Cash Management in Canada: Readers' Questions Answered
Royal Bank of Canada (RBC): Canadian banks are deposit taking and lending institutions that serve the needs of consumer, business and corporate clients. Most of the major banks also offer cash management, treasury, corporate finance, trade, leasing, securities, trust, global custody, discount brokerage and foreign exchange services.
The major financial institutions provide nationwide banking through their branches. Typically, all deposits receive same-day availability: a cheque drawn on an account in one part of the country can be cashed in virtually any part of the country and charged to the issuer’s account the same day. As a result, lockboxes are used less frequently in Canada than in the US. They are primarily used to reduce mail and processing float or to reduce internal administrative costs.
Canadian banks can also net balances maintained through their total branch network, which provides local autonomy for client operations and centralizes cash concentration for investment purposes, and minimizes bank borrowing requirements. Deposit interest can be paid on balances maintained in current accounts.
Canadian banks are highly sophisticated in their cash management capabilities, and can provide their clients with electronic access to balance and transaction information in a wide variety of methods – the most popular being Internet banking. Accessing images of the items processed through their account(s) is increasingly popular and is expected to become more widely used with the upcoming move to truncation of paper items.
They also offer a variety of electronic payment services, including: the highly popular direct deposits and direct debits, debit and credit card, electronic data interchange (EDI) and wire transfers. If cheques are required, a wide variety of tools are available to assist with reconciliation, including positive pay, reverse positive pay, part and full reconciliation, cheque sorting, and images of cheques.
Canadians generally embrace technology and have enthusiastically adopted automated banking machines (ABMs) and telephone/Internet banking as their main method of conducting banking transactions. Electronic document payment and presentment is also becoming more popular with consumers.
The Canadian Payments Association (CPA) operates the national clearing and settlement system, and relies on two systems for the clearing and settlement of payments: the Automated Clearing Settlement System (ACSS) and the Large Value Transfer System (LVTS).
The ACSS is used for clearing both paper-based payment items, such as cheques and electronic items, including Automated Funds Transfer debits (e.g. pre-authorized debits) and credits (e.g. direct deposits). In 2004, close to 76 per cent of payment items cleared via the ACSS were electronic, up from just 13 per cent in 1990. Paper items cleared through the ACSS declined from 86 per cent in 1990 to 24 per cent in 2004.
LVTS is used to clear and settle electronic wire payments. This system is used to facilitate the transfer of irrevocable payments, in Canadian dollars, across the country in real time. Each payment is final and settlement is shown immediately, even though the actual settlement occurs at the end of the day on the books of the Bank of Canada.
RBC: In 2004, three major Canadian banks entered into an agreement to commission a Cash Management and Electronic Business Banking study from Maritz Thompson Lightstone. The survey findings indicated that 86 per cent of respondents used one of seven major banks as their lead cash management bank:
All of these major banks offer a comprehensive suite of cash management products, including collections, disbursements and information reporting and control. For many years, these products have been offered through proprietary software or direct file transfer, but most of them are now offered via the Internet, with more being added every year.
The remaining respondents deal with regional Canadian Banks, such as Canadian Western Bank, US and other foreign banks, including Citibank, Credit Unions or niche players.
HSBC Canada: According to a 1997 Neilson Fraud Survey, the cost of cheque fraud in Canada is $1-$2bn annually. This figure has dropped significantly in recent years through the willing adoption of alternate payment types by consumers, such as debit and credit card and online bill payments. Attempted fraud in Canada has been greatly reduced, with figures now at approximately $130m annually (according to the CPA and Symcor). Financial institutions have recourse to return many fraudulent items within a specific timeframe. If they are outside this timeframe, the FI (with whom the cheque was drawn on) may, not only suffer the loss, but other costs associated with fraud, such as closing accounts, investigation and litigation.
Common fraud patterns include duplicating cheques using sophisticated equipment to capture and amend the payee and amount, making it virtually impossible to detect fraudulent activity, or by amending the payee name and amount through the use of chemicals that lift and dissolve ink. Cheque imaging will enable financial institutions to enhance existing fraud detection products such as Positive Pay by allowing Payee Name Verification. Customers will also have access to cheque images the day after they are presented for payment. By reviewing these images, customers have the ability to immediately confirm payee name and return many fraudulent items soon after they are encashed, protecting themselves and the bank they do business with.
RBC: Cheque fraud in Canada is a significant and constant challenge for FIs and clients alike. Historically, client agreements have placed fraud liability with the FI unless there is blatant negligence on the part of the bank client. Most agreements call for 45- or 60-day notice of fraud to the FI after statement dispatch. However, as it is increasingly difficult for banks to identify fraudulent items, such as counterfeit cheques or even irregular signatures, there have been two significant changes:
1. CPA rules were changed in 2003. Original cheques that have been materially altered may be returned up to 90 days after encashment. Also, most banks now require large issuers of cheques to perform daily reconciliation of issued cheques and to bear responsibility for fraud, should the reconciliation not identify suspect items.
2. The TECP (Cheque Imaging) initiative will improve several aspects of the process but two in particular. First, the technology will allow for a substantial improvement in the clearing times. Today, especially with smaller FIs, the return voyage for a returned cheque – from the day it is cashed, processed, transported, adjudicated and returned to the encashing bank – can take between four to 10 days, especially for out of region items. The new process will instil a four-day maximum for the complete process. Second, the digital technology will allow for additional fraud prevention tools, such as the reading of payee names from the cheques and matching these with issued item files for reconciliation. This concept and other fraud tools will generally be proprietary with each FI.
HSBC Canada: Trends in Canada include:
HSBC Canada: All financial institutions in Canada are required to be TECP compliant by the end of 2006/beginning of 2007. Each FI has teams in place that are dedicated to minimizing the impact of TECP to both banks and their customers as well as meeting the timelines for implementation mandated by the CPA. Banks are also working to raise public awareness of TECP impact via statement inserts and links from their websites. Most cheque suppliers in Canada are already TECP compliant, and customers with in-house printers have been encouraged to review new specifications as soon as possible.
RBC: The concept of co-mingling funds is not a matter of bank regulation, but rather one of the various laws covering inter-company sharing of funds, which is usually interpreted as inter-company lending. Depending on the jurisdiction or the incorporating statutes, inter-company lending may or may not be permitted.
Bankers will, however, be concerned about the liability for deposited items. A cheque payable to one company and deposited in the account in the name of another company, could be subject to unwinding in a bankruptcy, or even possibly a claim that the item was fraudulently endorsed. CPA rules currently allow for unlimited return times for items that are fraudulently endorsed. Most bankers are hesitant to open accounts with multiple owners for this reason.
HSBC Canada: Historically, it has been fairly difficult to concentrate across different jurisdictions, other than through traditional methods of payment such as wire transfer, ACH or cheque. Increasingly, some of the global banks, are introducing global liquidity structures that allow companies to automatically concentrate funds across different countries, where regulations allow. These new services are in direct response to clients who are increasingly managing their treasury on a global or regional basis.
HSBC Canada: Notional pooling is performed for both single entities (multiple accounts for the same legal entity) and for multiple entities (different legal entities). Companies pool in both Canadian and US dollars.
HSBC Canada: EBPP in the consumer space has had some success although with limited take-up. While the billers have been committed to EBPP, the subscriber rate has been slow. EIPP has had very little momentum in Canada. One of the challenges is creating standardization on invoice presentment in an environment where companies have very different structures and required information for their respective accounts receivables data.