While differences exist between the U.S. and Canadian banking structures, Canada is working towards a globalized payment standard, making international payments easier to facilitate by means of aligning to the industry’s direction with payments as a whole.

With business and industry becoming increasingly globalized, it is imperative for companies to achieve synergies within their working groups. To accomplish this, Canada is steadily working towards improving payment rails, new standardized file formats and other payment technologies that will closely resemble what is currently found in the United States. As a result, U.S. companies doing business in Canada will soon have the functionality that they are accustomed to at home. Here are 10 tips to help smooth the way for U.S. companies considering expansion in Canada.

1. The Canadian Banking Structure

Canada has 36 domestic (Schedule I) banks, along with 18 subsidiaries, 28 full-service branches of foreign financial institutions (Schedule II and III), and four lending branches of foreign banks. There are also five cooperative credit associations that are federally regulated. In addition, 32 foreign banks have established branches in Canada. PNC Bank is one of these institutions.

Canada is a dual-currency country with clearing systems and payment services in both Canadian (CAD) and U.S. dollars (USD). The USD clearing systems are separate and unique from those in the U.S., such as the Fed, the Clearing House and U.S. banks.

Canada’s two main interbank payment clearing systems are the Large Value Transfer System (LVTS) and the Automated Clearing Settlement System (ACSS). LYNX, which supports Canadian wire payments, is scheduled to be updated by the end of 2021, which will allow greater flexibility to adapt to changes in payment initialization. An example of this would be the ISO 20022 payment file increasingly being utilized internationally and, as a result, domestically in Canada.

The LVTS is the country’s real-time settlement system, used for high-value and urgent electronic payments (wires). The ACSS is the country’s main retail payments clearing system. It is used to process bulk electronic payments (ACH) as well as CAD-denominated checks. Both are operated by Payments Canada (formerly the Canadian Payments Association).

2. Payments Canada Modernization Initiative

The payments ecosystem in Canada (and around the world) is rapidly changing: Consumers and businesses want faster payments and access to funds, enhanced security and privacy. Businesses want richer payment data and operating environments that promote efficiencies like end-to-end, straight-through processing. As a result, Canada is currently undergoing an expansive payments modernization project spearheaded by Payments Canada.

This modernization initiative will include a new core clearing and settlement system, which will replace both the ACSS and the LVTS. The many benefits for this project include real-time payments, the addition of enriched data for reporting electronic payments, as well as adoption of ISO 20022 data standards.

Payments modernization focuses on bringing leading-edge functionality to Canada and will place Canada into alignment with the United States and other global markets. A direct outcome of payments modernization will be faster processing of funds, more data travelling with payments, and increased funds availability. This Canadian investment into the payment rails will also increase the similarities to U.S. payment systems and technology.

Figure 1: U.S. Statistics of Instrument Usage and Value

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Figure 2: Canada Statistics of Instrument Usage and Value

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3. ACH Payments

Electronic Funds Transfer, Canada’s version of ACH, currently lacks data and transparency into addenda records when compared to the U.S. systems. Only a restricted amount of characters can be passed along with each payment in Canada. This can require additional time and costs for companies during the reconciliation process.

As part of the Payments Modernization Initiative, additional transaction detail will be available, similar to the U.S. market. In developing a stronger payments ecosystem, Canada has added an additional clearing window at 7 p.m. EST to accommodate payments taking place on the west coast of Canada. Previously, the latest clearing time for ACH payments was 5 p.m. EST.

ACH payments can be sent individually, as a bulk payment file with several ACH instructions, or as part of other payment times in a Mixed/Integrated Payables File. Canada has seen a movement from manual file uploads to direct connectivity between Enterprise Resource Planning (ERP) platforms and bank systems for sending payment instructions.

What’s Next for the Low-Value System

Payments Canada has also announced plans to develop a new batch payment system. The new system, called Settlement Optimization Engine (SOE), will replace the existing ACSS and USBE systems. The SOE project will be implemented in three phases. Phase I, which will involve the development of an “ACSS like” replacement, is scheduled for early 2021. Phases II and III will be implemented following the completion of Phase I, targeted within 2022. This project is part of Payments Canada’s multiyear strategy to upgrade the national payment system infrastructure.

4. Cheque Payments

The use of cheques has been in decline in Canada in favor of electronic payment instruments. However, cheques remain popular, especially with small companies and consumers.

TThere is no clearing float in Canada. Cheques clear overnight in a batch process through the same system that Canadian ACH clears through (ACSS); but what’s different is that they are backdated to the prior day’s date of deposit. And it’s also important to know that Canada accepts post-dated cheques.

