasing equipment
Equipment finance is in a position on the future of sustainability because of the focus on efficiency. availability, eliminating rentals and reducing capital expenses. Health systems typically purchase or finance surgical equipment that is dedicated to an operating room suite or floor. Often smaller hospitals or hospital groups delay the purchase of the latest
technology, such as a surgical robot, because it is simply too expensive (even if financed), for their capital budgets. One facility might request a laser while one lies idle at another. Cohealo’s solution tracks where equipment is, its utilization, and provides scheduling and logistics to support intra-health system sharing. Cohealo CEO Dr. Todd Rothenhaus noted, “We are helping clients including DHL in the U.K., Thomas Health Systems and Kaiser Permanente increase equipment utilization and drive significant cost savings.”
Subscription-based models There are many names for subscription based “as a service” models used for finance products across industries and equipment types. A couple of examples of offerings deemed equipment subscriptions are Sparkfund in the energy space and LiftForward in technology. Sparkfund offers energy subscriptions for a fixed monthly amount with a functional guarantee at predetermined power or service levels, covering systems such as lighting, heating/ventilation/air conditioning (HVAC), 10
CANADIAN EQUIPMENT FINANCE | Spring 2020 | canadianequipmentfinance.com
monitors and controls, electric vehicles and charging and energy storage. Its technology platform monitors equipment operations to reduce energy costs and carbon emissions. The company has over 500 installations and claims 469,204,503 total lbs. of CO2e (carbon dioxide equivalent) reduction and over $70 million in energy savings. LiftForward is working to reimagine ownership by offering technology subscriptions with partners such Intel and Microsoft. Surface All Access is a fixed monthly subscription including hardware and software service. After two years customers are refreshed with the newest technology. LiftForward actively supports circular economy equipment reuse. CEO Jeffrey Rogers explained that “after secure data wipes, returned devices are repurposed for use in under-served, techchallenged schools.”
Building momentum for solutions Equipment finance is in a unique position as we move to the future of sustainability because of our history of focusing on equipment efficiency. As user demand for sustainable solutions increases alongside the pace of technology, more solutions and scale are sure to come. The question will be how to both measure and improve the true impact these solutions have toward achieving international and Canadian sustainable finance goals. Patricia Voorhees is a director of The Alta Group in the strategy & competitive alignment and merger and acquisition advisory practices.
Industry Report
Yellow signs for U.S. investment .S. equipment and software investment is projected to expand by just 1.1 percent in 2020 while the country’s economic growth is expected to slow to 1.7 percent according to the 2020 Equipment Leasing & Finance U.S. Economic Outlook, published by the Equipment Leasing & Finance Foundation. After decelerating over the course of 2019, the U.S. economy is poised to soften further in 2020. Equipment and software investment is likely to post its weakest year of growth since 2016, the report said, weighed down by the first annualized contraction in over three years in Q3 2019. Several headwinds highlighted in the 2019 Economic Outlook began to stunt growth in the second half of 2019 and are expected to continue dragging on business confidence and investment in early 2020. Here are several key expectations from the 2020 Economic Outlook. Uneven growth. The U.S. economy saw uneven growth over the course of 2019 but ultimately decelerated from its 2018 pace. Consumers supported the economy throughout the year, buoyed by the strongest labour market in a generation and faster wage growth. However, political uncertainty, tariffs, and a slowdown in growth in several key trading partners have weighed on U.S. exports and business investment. These headwinds show few signs of abating, which should lead to another year of decelerating economic growth in 2020. Muted capital investment. Capital investment contracted for two consecutive quarters in 2019 and is expected to remain muted in early 2020, in large part due to the ongoing trade war with China and other slowing economies around the world. Despite weak or negative investment growth and faltering business confidence, credit market conditions remain broadly healthy. Financial stress, while up slightly, remains subdued by historical standards and credit supply, while
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slightly tighter, is still not cause for concern. However, demand for credit — especially by businesses — has weakened notably, which may portend a further slowdown in business investment in 2020. Federal Reserve rate cutting. After adopting a wait-and-see approach to monetary policy in the first half of 2019, the Federal Reserve cut its benchmark policy rate three times in the second half of the year in an effort to insulate the U.S. economy from the effects of trade headwinds, industrial sector weakness, and a global economic slowdown. Given the Fed’s demonstrated willingness to cut rates proactively in the face of economic weakness and the expectation of weaker macroeconomic fundamentals, the Outlook expects the Fed to cut the federal funds rate twice in 2020. The Foundation-Keybridge U.S. Equipment & Software Investment Momentum Monitor, which is included in the report, tracks 12 equipment and software investment verticals. In addition, the Momentum Monitor Sector Matrix provides a customized data visualization of current values of each of the 12 verticals based on recent momentum and historical strength. Several equipment verticals should expect their growth outlook to remain steady in the first half of 2020. Over the next three to six months: ◉◉ Agriculture machinery investment growth is likely to improve; ◉◉ Construction machinery investment growth should increase moderately; and ◉◉ Materials handling equipment investment may expand. All other industrial equipment investment growth should remain moderate. In other sectors: ◉◉ Medical equipment investment growth is expected to improve; ◉◉ Mining and oilfield machinery investment growth could improve modestly; ◉◉ Aircraft investment is likely to remain in negative territory;
