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What You Need to Know About Payment Rails in Canada and How to Use Them to Gain a Competitive Advantage

Understanding how payments are sent and received is essential to many business market segments in Canada. Processing payments quickly and efficiently can give a business a competitive advantage – or be a source of extra administration expense and time delay limiting your scalability and growth.

By Marc Milewski // @MarctMilewski // January 17, 2021

Payments are the foundation of our economy. Goods and services, cannot move without money flowing from one account to another.

Payments are the foundation of our economy. Goods and services, cannot move without money flowing from one account to another.

Understanding how payments are sent and received is essential to many business market segments in Canada. Processing payments quickly and efficiently can give a business a competitive advantage – or be a source of extra administration expense and time delay limiting your scalability and growth.

While digital payments have been around for decades, fintechs are helping drive the next generation of digital payment solutions.

There are four main payment types available to businesses in Canada that we will cover in this article:

  • EFT (transfer from bank account)
  • Credit Card
  • Interac e-Transfers
  • Visa Direct

Let’s look more closely at each payment type – how it works, the pros and cons, and how best to utilize it to your advantage.

EFT - Electronic Funds Transfer

EFT, or Electronic Funds Transfer, is the grand-daddy of payments. It’s the primary system that banks have developed to transfer funds from one account to another.

It is a file-based process in which each financial institution compiles a data file according to an agreed-to protocol specifying the required fund transfers. This file is sent to other financial institutions, typically daily. Banks only accept files from their business customers up to a specific time each day. They need to compile all the fund transfer requests into one of three daily files sent to each of the other banks. If transactions occur after these cut-off points, they don’t get sent until the next file run. If you miss a file run on a Friday, it could mean that the wheels don't get put in motion until the following Monday.

This foundational fund transfer method is reliable and inexpensive on a per transaction basis.

However, it is slow. Payments can often take hours or days (if on holidays or weekends) to appear in accounts due to the transferring and processing files in batches. Not to mention, the level of technical understanding to automate this process is rather large, and rather antiquated as a skill set.

These delays can cause a variety of operational problems. The EFT protocol only reports back on a transfer request if the account debited has failed due to various reasons (NSF, stop payment, wrong info); if fund transfers are successful, they just show up in the recipient’s account.

NSFs raise operational challenges because they usually must be managed and resolved through manual interaction with a customer, for instance, whose payment didn’t happen due to the lack of funds. Similarly, Pre-Authorized Debit (PAD) agreements are required for automatic or recurring payments.

Still, it’s not uncommon for customers to challenge PAD agreements they’ve previously agreed to. When this happens, funds may be transferred but are subject to clawback by the financial institution for up to 90 days.

Finally, making file transfer work and integrating it into most businesses’ financial operations and accounting software is a considerable undertaking that requires an experienced payments developer. Banks have varying degrees of file transfer protocols which pose a significant barrier to just get started, let alone to manage the day to day activity.

Takeaway: EFT is a reliable and inexpensive payment method, but not particularly fast or efficient.

Credit Cards

Credit cards run on an independent network operated mainly by the two leading card associations, Visa and Mastercard. These networks have the advantage of being ubiquitous and virtually universal in their distribution around the world.

It is convenient and easy to make credit card payments in the online world – all you need is a few pieces of information to complete a transaction. No PAD agreement is required to pay with a credit card.

Credit cards offer instant payments. Settlement may take additional time, though it's consistently faster than EFT payments and settlement.

Handling credit card data typically has a higher threshold of compliance than other banking information. When a company wants to store credit card data, they need to be PCI-compliant, which requires a greater level of security and technical expertise to meet. This comes at a significant cost to maintain holistically and is usually pushed off to the gateway of choice of the merchant. However, credit cards have some limitations, as well. They are good at what they do, but they’re not particularly nimble. For instance, credit cards are rather rigid in the way the settlement from a merchant account works, thus preventing optimal flows in emerging market place applications.

Credit card payments flow only one way, from purchasers to sellers, though refunded payments can be credited back on the cards. Charges can be disputed for up to six months, which can involve funds clawed back. This process is rather painful and can be abused with online purchases.

Not surprisingly, credit card fees are considerably more expensive for merchants than EFTs due to many factors. This includes the many parties involved in making transactions work across the network as well as covering the spread on the various rewards a purchaser gets from the card company. Thes variable fees are called “interchange” which can range from 1-3%, and are subject to change.

Takeaway: Credit cards offer a virtually instant and universally accepted payment method, which comes with a higher cost and much longer customer dispute window

Visa Direct

Visa Direct is a payment method enabling near real-time fund transfers domestically and internationally. Visa Direct enables person-to-person (P2P), business-to-consumer (B2C) and business-to-business (B2B) payments. The platform facilitates fast debit or prepaid card payments on the Visa network, with the funds reaching the recipient’s account within 30 minutes or less.

Visa Debit is like a credit card that can be used online, but it’s tied to your bank account. You may notice that your Interac debit card is also branded as a Visa Debit. These cards provide access to a whole separate network that allows for instant payments between bank accounts. The fees are lower than credit cards, usually a fixed fee plus a variable amount. If the speed of transfer is the primary consideration, Visa Direct is the choice.

The drawback is that Visa Direct is not universal – only 90% of the Canadian Market has access to these rails, since BMO and National Bank use MasterCard Debit cards. In the future when the MasterCard Direct rails are live in Canada it will be an option to cover this market.

As for cost, there is a variable element to this like that of traditional credit card processing, however it is a lot less than traditional merchant service processing. Interchange is a floating fixed fee with a 5 BPS variable. When sending funds via Visa Direct, the cost is capped and is comparable to that of Interac.

The real benefit of this platform is the ability to tokenize and store users data to automate the push and pull funds without any user interaction. It is truely instant, and allows for frictionless payments.

Gain a Competitive Advantage

At Zūm Rails, our mission is to bring these payment types together into a single platform so our customers can benefit from this renaissance in payments technology and accelerate their growth and success. The market verticals in which payments efficiency is critical include online lending, insurance, real estate, and software-as-a-service (SaaS) businesses. The exciting thing about payments is that new industries and verticals are finding use cases in which payments can be automated to improve operations. At the end of the day, with these improvements on the legacy EFT rails, every industry and business has a path to improve client financial interactions for the better.

For instance, in the online lending space, near-instant payments can be a substantial competitive advantage. Onboarding customers more quickly using digital PAD agreements and data aggregation tools can also expedite the loan underwriting process. Even in-person lending situations, such as auto or equipment leasing, data aggregation coupled with mobile-friendly digital PAD agreements can enable deals to close faster by empowering the customer to sign on the dotted line right then and there.

In property and casualty insurance, traditional printed PAD agreements and void cheques can be replaced with digital PAD agreements and point-of-sale premium payments.

In multi-tenant residential real estate, data aggregation coupled with digital PAD agreements and monthly recurring EFT payments can eliminate manual cheque collection and processing and expedite tenant credit checks.

Fast, automated customer onboarding and inbound/outbound fund flow can make or break a SaaS business, especially with B2B2C business models. If collecting payments from a customer’s customer, deducting fees, and remitting to your customer, the faster the payments flow, the better. End customers can pay with credit cards, while Visa Direct can transfer those payments, less the fees to your business customer.

Businesses that implement faster and more convenient payment methods while streamlining the efficiency of payments management and the speed with which funds flow – will gain a tangible competitive advantage. After all, time is money.