TABLE OF CONTENTS EXECUTIVE SUMMARY

Issues Paper: Review of Bill Payments in Canada Canadian Payments Association Policy and Research Division February 2008

TABLE OF CONTENTS EXECUTIVE SUMMARY 1 A - BILL PAYMENTS RESEARCH 2 1. Issue under Review 2 2. Research Methods 2 B - BILL PAYMENTS IN CANADA 2 1. CPA Framework for Bill Payments: Rule H6 3 1.1 CPA Rule H6: The Basics 3 1.2 H6 s Electronic Bill Payment Step-By-Step 4 1.3 Proprietary Contracts 5 1.4 Opting Out of Rule H6 5 2. Other Bill Payment Arrangements in the Clearings 6 2.1 AFT Payments 6 2.2 Financial Institutions Third Party Service Providers (PSPs) 6 2.3 Bill Consolidators 7 2.4 Biller-Direct Model 7 3. Proprietary Bill Payment Arrangements Outside the Clearings 8 3.1 On-us Bill Payment Arrangements 8 3.2 Credit Card Schemes 8 C - BILL PAYMENT ISSUES 8 1. Facilitating Faster Payments: Biller Reconciliation and Remittance Data 8 2. Scope: New Players and New Service Offerings 9 3. Consistency: Common Standards and Process 10 4. Transparency: Clear Roles & Responsibilities of Parties 10 5. Issues/Concerns within the CPA s Scope 11 D - INTERNATIONAL BILL PAYMENT PRACTICES 12 1. Australia: BPAY 12 2. United States: Electronic Payments Gaining Ground 13 2.1 Reliance on Third Parties 13 2.2 Lead-Time Disclosure & Expediting Payments 14 3. United Kingdom: Faster Payments 14 4. European Union: Next Day Service 15

EXECUTIVE SUMMARY Today, the adoption of more efficient electronic systems at each level of the payment chain has greatly enhanced the efficiency of the processes supporting bill payments and reduced lead times considerably. Nevertheless, there is no online, real-time, end-to-end processing (i.e. from customer to biller) to support bill payments. Indeed, what may appear like a simple, straightforward and seemingly real-time transaction for customers actually results in a series of complex behind-the-scenes procedures and arrangements. No less than four separate systems and various players are involved in the exchange and processing of many of these bill payments. The Canadian Payments Association (CPA) plays an important role in the bill payment equation, in that it provides a framework for clearing and settlement of transactions that are exchanged between financial institutions. As part of its strategic priority to promote electronic payments, the CPA began a study of bill payments in mid 2007, starting with an environmental assessment of the current bill payment landscape. In doing so, the CPA organized two separate industry Bill Payments Forums in order to obtain a clear understanding of the issues and concerns associated with bill payments in Canada from the perspective of consumers, billers, payment service providers and member financial institutions. During this process, it became clear that there are a wide variety of arrangements in place today that, to varying degrees, fall outside of the CPA s scope. These include proprietary systems of financial institutions and their arrangements with individual billers (e.g. on-us transactions), as well as other closed networks for the exchange of payments, such as those operated by some of the credit card companies. As a result, the processes for making a bill payment and the obligations of parties involved in that process can vary considerably, thus leading in some cases to confusion for consumers and billers as to their rights, roles and responsibilities. For those arrangements that do fall within the CPA s scope, members and stakeholders have expressed the view that several gaps exist in the CPA s current bill payment framework, Rule H6. In this regard, a number of issues were raised by participants at the Bill Payments Forums that can be categorized in four broad key areas of concern: i) facilitating faster payments (biller reconciliation and remittance data); ii) scope (new players and new service offerings); iii) consistency (common standards and process); iv) and transparency (rule with clear roles and responsibilities of parties engaging in bill payments). This paper describes the current bill payment processes available in Canada, outlines four general key areas of concern and the issues that underlie each, and provides a brief review of other international developments in the bill payment arena. Page 1 of 15

A - BILL PAYMENTS RESEARCH 1. Issue under Review The Canadian Payments Association s (CPA) current framework for the clearing and settlement of bill payments is CPA Rule H6. Although various options to pay bills are available under this framework including via telephone, Internet, and the ATM, it is estimated that a large volume of bill payments initiated in Canada are processed outside of the CPA's H6 bill payments rule. CPA members and stakeholders have expressed the view that several gaps exist in the current CPA bill payments rule, and as a result, many companies subscribe to separate proprietary bill payment arrangements. As service offerings can vary under these separate arrangements, inconsistencies in payment processing have led to confusion among consumers and billers as to their rights and responsibilities. Of note, the House of Commons Finance Committee expressed concern about electronic bill payments this past spring, primarily in regards to the length of time between when a consumer makes a payment and when the consumer's account is credited by the biller. The CPA has undertaken a review of the current bill payment landscape to identify the processes in place today and to better understand the concerns and issues of the various market participants. As such, this paper describes the current bill payment processes available in Canada, outlines four general key areas of concern and the issues that underlie each, and provides a brief review of other international efforts in the bill payment arena. 2. Research Methods As part of its research into the bill payments market, the CPA hosted two Industry Forums in November 2007 on the Future of Bill Payments in Canada bringing together the various parties that participate in the bill payments value chain. Organizations representing CPA member financial institutions (FIs), billers (including government billing departments), third-party payment service providers (PSPs), and consumers came together to provide the CPA with an understanding of the needs of market participants and their specific issues of concern, their current practices and emerging issues in this space. This report also leverages the output from other internal research (e.g. literature review, work of previous bill payments working groups, etc.). B - BILL PAYMENTS IN CANADA While the process of initiating a bill payment can be both quick and convenient for the consumer, there is a complex web of arrangements behind the scenes that ultimately make it happen. Moving payments and the related billing information from the consumer to the biller requires a number of sequential steps, each of which relies on a separate system. Further, the delivery route and mode may vary considerably between billers and depends on a number of factors such as how the consumer initiates the payment and the technical capabilities of the biller. Although the CPA plays an integral role in most instances as it operates the national clearing and settlement system through which many of these payments will be exchanged between financial Page 2 of 15

