Bank Of Canada

Planning an Evolution:The Story of the Canadian Payments Association,1980–2002James F. DingleBank of CanadaA Joint Publication of the Bank of Canadaand the Canadian Payments Association

The Canadian Payments Association was established by an Act ofParliament in 1980 as a regulated public-purpose organization, with amandate to “establish and operate a national clearings and settlement systemand to plan the evolution of the national payments system.”

ContentsAcknowledgementsixIntroductionxi1 Anticipating the Electronic Era1The Seminal Statement1The Computer/Communications Revolution2Branching Out2Towards an Electronic Payments System3The Canadian Payments System Standards Group3The White Paper on the Revision of Banking Legislation52 The Act of Creation7The Key Idea7Objectives and Powers7Governance: The Board of Directors3 Integration of the Non-Bank Financial Institutions1113The NBFIs in the Cheque-Based Payments System13Acceptability of NBFI Items to the General Public13Acceptability of NBFI Items Presented on Deposit14Acceptability of the NBFIs to the Clearing Agents15Integration of the NBFIs—in Human Terms16

viContents4 Automation of the Clearings19The State of the Clearing Process in the Early 1980s19Design Objectives of the ACSS20Project-Management Challenges Posed by the ACSS21The Technology Used for the ACSS22The ACSS in Production225 The Bank Failures of September 198525Background25Main Events26Immediate Aftermath29Longer-Term Impact306 The Emergence of EFT/POS31The Global Context31Initial Discussions in Canada32Shared Cash Withdrawals—The Dress Rehearsal32The Framework for the Evolution of the Payments System34The Long Road to Consensus35The Canadian Love Affair with EFT/POS367 Building the LVTS39The Magnitude of the Task39Convincing the Banks40Gaining Regulatory Approval41The Construction Phase43Adjusting the Daily Implementation of Monetary Policy44The LVTS in the Domestic Context45The LVTS in the Global Context47

Contents8 Looking Ahead: The Canadian Payments Actvii49Five Years of Significant Legislative Change49The Canadian Payments Act49Observed Trends at the Start of the Millennium52Appendix: CPA Directors and Alternate Directors55Subject Index59

AcknowledgementsI wish to thank Chuck Freedman of the Bank of Canada, Deputy Governorand a long-standing colleague, for commissioning this work and for readingeach section as it emerged. Serge Vachon, who was Chairman of the Boardof the Canadian Payments Association (CPA) from its inception in 1980until just before his retirement in 2001, also read the complete manuscript.Wm. C. Hood, Bill Kennett, and Bob MacIntosh helped me recapturethe thoughts of the 1960s and 1970s regarding the need (or otherwise) for anarrangement such as the Canadian Payments Association.Frank MacDonald and Hirsh Tadman commented on the early years ofthe Association and on the way the non-bank deposit-taking institutionswere brought into the national clearing system, which had been operatedsince 1900 by the Canadian Bankers Association.Two technically oriented individuals directly involved with thedevelopment of the Automated Clearing Settlement System, LarryMoncrieff and Marc Parent, read and improved the material on the firstsignificant automation project of the CPA.John Roberts and Al Lamb, both of whom were caught in the tanglescreated by the defaults of the two western Canadian banks in 1985, refinedthe text on that complex topic.Three people who lived through the lengthy negotiations necessary forthe emergence of electronic funds transfer services at the point of sale inCanada, namely Jack Speake, Jane Hamilton, and Ken Morrison, helped merecall all the forces at play and the many steps that ultimately provednecessary.The building of Canada’s large-value transfer system (LVTS), waslargely directed by Don Marcotte and Fredda Cole, LVTS project owner andproject manager, respectively. They helped me handle the intricacies of that10-year endeavour.Bob Hammond and Penny-Lynn McPherson, who were CPA GeneralManager and Legal Counsel, respectively, during much of the 1990s, readthe chapter on the legislative changes at the turn of the millennium and

xAcknowledgementshelped me assess what appeared to be the significant trends for theAssociation at that time.In preparing the document, I greatly appreciated the skill and good willof the editors and translators of the Bank of Canada: Jill Moxley and LeaAnne Solomonian; Eddy Cavé, Denyse Simard-Ebert and Lyse Brousseau.