Unlike the U.S., remote deposit and image cheque clearing are relatively new to the market. Yet according to Payments Canada, electronic imaging is on the rise and will shortly account for nearly half of all the cheques exchanged between financial institutions.

5. Lockbox Services

When conducting business in Canada, having accounts in-market and being able to initiate and receive local currency payments not only improves the clearing of funds but also reduces the foreign exchange risk that comes with cross-currency transactions.

Establishing a lockbox for processing large amounts of cheques may benefit your organization from a quantitative (float times as it relates to cost of funds, finality and interest earnings opportunity) as well as a qualitative perspective (improved information reporting with remittance information and time saved from a resource perspective).

Having a Canadian mailing address for payments has several advantages for U.S. companies. In instances where organizations don’t have resources available to process incoming cheques, it could be beneficial to outsource this work to an in-market Canadian lockbox, so you can direct your energies to core operations rather than to reconciliation.

Alternatively, a Remote Deposit Capture (RDC) device can be advantageous if you receive a limited number of cheques and prefer to leverage an in-house scanning device rather than establishing lockbox services.

6. Integrated Payables

An Integrated — or Mixed — Payables file optimizes a corporation’s payment protocol by automating the disbursement function with a single transmission of one consolidated payment file. Within this single, consolidated file, a company can send all of their payables in one place: cheques, ACH/EFT, wire and card payments.

By establishing connectivity from a company’s ERP system directly into the bank’s operating platform, you can optimize efficiency, enhance data integration, tighten process control and capitalize on a reduction in processing costs.

This type of payables setup has been popular in the U.S. for several years and is commonly used by large corporate companies streamlining payables across various payment types in the Canadian market. Certain providers are even able to accept a single payables file for payments that need to be made in both countries through the one consolidated file. It is important to talk to your banking provider about their ability to accept an integrated Payables file as your company strives to optimize the accounts payables process.

Figure 3: Integrated Payables Example Diagram

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7. Real Time Payments

Canada’s newest payment rail in nearly 40 years is RTP, a 24/7/365 system that will facilitate the delivery of low-value payments in a matter of seconds when it comes online in 2022. RTP will provide a faster alternative to less efficient payment options, support last-minute payments and provide certainty of receipt.

RTP is an extremely exciting payment introduction to the B2B payments, as companies will have the benefits of 24/7/365 payment processing capabilities prioritizing access of payments as well as finality. Additionally, enhanced data will be able to be transmitted with the payment unlike in previous payment options. An increased focus on faster real-time payments is taking place in Canada in line with other countries, such as the United States, England and Australia.[1]

8. Commercial Card Payments

Commercial Card technology and product enhancements have seen tremendous development within North America over the last decade. Card and virtual card payments have a direct benefit to corporations’ working capital metrics as well as internal controls. As the industry continues to evolve, virtual payments hold an increasingly important position within submitting and receiving payments. Establishing a single-card provider, in conjunction with other treasury services, can provide opportunities to review and upgrade supplier agreements and qualify for revenue sharing in the form of a rebate. As companies work towards optimizing their payables process, consider converting low-dollar invoices — historically paid by cheque — to now be paid by card.

The use of payment cards continues to increase in Canada, especially among retail consumers, and corporate cards are available through some banks. Visa, MasterCard and American Express are the main credit card associations in Canada. Interac is the main debit card system operating in Canada. Debit cards supporting both Visa and Interac networks are also available. Domestic transactions made via these cards are processed through the Interac system, with online and international transactions processed via the Visa network.

9. Know your Customer and Due Diligence in Canada

As corporations look to open accounts in Canada, they are required to complete Know Your Customer (KYC) and Due Diligence items. Companies are required to identify any individual who owns (directly or indirectly) 25% or more of the legal entity. Having an established relationship with a banking provider with a Schedule II or III banking license in Canada can reduce the time required to create an account in Canada. Given most of the information required to open an account in-market is likely captured, only additional items of validation may need to be requested. Partnering with a North American financial institution always helps when expanding outside the United States.

Although companies may have U.S. accounts open with their U.S. bank provider, Canadian accounts will still require their own in-market regulatory and compliance approval. Even when working with the same bank in both countries, a review of Canadian-specific regulations and sanctions is required. Every country has its own unique regulatory and compliance procedures that must be fulfilled.

