Predicting Payment Migration in Canada

Canada currently has two core payment systems to process funds transfers between financial institutions: the Large Value Transfer System (LVTS) and the Automated Clearing Settlement System (ACSS). These systems will be replaced over the next few years by three new systems: Lynx, the Settlement Optimization Engine (SOE) and Real-Time Rail (RTR). The migration of current payments into the new systems might introduce payment system risks—such as end-of-day credit exposures or fraud.

To better understand and address these risks, we use historical LVTS and ACSS data and a discrete choice approach to estimate demand for payment instruments and systems. We uncover the preferences of end-users and financial institutions in their respective decisions on which payment instruments and systems to use. Based on this, we conduct counterfactual simulations to predict the demand for the future systems.

Overall, our results suggest that, without additional regulatory restrictions:

• Lynx will inherit at least 50 percent of the large-value, inter-bank payments currently processed in LVTS
• SOE will attract almost 50 percent of the small-value, client-driven LVTS payments
• RTR and RTR-based payment instruments will take on a non-negligible fraction of payments, both from ACSS (around 6 percent) and from LVTS (almost 20 percent)

These migration patterns raise important policy questions, such as whether the future systems should be subject to value caps and/or higher collateral requirements.