IntroductionIn simple societies, money itself—whatever its physical form—provided themedium of exchange in economic transactions. More recently, paymentssystems have evolved to provide the medium of exchange, facilitating thenumerous transfers of money—now largely recorded as deposit liabilities offinancial institutions—from payors to payees. In Canada, as generally in theworld, the decades of the 1980s and 1990s saw the medium of exchangemove away from paper and increasingly towards electronic form. This wastrue both for individual consumers, who began using payment cards to makepurchases at retail stores, and for corporate treasurers, who increasingly paidfor manufacturing inputs or financial investments by using a direct computerlink to their financial institutions.Such evolution in Canada and elsewhere can be viewed as the latestphase in the long and diverse history of money.1 What makes this twodecade Canadian story noteworthy is that, for the first time, a nationalgovernment established a planning mechanism in order to reconcile in oneentity—the Canadian Payments Association (CPA)—the views of thenumerous parties involved in consciously changing a national paymentssystem.This account is organized chronologically. Chapter 1 addresses theways in which Canadians in the 1970s anticipated the electronic era—inparticular, foreseeing some sort of payment card. Chapter 2 presents thedetails of the 1980 federal law that created the CPA, emphasizing theplanning mandate of the Association. Chapter 3 deals with a key theme forthe early years of the CPA; namely, how non-bank, deposit-takinginstitutions would fit into the existing clearing arrangements for cheques andthe forthcoming electronic payment items. Chapter 4 describes the firstmajor information technology application of the CPA—namely, theAutomated Clearing Settlement System. Chapter 5 presents the cautionarytale of the default of two small western Canadian banks in 1985, events that1. See J.K. Galbraith, Money: Whence It Came, Where It Went (Boston: Houghton MifflinCompany, 1975).

xiiIntroductionrevealed the noticeable level of systemic risk in the national arrangementsfor the clearing and settlement of payments and the need for a radicallydifferent method for handling large-value funds transfers. Chapter 6 coversthe appearance of card-initiated electronic payments at the point of sale inCanadian retail establishments. The theme of minimizing risk returns inChapter 7, which describes the building of Canada’s large-value transfersystem, the LVTS. The final chapter summarizes the contents of the 2001Canadian Payments Act, which refocused—and articulated more fully—theplanning mandate of the CPA for use during the expected developments ofthe decade to come.

1Anticipating the Electronic EraThe Seminal StatementThe earliest statement containing the idea of an association of all theinstitutions that provide payments services to Canadians appeared as one ofthe recommendations of the 1964 Royal Commission on Banking andFinance, commonly known as the Porter Commission. The recommendationwas worded as follows: “The clauses of the Canadian Bankers’ AssociationAct which give the Association the right of operating the clearing systemshould be repealed, and an association of all clearing institutions formed tomanage the system and allocate costs equitably among all members inrelation to the work done by each.”1 All types of clearing institutions could,via their membership in the proposed association, settle their clearingobligations at the central bank, rather than being required to makearrangements to do so with one of the chartered banks.The Commission felt that it was inequitable for the banks alone to runthe payment clearing system, which other types of financial institution hadto use in order to provide transferable deposits to the public. Moreover,existing clearing arrangements were probably not as efficient as possible noras conducive to full and free competition among all the providers of fundstransfer services.2These views of the Porter Commission and its staff were to inform thedevelopments of the subsequent decade. Their perception of inequitable andinadequate competition would be joined a few years later by a further idea,namely, the need to address these shortcomings in a radically differentcontext—the electronic era.1. Canada, Report of the Royal Commission on Banking and Finance (Ottawa: Queen’sPrinter, 1964), 393.2. Communication between the author and Wm. C. Hood, Director of Research of theCommission, 25 June 2001.

2Chapter 1The Computer/Communications RevolutionIt is a challenge today to recapture the degree to which the financial world ofthe 1970s, indeed the entire society of that time, was awakening to theastonishing power of the combined technologies of computers andcommunications devices. The titles of two widely read and influential booksof the period are suggestive: The Coming of the Post-Industrial Age, byAmerican sociologist Daniel Bell was published in 1975, and a reportentitled L’informatisation de la société, by publisher and intellectual SimonNora, appeared in 1978 in response to a request from the President ofFrance. It is also noteworthy that, during this decade, the Canadiangovernment felt it appropriate to have a Department of Communications, aministry that worked jointly with the Department of Finance on severalmajor policy papers shaping financial sector legislation.Branching OutThis was the title of the 1972 report of the Canadian Computer/Communications Task Force, a semi-autonomous, multisectoral bodyestablished within the Department of Communications to recommendpolicies and institutions that would ensure the orderly and efficient growthof combined computer/communications systems in the public interest.Volume II of the report included detailed examinations of three fields ofbroad social significance, namely, education, health care, and banking. Thefollowing excerpt from the section on banking makes for interesting readingin hindsight:“Notwithstanding their rivalry, the banks find it essential toco-operate on certain rules and arrangements in order toprovide a flexible, workable payments system. Because oftheir mutual dependence, they have some reciprocalarrangements, such as lending equipment or services in caseof emergency. Through the Canadian Bankers Association,the banks have standardized much of their interchange ofinformation. More co-operative efforts are almost certain toevolve in situations where there is recognizable mutualadvantage. However, such changes must occur at their naturalpace to gain acceptance and to undergo the developmentnecessary for the emergence of a smoothly running system.