Journal of Financial Market Infrastructures

Predicting payment migration in Canada

Anneke Kosse, Zhentong Lu and Gabriel Xerri

  • Canada is undertaking a large initiative to modernize the payment infrastructure, including the large value payment system and the batch retail payment system. This paper predicts how payments may migrate to the new systems in the modernized world.
  • Results show that financial institutions have a strong incentive to migrate a significant share of small-value, client-driven payments from the current large value transfer system to the new retail batch system for lower liquidity costs.
  • The new faster retail payment system is likely to attract a considerable amount of payments from both the large value payment system and batch retail payment system if not subject to value caps.
  • The results of this paper provide important insights on the potential incentives faced by both end-users and financial institutions when choosing between payment instruments and payment systems. The migration patterns predicted in this paper raise important policy questions, such as whether the future systems should be subject to value caps and/or higher collateral requirements.

Canada has two core payment systems for processing funds transfers between financial institutions: the Large Value Transfer System (LVTS) and the Automated Clearing Settlement System (ACSS). These will be replaced in the next few years by three new systems: Lynx, the Settlement Optimization Engine (SOE) and the Real-Time Rail (RTR). We employ historical LVTS and ACSS data and use the discrete choice demand estimation approach to uncover end users’ and financial institutions’ preferences when deciding which payment instruments and payment systems, respectively, to use. Based on the estimated preferences revealed, we conduct various counterfactual analyses to predict the volume and value shares of the future payment systems. The results show that small-value LVTS payments will likely migrate to the SOE. Also, in the short run, about CA$10 000 billion of LVTS and ACSS payments per year is anticipated to migrate to the RTR if not subject to maximum transaction values. These migration patterns raise important policy questions, such as whether the future systems should be subject to value caps and/or higher collateral requirements.

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