How can Canadian banks prepare for the Real-Time Rail?

Though Canada is currently behind its peers, it now has an opportunity to learn from nations that are further along in their instant payments journey.

Kellie Johnson, SVP of Payments in the Americas at RedCompass Labs, explores the research into the EU and the US market to uncover opportunities, challenges, and use cases that Canadian banks should consider ahead of the RTR launch.

If the world is in a race to instant payments, India and Brazil are winning. UPI and Pix are revolutionizing how each country transacts, lubricating the cogs of commerce and ushering millions into mainstream economic life. 300 million people now use UPI monthly. 160 million use Pix.

The Western world, though different in many respects, is playing catch up. Canada’s instant payments scheme – the Real-Time Rail (RTR) – will be finalized later this year. Testing will take place through 2025 followed by industry testing in 2026. The RTR is expected to go live shortly after.

Considering 90% of the world’s markets (measured by GDP) are already covered by instant payment schemes, 2026 might seem like a way off. But Canadian banks have much to consider in the next 18 months: legacy systems, competing card revenues, finding the business cases that work, and fraud, to name a few. Fortunately, Canada can draw valuable insights from other Western markets.

Earlier this year, RedCompass Labs published the results of two market surveys in the EU and US. We asked bankers in each country how they are tackling the need to participate in and offer instant payments. Despite modernizing for different reasons, at a different pace, on different sides of the world, common themes emerged. For example, the demand EU and US banks are experiencing from their clients is similar, as are the challenges they face and the benefits they see for their corporate customers. Some banks have underestimated certain aspects, while others have entirely overlooked critical areas (such as fraud prevention).

The results hammer home a simple fact: getting ready for instant payments isn’t easy. But Canada is in a good position to learn from these markets and hit the ground running for the RTR.

So, what are the key takeaways for Canadian banks?

There is big demand for instant payments, but the challenges are bigger still

Both the EU and the US are seeing huge demand for instant payments. Nine in ten (89%) European bankers say there is growing demand for instant payment products and services from their customers. In the US, nearly every (99%) banker surveyed said they feel some level of demand from their customers. Two-thirds (66%) of US corporate bankers feel overwhelming or significant demand from their corporate clients, while just over half (52%) of retail bankers feel the same from their retail customers. That’s despite less than a third of US banks having the ability to offer instant payments to their corporate clients via RTP or FedNow.

Yet to deal with the increase in volume and speed of transactions instant payments require, most banks will need to modernize their current infrastructure in some way. This goes beyond core payment systems to client channels, core banking, fraud, and middleware. But updating these systems is no small feat.

In the past, we talked about hundreds of transactions per second for bank-to-bank systems. Now, it could be multiples of thousands per second. For an instant payment system to be reliable, banks also need to cover downtime and system outages while recording and synchronizing data accurately, in real-time, across various channels. The systems need to be scalable, interoperable, and secure.

Both EU and US banks are understandably concerned about what this means in practice. Processing more volumes and scaling throughput, updating legacy infrastructure, 24/7 availability, and fraud (including introducing a confirmation of payee service in the EU) are among bankers’ top concerns.

In the EU, the SEPA Instant Regulation has an added complexity. PSPs need to offer instant payments across all payment initiation channels. This covers mobile and online channels, where many banks can introduce instant payments today. But it also includes banking kiosks, file-based payments, API channels (PISP), paper channels, fax, emails, telephones, and face-to-face interactions. The enormity of this project cannot be overstated.

Banks underestimate instant payment volumes

In Europe, banks appear to be underestimating the processing capacity needed to implement instant payments. We found that only 5% of EU banks expect to process over 1,000 transactions per second by the end of 2025. But payments aren’t always spread throughout the day. Some bulk payment files initiated by corporates, such as payroll providers and pension funds, can contain hundreds of thousands of payments that will need to be processed immediately. Banks that receive bulk instant payment files must prepare for a potentially higher number of payments per second to ensure they can meet peak demand.

In Canada, there were more than one billion e-transfer transactions in 2022. Online transfers (which include the existing Interac e-Transfers) have grown 328% in the past 5 years, according to Payments Canada’s Canadian Payment Methods and Trends Report 2023. These will move to the RTR when it goes live and unlike many other countries that have seen a gradual ramp-up (the US included), Canada will have ubiquity from day one. (The incumbent solution has been available in the market for several years.)

