Canada's small businesses pin hopes on real-time payments

Most real-time payment use cases focus on digital commerce or back-office needs. In Canada, there's also a growing desire to support faster payments for local businesses.

This demand stems from the "shop local" trend that grew during the pandemic, according to research from Interac, the Canadian debit network, which is developing a real-time rail with Payments Canada, the Ottawa-based organization that oversees the nation's payment system. The target date for launch is late 2022.

"Small businesses need instant payments that integrate with all aspects of running a business. And these things are fragmented right now," said Janet Lalonde, senior director of modernization for the real-time rail at Payments Canada.

Interac's research found increased consumer demand for digital payments online, in-app or in-store, which is not revealing in and of itself. But what it did find was Canadians want to support local businesses, enough to pay more to shop at local retailers over major online merchants.

Referring to the trend as "feel good" shopping, the research describes an emotional bond to community that was forged during the pandemic, and it's particularly prevalent among younger shoppers.

Thirty-one percent of Canadians are willing to pay $10 more for a product, if necessary, to support a local business instead of ordering from a large e-commerce firm. And 75% of Canadians say the pandemic has made shopping and supporting businesses in their community more important. More than half say a desire to support local business has led them to shift spending by shopping closer to home.

Like similar projects in other countries, such as the Federal Reserve's in-development FedNow and The Clearing House's active RTP network in the U.S., Canada's Real-Time Rail (RTR) is an innovation designed to enable a wide range of use cases.

In the example of business payments, real-time processing can contribute to supply chain finance by processing business-to-business payments faster, allowing small merchants with less inventory flexibility than large chains to match their products and staffing to demand.

Small-business liquidity has been one of the challenges of the pandemic, given the sudden shifts in the economy.

Transaction speed and accuracy will need adjustment as retailers add mobile shopping, ordering and payments; employers add digital payroll, gig workers and early wage access; and businesses streamline supply chains to improve liquidity, Lalonde said.

"There are many use cases for lightning-fast movement of money that can be deposited in seconds," Lalonde said.

The real-time rail will increase trust in the system, since each function will require funding, making each payment final and irrevocable, Lalonde said. "That will take away some of the risk with unfamiliar customers and buyers," she said, adding Canada's real-time rail will use the ISO 20022 messaging standard.

The ISO 20022 standard is designed to improve visibility for digital transactions, and is considered a key part of blockchain, open banking and real-time payments, drawing support from the U.S. FedNow project, among others. The standards allow digital payments to carry information in consistent data fields to promote transparency for banks and a similar experience for different parties in a transaction.

There are challenges for the Candian real-time payment project, most notably how nonbanks will access the system. The laws governing the RTR project in Canada do not allow fintechs to directly access the system, causing a push from a lobby group called Paytechs of Canada to change the law, noting other countries such as the U.K. saw a growth in innovation after fintechs were allowed to access the faster payment scheme. Paytechs of Canada did not return a request for comment.

Canada's 2021 federal budget includes the Retail Payments Oversight Framework, which is designed to consider how nonbanks can access the country's payment system for purposes such as faster processing. That reform includes the Retail Payments Activities Act, which is meant to expand access to a broader range of companies, making all providers subject to similar oversight.

The push to support faster business payments in Canada is already attracting technology developers.

The fintech Veem just launched Veem Local Canada, which charges fees only for cross-border payments. The San Francisco company offers electronic funds transfer, invoice capture and tiered approval flow.

"There are still different segments to handle different parts of business payments, such as accounts receivable and accounts payable. That's creating fragments for businesses … and subscription fees for AR," said Marwan Forzley, Veem's CEO. Much of the country's real-time payment innovation projects, and the Interac digital rail, are more geared to consumer use, he said.

Veem offers real-time payments, and instant deposit where payments are deposited to the bank account linked to the customer's debit card. Instant deposit on cards is available in the U.S. and is being extended to Canada.

As real-time capabilities are developed in Canada, Veem plans to take advantage of these systems to strengthen the experience for the customer, Forzley said. "The more real-time payments we can leverage, the more the experience is delightful to the user," he said.

In an earlier interview, Debbie Gamble, chief officer of Innovation Labs and New Ventures at Interac, said the trend of consumers adopting digital payments earlier than other nations has contributed to business adoption by extension. "In Canada, small to medium businesses are a huge part of our economy," Gamble said during that interview, adding that fast transfers from account-to-account via mobile have expanded from consumers to a focus on business payments.

Interac has also partnered with banks in an attempt to streamline business payments. The debit rail partnered with BMO in late 2020 to power multiple SMS requests for business payments to different suppliers at the same time. This effort is designed to give businesses more control over supply chain transactions while improving visibility in cash positions.