10. USMCA—the New NAFTA?

The global pandemic has emphasized the uncertain financial market, thus contributing to firms increasing their attention on cash flow position to better prepare for the formidable future. Faster payments adoption has been a focus for years in Canada, and the nature of remote work has accelerated the need for such services with virtual payments and businesses. The implementation of new technology such as the Large Value Transaction System (LVTS) in Canada in 2021 and the push to improve and enhance payments with the business-to-business systems has become increasingly pertinent.

Payments Canada is successfully rolling out a multiyear modernization initiative, striving to achieve worldwide conformity. With the support of the Canadian banking industry and companies within country, Payments Canada is not only improving payment infrastructure but also the technology to remain globally competitive.

Payments Canada is working to build their own 24/7/365 system named the “Real-Time Rail,” which will leverage the ISO 20022 standards. For more details on this, refer to tip 7 above. API’s are also contributing to the innovation initiative. By providing the ability to pull data from relationship banking and technology providers automatically, companies can have information at their fingertips. As companies expand internationally, managing data can become a full-time responsibility. With the use of automated API’s, organizations can and will benefit from the seamless data integration that becomes available across business units and financial data.

Another key innovation that can help your company thrive in a digital world is a virtual commercial card program, which allows for initiation and control of payments on behalf of an organization. PNC offers this program through our service ActivePay®. Leveraging leading-edge technology that can be integrated within an ERP system, your company can pay suppliers while providing invoice information that can include important detail as well as the invoice itself. Combining the ability to automate bulk transactions or individual virtual card payments with the added security maximizes the advantages of these payments.

Banking in Canada

It’s important to take a fresh look at how you are operating in Canada. As Canada improves payments systems and introduces leading global technology, collaborating with a bank or strategic supplier who understands your business model and can work alongside your company as it grows will become vital to your business.

In the face of a constantly changing economic landscape, ensuring your treasury management provider and account structure are flexible and optimized for your needs is more important than ever. We recommend keeping up to date on developments that will affect your business and potentially influence the structure of your banking relationships and services in North America.

About PNC Bank Canada Branch

Established in Canada in 1998 and a Canadian commercial lending foreign bank branch since 2001, PNC Bank Canada Branch (“PNC Canada”) offers specialized knowledge and experience to help you succeed in this vital cross-border marketplace.

Ready to Help

If you are a U.S. company with actual or projected operations in Canada, or a Canadian company, PNC Canada can assist you with credit, depository, and treasury management products and services. If you are interested in exploring how PNC Canada might be able to assist with your Canadian operations, we encourage you to contact your Relationship Manager or visit pnc.com/canada.

Accessible Version of Charts

Figure 1: U.S. Statistics of Instrument Usage and Value

  Transactions (billion) % change 2019/2018 Traffic (value) (USD billion) % change 2019/2018
  2018 2019 2018 2019
Checks 14 13 -7.1 26,672 25,834 -3.1
Fedwire transfers 158 168 6.3 716,210 696,000 -2.8
CHIPS transfers 115 118 2.6 417,940 417,000 -0.2
ACH credits 12 13 8.3 40,873 44,292 8.4
ACH debits 17 18 5.9 23,285 25,586 9.9
Debit card payments 73 78 6.9 2,749 3,026 10.1
Credit card payments 41 44 7.3 3,644 3,964 8.8
Total 430 452 5.1 1,231,373 1,215,702 -1.3

Source: Bank of International Settlements - CPMI Red Book, January 2021

Figure 2: Canada Statistics of Instrument Usage and Value

  Transactions (million) % change 2019/2018 Traffic (value) (CAD billion) % change 2019/2018
  2018 2019 2018 2019
Checks 501 444 -11.4 2,858 2,706 -5.3
Debit Cards 6,042 6,249 3.4 251 255 1.6
Credit Cards 5,730 5,749 12.3 548 581 6.0
Low-value Credit Transfers 1,429 1,459 0.3 3,116 3,256 4.5
High-value Credit Transfers 9 10 11.1 45,629 47,660 4.5
Direct Debits 918 942 2.6 818 861 5.2
Total 14,629 14,853 1.5 53,220 55,319 3.9

Source: CMPI - Red Book statistical update, November 2020.

Figure 3: Integrated Payables Example Diagram

Automatic disbursement of payments via the consolidated payments file, made possible by your company’s ERP system connection to your banking provider. In the United States, your consolidated payment file would include check, ARP, ACH, Domestic Wire, International Wire and Card. In Canada, your consolidated payment file would include cheque, ARP, EFT, Domestic Wire, International Wire and Card.