◉◉ Ships and boats investment growth are expected to remain weak; ◉◉ Railroad equipment investment growth is likely to soften; ◉◉ Trucks investment growth is expected to weaken; ◉◉ Computers investment growth will likely remain weak; and ◉◉ Software investment growth should remain solid. The Foundation produces the Equipment Leasing & Finance U.S. Economic Outlook report in partnership with economic and public policy consulting firm Keybridge Research. The annual economic forecast provides a threeto-six-month outlook for industry investment with data, including a summary of investment trends in key equipment markets, credit market conditions, the U.S. macroeconomic outlook and key economic indicators. The report will be updated quarterly throughout 2020. “After robust growth in 2018, equipment and software investment slowed markedly throughout 2019 and contracted in the third quarter as the effects of unresolved trade tensions and a Scott Thacker, Foundation slowing global chair and CEO of Ivory Consulting Corporation. economy took hold,” said Scott Thacker, Foundation chair and CEO of Ivory Consulting Corporation. “However, a strong labour market and a still-confident U.S. consumer base should keep the broader economy above water, even as investment in several key equipment verticals slows or remains weak.”
canadianequipmentfinance.com | Spring 2020 | CANADIAN EQUIPMENT FINANCE
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your Business
Enabling modernized payments By Pamela Steer
s ew technology and payments innovation are transforming the way Canadian consumers and businesses make and process payments. According to data from Payments Canada’s annual Canadian Payments Methods and Trends Report, Canadian businesses are writing less cheques while expanding the range of electronic payment options they offer to their customers. To put this in perspective, in 2018 there were 277 million fewer cheque and paper items exchanged than in 2013, a decline of 29 percent, while electronic payment options, such as electronic funds transfers, increased by 21 percent. The juxtaposition in these trends does not come as a surprise. The report also indicates that businesses are actively looking to adopt new and innovative payment methods that are fast and easy to use, appealing to the “instant” and “always on” experiences that customers, including business customers, have come to expect.
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collections, limited predictability of cash inflows and outflows, difficulty tracking cross-border payments and continued reliance on manual processes and legacy technology.
Payments modernization in Canada Payments Canada — the organization that owns and operates Canada’s payment clearing and settlement infrastructure, including associated systems, bylaws, rules and standards — is leading a multi-year industry program to modernize Canada’s payment infrastructure. One of the objectives of this program, is to enable financial institutions and other payment service providers to offer new, secure and innovative products and services for businesses. Setting the groundwork for payments modernization was the release in 2016 of Payments Canada’s Vision for the Canadian Payments Ecosystem, which identified eight needs for a modern payments system. The Vision represented feedback gathered from a multitude of stakeholders, including
SWIFT is spearheading a global initiative to implement ISO 20022 for cross-border payments. Another significant reason why businesses are looking for alternate payment options is to support more efficient payments processing. A Payments Canada study, in partnership with Ernst & Young LLP, quantified that the lack of adequate payment processing capabilities is costing Canadian businesses upwards of $6.5 billion a year. This is due to factors including labour-intensive matching of customer payments to invoices, poor visibility into supply chain and 12
businesses, financial institutions, government, regulators, payments service providers and new entrants. One of the eight needs from the Vision was the introduction of ISO 20022. ISO 20022 is an international messaging standard or common global “language” that will allow structured data to flow with electronic payments and help businesses facilitate the move away from paper. This standard is fundamental to Canada’s new and improved systems, starting with the implementation of ISO
CANADIAN EQUIPMENT FINANCE | Spring 2020 | canadianequipmentfinance.com
20022 messaging for Canada’s new highvalue payments system, Lynx, which will replace Canada’s current Large Value Transfer System in 2021. The introduction of smarter payments — payments that are data-rich — will bring highly efficient options to Canadian businesses that will lower operational costs and boost bottom line returns over time. An example of an efficiency is the opportunity of straightthrough processing, a change that has the potential to improve automation and reconciliation efficiency, thus reducing many of the pain points in accounts payable and receivable.