What’s more, Canadian banks must consider a possible migration of transactions from other rails. Approximately 45% of Lynx transactions are CAD $10,000 or less – a natural fit for the RTR. Meanwhile, uses like Earned Wage Access which are gaining momentum globally will naturally migrate from systems like ACSS.

Forecasting for the future will be key, all while preparing for the peaks and the fraud that may follow.

Earned Wage Access (EWA) schemes can help banks build a business case

Earned Wage Access (EWA) schemes are taking off around the world. Walmart, for example, is enabling instant access to pay daily pay for its US workers via an EWA scheme. For those on low incomes with rent due before their paycheck, or those who need to foot the bill for an emergency or unexpected cost, instant access to wages can be a lifeline.

Corporates are using schemes like these to attract and retain staff while managing their cash flow. Banks can use instant payments to attract and retain corporate clients. That means banks have a key input into a business case to implement instant payment solutions.

EWA is not just good for workers, employers and banks; it’s good for the economy. The increased payment velocity helps the markets to move, and businesses grow.

Fraud solutions are essential for every bank

Instant payments are immediate and irrevocable, which makes them useful tools for scammers. Every major market (and other non-major markets) that has introduced an instant payment scheme has seen a spike in authorized push payment fraud.

In the UK and Europe, the industry is fighting back with Confirmation of Payee (CoP) (also known as Verification of Payee (VoP)). This service verifies the name and account against the details held by the recipient’s bank. If there’s a difference in the payee’s name, for example, the payer is notified before the funds are transferred. The payer can then decide if they’d like to continue, amend the payee’s information, or cancel the transaction.

CoP has proven to be a powerful tool. Dutch banks saw an 81% reduction in fraud after introducing SurePay, a fraud solution, in 2017. Yet, according to SurePay CEO David Jan Jansen, this only solved the problem for participating banks. Scammers began avoiding banks that offered CoP and migrated to those that did not offer the service in neighboring countries. Cross-border invoice fraud shot up. The moral of the story: every bank needs a CoP solution in place for it to be truly effective

The EU is aiming for ubiquity by mandating that all banks performing euro credit transfers offer a VoP service.  But implementing such a scheme will not be easy. It was one of the top concerns amongst our EU respondents.

While Canada has yet to decide if a CoP solution will be mandatory, it is quickly becoming table stakes in the fight against payment fraud globally. Payments Canada did announce a centralized fraud utility service would be included as part of their commitment to provide a safe and secure foundation for Canada. Canadian banks should, therefore, follow how the European banks tackle the implementation of VoP services. The EU will update its VoP Rulebook in the coming months to find a standardized way for banks to communicate. There may well be lessons to learn here too.

Interestingly, fraud featured last in the list of concerns for US banks in our survey. The results suggest banks are either confident they already can tackle fraud or so overwhelmed by other challenges (such as updating their core systems) that fraud is taking a back seat.

I’m a Canadian FI, how can I get ready for the Real-Time Rail?

Plan early. Start now.

The EU has over 5,000 banks. The US has 4,500+. Canada’s market is highly concentrated with a much smaller number of financial institutions. Some banks will need big capacity to process instant payments from their corporate clients. How much of the traditional bulk payroll payments will migrate when some of the largest retailers and tech companies (like Uber) move payroll to RTR? Financial institutions must plan for more than their current e-transfer volume when preparing for the RTR.

Meeting the needs of corporate clients will be a key factor in implementing a successful instant payments program. That means anticipating and offering value-added services before they are demanded, getting ready for peak volumes, while continuing to combat fraud.

With industry testing planned for 2026, banks need to be ready in 2025. Ask yourself: How can I leverage core payments infrastructure for RTR in a 24/7 world with SLAs to meet and no downtime? How are system patches, upgrades, and maintenance going to be managed? What about bulk payments?

At RedCompass Labs, we’ve helped some of the biggest banks on the planet embrace the future of payments. Our unique blend of payment expertise and technology can support your FI from design to implementation to go-live. Our team is here to help you get to market faster, cheaper and more securely. If you’d like to talk about your plans for instant payments, ISO 20022, or anything in between, get in touch today.