Capgemini on Canadian payments trends

Capgemini on Canadian payment trends

By Brendan Read

Capgemini is a leading global consulting and technology services company, with expertise in digital transformation, including financial services. Each year the company publishes the World Payments Report (WPR), which covers global and regional non-cash payments trends, the key regulatory and industry initiatives (KRIIs) and payments environment changes. Payments Business recently interviewed Soumya Ghosh, who is head of banking, Canada, Capgemini, to get his insights on Canadian payments. Soumya Ghosh

Payments Business (PB). Canada has been embarking on payments modernization. How will this shape the payments landscape and how should industry participants (e.g. banks, credit unions, FinTechs, processors, merchants) prepare?

Soumya Ghosh (SG). The Canadian payments market continues to be influenced by domestic and international payments innovations, payment service providers (PSPs), payment systems modernization and by regulators’ efforts to reshape the payments industry for the future. In fact, the WPR 2019 data shows an increase of non-cash volume for Canada between 4-5 per cent, which is on the low end compared to other markets (double digit growth). Infrastructure renewal should be translated into customer-facing innovation (use of real-time payments for example), but this requires wider effort in the market by the participants

Industry participants should take a more holistic approach to fraud management and address concerns around identity verification, data privacy/data theft management and transaction monitoring. Additionally, the industry should focus to improve their payment offerings and provide a more engaging customer experience that requires reimagining and redesigning the payment journey, personalizing/tailoring to customer needs and rewarding payments.

“Increasingly, users are looking for speed and convenience.”

PB: What payment methods will heat up and which ones will cool down?

SG: Credit card transactions have actually grown by 10 per cent from 2016-17, driven by a growth of tap-and-go payments; in Canada, Visa is seeing 26 payWave transactions per second. Increasingly, users are looking for speed and convenience, which is being witnessed in the growing volumes of Interac e-Transfers, making more purchases online and in-app and leaving behind traditional forms of payment, like cash and cheques. Cheques and electronic funds transfer dominate the remote transaction environment, but credit cards and online transfers continue to have strong growth.

Card transactions contributed to about 80 per cent of total payments volume. However, the growth was driven by mobile payments, in-app purchases within game consoles and smart speakers: which are emerging as fast and convenient payment channels in Canada.

PB: Canada’s big banks appear to be using a “hold your enemies closer” approach to FinTech competition (big and small tech alike). But banks privately admit they are less swift footed there than their competition. Please comment on the effectiveness of the banks’ strategies.

SG: Canadian banks realize the need to transform themselves with changing demographic and technology requirements. The Canadian Bankers Association (CBA) stated that from 2012 to 2017, 298 bank branches have closed. Major banks are also undertaking digital transformation initiatives. Canada’s market adoption rate of FinTech stands at a pretty significant level; it is ahead of that in the U.S., France and Japan but still behind China and India.

Canadian banks have been very open to look at solutions that would help them differentiate from their competitors and help drive better client experiences. Their innovation strategies include inhouse development of new technologies, technology sourced from or developed in partnership with FinTech companies and banks as tech incubators in collaboration with the FinTech community.

PB: Credit unions play an important role in Canada’s financial landscape. Where do you see them going in the payments space?

SG: Credit unions have started to realize the need to transform. Several of them have made a strong digital push and have launched digital platforms. They realize the need; what is holding them back is the lack of capital. The Canadian credit union sector is working with partners to offer payment options that members want. Recently, they’ve expanded mobile payments with Interac Debit on Google Pay. With

more agility and being more open to using third party infrastructure, there is a lot of potential for the credit unions to move ahead.

PB: What actions do you see Canadian regulators taking and in which areas?

SG: Currently, an increasing number of standardizations focused on KRIIs are being introduced. While the earlier ones were aimed at ensuring a level playing field, those recently introduced facilitate a balance between regulatory supply and market demand.

The Canadian federal government’s 2019 budget supported payments innovation and changes to safeguard the funds and payments data. Most notably to the payments ecosystem is the government’s proposed functional, risk-based approach to retail payments oversight. This will, among other things, regulate nonbank payment services.

PB: Instant payments (IP) and open banking will reinforce each other, driving the need for back-office rationalization. Do you see this happening in Canada?

SG: I do see the global trend of request-to-pay service that is overlaid on financial processing systems, and which is already being seen in the U.K., happening in Canada. There is a convergence of payment methods and instruments can support existing instruments including credit transfers, direct debits, cards and cheques as IP-based offerings. Back-end infrastructure can be rationalized on IP rails to process transactions. This, in combination with open banking, will allow banks to explore new revenue streams and service offerings.

PB: What do expect Canada’s payments landscape to look like in 2025?

SG: Canadian retailers are responding at a faster pace and investing in digital platforms for meeting customer expectations and to ward off competition from the global eCommerce players. While cards are the most prominent method, digital wallets are witnessing increasing share. The implementation of an IP system will lead to instant settlement of low-value payments that is expected to promote innovation in overlay services.

Canadian banks are following the examples of Sweden or the Netherlands and the developments there as these countries also have the same concentrated banking sectors, based on which innovations can happen much more easily. In the future, with the ongoing payments infrastructure modernization initiatives, banks, merchants and non-bank players are enabling themselves for an open ecosystem of tomorrow.