Why now is the right time SWIFT, the global provider of secure financial messaging services, is spearheading a global initiative to implement ISO 20022 for cross-border payments. This means all financial institutions on the SWIFT network in Canada must be in a position to receive and process payments using the ISO 20022 messaging standard by November 2021. With this deadline approaching, now is the time for businesses to prepare to unlock the potential of the standard. A starting point for all businesses is to ask the question “what can ISO 20022 do for my business” and to connect with key partners on ISO 20022, including suppliers, vendors, contractors and financial institutions. A go-to for information is 20022Labs, a Canadian not-for-profit organization that aims to connect corporations and other ecosystem members to help accelerate the global adoption of ISO 20022. Ultimately, the transition to ISO 20022 is a strategic business decision that will support interoperability with global payment ecosystems, enable new opportunities for financial products and services and bring new levels of efficiency to the Canadian economy. Pamela Steer is chief financial officer of Payments Canada & Canada’s CFO of the year for 2019.
Your Business
Cybersecurity more important than ever By Yves Paquette
t a time when data breaches are the matter of the moment, our fourth annual NOVIPRO/Léger Portrait of IT Trends could not be more relevant. But while the data gathered in the study reveals a shift in some trends, the pace at which companies are changing their approach to cybersecurity clearly needs to gather speed. The most significant revelation is not a comforting one. For despite the current landscape, Canadian financial services companies don’t seem to feel the urgency to protect themselves and ensure the security of their data. The survey, a status report on IT in Canadian businesses, was conducted over a one-month period in the fall of 2019 and involved 496 respondents from medium and large Canadian companies, 300 of whom were IT decision-makers with the balance from other fields. The data gathered offered a strong picture of current attitudes towards cybersecurity, particularly in the banking sector, where breaches have repeatedly made headlines. With finance being a conservative, tightly regulated field with rigorously enforced standards, this may explain why the IT infrastructure of so many financial sector companies were described as merely functional. I’m referring here to statistics that show a laxness on the part of such companies. For example, only 25 percent of financial industry respondents described their company’s infrastructure as “state of the art.”
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Awareness not enough Overall, the survey shows that organizations have a better and better understanding of the risks associated with cybersecurity. But it’s not enough to be simply aware. There need to be concrete actions to defend oneself against all kinds of
attacks. And this responsibility doesn’t just concern IT teams; it needs to be a priority for all decision-makers. That said, even in the context of widely publicized leaks, not all companies in the financial services sector have made proactive changes. A full 38 percent maintained their existing practices. This wasn’t the worst of the lot; 39 percent of health care organizations kept the status quo. In contrast, agriculture businesses showed definitive prudence, with 60 percent having revised their cybersecurity practices. And that’s a good thing — and worth emulating by other especially financial businesses — because attacks are on the rise. More than one in three companies (37 percent) claimed they’d been victim to a cyberattack in the last year: a significant increase over the 28 percent cited in last year’s survey. But out of the 40 percent of companies in the financial services sector that were targeted, 57 percent confirmed that the threat came from inside the organization. Our director of technology solutions, Éric Cothenet, recommended that organizations bring in sound processes and methods of governance to make employees aware of IT threats. “Threats from inside an organization are very real,” he said. “Problems often occur unintentionally, with too few employees trained to identify risk.”
Companies making halting steps In 2018, nearly one in four companies (74 percent) trained their employees on cybersecurity in 2018 and more than half want to do so again next year. And although one in two companies did not review their practices after the news of high-profile breaches and data theft, almost all of them took at least one action to prevent further breaches. Despite these moves toward process improvement in cybersecurity, it was
disturbing to learn that companies are generally not all that transparent. Just over a third (38 percent) of respondents would notify their customers in the event of a cyberattack, whereas less than half (49 percent) would have done so in 2018. Organizations in Quebec (39 percent) and Ontario (40 percent) were the most likely to reach out to their customers. These low figures are worrisome. Particularly given that 61 percent of these organizations were holding critical and confidential customer data such as credit card numbers and Social Insurance Numbers. It’s certainly not all doom and gloom. In addition to the cybersecurity training that most companies are putting in place with employees, the perception of IT is changing. In 2016, it was considered a strategic partner by only 21 percent: a figure which rose dramatically to 41 percent in 2019. In 2016, 47 percent of respondents threw IT into the “investments” category: less so in 2019 with only 28 percent seeing it as such. Indeed, IT has become so much more strategic in the minds of many. An expert who commented on our report, Alina Dulipovici, who is associate professor of Information Technologies at HEC Montréal, said that companies need to quit thinking of information assets as a sunk cost. “It’s actually a strategic investment that helps achieve business objectives,” she said. “Not only that, companies would benefit from doing more to make their employees — and even their business partners — stronger links in the information asset protection chain by raising their awareness of security risks.” Fortunately for consumers, whose precious data is constantly hanging in the balance, indicators suggest that change is underway. Yves Paquette is co-founder and president, NOVIPRO.
canadianequipmentfinance.com | Spring 2020 | CANADIAN EQUIPMENT FINANCE
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Management Strategy
SMEs still optimistic about prospects By Don Curren
t’s a new year, but small-and medium-sized enterprises (SMEs) in North America continue to confront a world of uncertainty. SMEs are charting a course for 2020 with their vision being clouded by the specter of trade tensions with China, Brexit, the U.S. presidential election, the coronavirus outbreak, the potential for heightened conflict in the Middle East and supply chain disruption from unresolved issues with Indigenous peoples. Yet despite those headwinds, a strong majority of financial decision-makers at SMEs remain optimistic. In a first-of-itskind survey, Cambridge Global Payments found that 81 percent feel positive about the outlook for their business over the next six months. The survey, commissioned by Cambridge and conducted independently by Leger, polled more than 500 senior financial decision-makers at SMEs in Canada and the U.S. Despite their contribution to the economy, SMEs haven’t typically been included in foreign exchange sentiment surveys in the past.
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SME versus enterprise outlooks The optimism among SMEs contrasts with their larger peers, whose sentiment slumped toward the end of 2019 due to uncertainties about trade policies, among other factors. That may result from the fact that SMEs tend to be less directly exposed to trade policy uncertainty than large corporations, which often have supply chains and operations that stretch across many jurisdictions. It also suggests SMEs might be more sensitive to the mood of consumers, as consumer confidence surveys were generally 14
positive through 2019, although they have deteriorated recently. Financial decision makers at SMEs also diverge from larger institutions in their expectations for foreign exchange (FX) currency volatility. Slightly more than half of survey respondents expect volatility to increase, while the expectations implied by options-market positioning forecast relative calm in 2020. SMEs may be making a better forecast than option market players in this case, since periods of constrained volatility as seen recently in currency markets are usually followed by sharp increases in volatility. Nonetheless, a significant share of the SME sector isn’t positioned for such an increase and may not be adequately prepared for a return to more volatile conditions. While many respondents expect the U.S. dollar to strengthen on a tradeweighted basis over the next six months, the survey showed SMEs aren’t as positive on the British pound relative to forecasters at financial institutions surveyed by Bloomberg. This suggests SMEs are more worried about the impact of Brexit uncertainties on pound sterling than financial institutions. However, SMEs may be more optimistic on the pound following the election of a majority Conservative government in the U.K. late last year after the survey was done.
Trade issues and opportunities Brexit itself, as it moves forward, is likely to have a disruptive impact on SMEs that have a trading relationship with companies in the United Kingdom. However, Canadian SMEs have benefited from the CETA trade pact with the European Union, which has supported both exports to and imports
CANADIAN EQUIPMENT FINANCE | Spring 2020 | canadianequipmentfinance.com
from the customs union, and that trading relationship is likely to continue to expand without much disruption from Brexit. Meanwhile, the removal of the residual uncertainty surrounding CUSMA is undoubtedly positive, although the treaty is broadly similar to its predecessor and isn’t likely to have a substantial impact on trade flows in North America. Longerterm, the health of the three economies in CUSMA will likely be a bigger factor in trading volumes between them than the adjustments to the trade deal. Most respondents expect the Canadian dollar to remain stable against its U.S. counterpart over the next six months. SMEs should continue to take advantage of the integration of the North American economy and can use risk management strategies to help mitigate the risk stemming from adverse currency moves. With the election cycle ramping up, it is perhaps unsurprising that 61 percent of respondents believe President Donald Trump and political uncertainty in the U.S. will be the biggest cause of volatility in foreign exchange markets.
Canadian developments In Canada, the ruling Liberals will introduce their first federal budget since losing majority government status in October’s election, one of the many uncertainties in what’s bound to be a tumultuous year. The broad optimism among financial decision makers at SMEs is a good omen for the North American economy. But the mood could shift quickly considering the uncertainties for the issues discussed. With crosscurrents looming, it’s vital for SMEs to adopt a risk management strategy to weather any FX storm. Don Curren is strategist, Cambridge Global Payments.
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