institutions other separate proprietary arrangements also exist. The CPA s framework and these other arrangements are covered in the following sections. 1. CPA Framework for Bill Payments: Rule H6 1.1 CPA Rule H6: The Basics The CPA Rule H6 Rules Pertaining to the Inter-Financial Institution Exchange of Bill Payment Remittances for the Purposes of Clearing and Settlement deals specifically with bill payments that involve an invoice. A bill payment exchanged and settled through a CPA-operated system is a credit transfer between two FIs resulting from a customer-initiated payment to a biller. Any biller that chooses to function as a corporate creditor pursuant to CPA Rule H6 is required to enter into a Corporate Creditor Agreement with its FI and use a Corporate Creditor Identification Number 1 (CCIN) to facilitate the routing of paper remittances. Further, Rule H6 stipulates that a biller shall use the date that the customer paid their bill (e.g. in person at the bank, at the ABM, on-line, by telephone, etc.) as the value-date 2 for the purposes of late fees or interest charges. 3 Bill payments may be exchanged in a number of ways, including both paper and electronic formats. While H6 outlines a complete end-to-end framework for the paper-based bill payments realm, a more streamlined framework that addresses solely the inter-fi exchange governs the electronic domain. To support electronic bill payments, CPA Rule H6 prescribes Electronic Data Interchange technology (EDI). EDI technology was chosen at the time the Rule was implemented because it could support a large amount of payment related data (i.e. remittance information) and provide value to billers in a timely manner. Within the CPA s H6 framework, there has been over the last six years a clear shift from paper in favour of electronic bill payment methods. While the use of paper bill remittances has declined from 68 to 23 million from 2001 to 2006, EDI-based electronic remittance transactions grew considerably in that same period, from 78 to 251 million. Today, bill payment EDI transactions amount to $73.5 billion up from $14 billion in 2001, while paper transactions amount to $15.7 billion down from $19.7 billion in 2001. 4 Despite a seemingly successful migration to the electronic realm, it should be noted that not many billers use EDI, opting instead for other methods that fall outside of the CPA s Rule H6 framework see section 2 Other Bill Payments Arrangements in the Clearings, and 3 Proprietary Bill Payment Arrangements Outside the Clearings. In fact, members anecdotal reports suggest that up to 80% of billers leverage other services to process their bills services that may or may not clear through the CPA s clearing and settlement systems in another form. As a result, leading financial institutions have indicated that a large portion of their billers (estimates provided anecdotally range from 40% to 60%) continue to receive remittance information for their bill payments via fax and e-mail. 1 A CCIN is a non-transferable identification number issued by the CPA that uniquely identifies the biller for the purposes of bill payment remittance processing. 2 If the date falls on a weekend or statutory holiday, the following business day is used. 3 Some FIs have bilateral agreements with some billers opting not to use a CCIN that require the biller to take the day the payment was initiated as the payment date for the purposes of late charges and interest fees. 4 Canadian Payments Association, Annual ACSS Statistics, http://www.cdnpay.ca/publications/acss_ann.asp Page 3 of 15

1.2 H6 s Electronic Bill Payment Step-By-Step Although the move to electronic transactions can expedite the routing of payments and payment related data to the biller, there is no online, real-time, end-to-end (i.e. from customer to biller) process to support electronic bill payments. In fact, most consumer bill payments and the relevant remittance information must flow through four (4) generally unrelated systems. Although CPA systems provide a critical function in the bill payment equation clearing and settlement a number of other proprietary systems (i.e. steps 1, 3 & 4 below) have developed around this core function to complete the bill payment process end-to-end. Following is an overview of the process in cases where the biller subscribes to Rule H6. 1. First, a consumer decides to pay a bill online: He/she logs into his/her FI s website, selects the bill to be paid, and initiates the transaction by instructing his/her FI to send the payment. This is the first system, connecting the consumer to his/her FI. 2. Then the FI takes that instruction, along with all others for the day and batches them up into an EDI electronic file format that is sent across the CPA clearing system to the biller s FI. This is the second system. Each day, there are specific cut-off times that FIs must adhere to when delivering this information. 3. Once the biller s FI has received the files, it aggregates the payments for the biller received from all the other FIs on that particular day, and credits the account of the biller for the total amount received. This is the third system. 4. Finally, to assign the appropriate credits to the appropriate customer s accounts, the biller needs the detailed remittance data pertaining to each customer that made a payment on that day. If the biller is capable of receiving payment data in the EDI format, then the biller s FI will flow the remittance data directly to the biller. These files can then be processed in an automated fashion to credit the accounts of the customers that have made payments in an expedited manner. Billers leveraging the CCIN and/or EDI technology to process bill payments generally operate pursuant to CPA s Rule H6 framework and accordingly are required to use the date that the customer paid the bill as the effective date for the payment for the purposes of interest and late charges. Nevertheless, it may still take a few days to update the customer s account given the previous steps described above. Page 4 of 15

Electronic Bill Payment Using EDI for the Inter-FI Exchange Biller s Payment Processing System STEP 4 Initiation & Reconciliation STEP 1 Customer Pays bill via telephone or online banking, in branch or at an ABM 3 rd party service provider Processes payment information and credits customers billing accounts STEP 3 Biller Forwards payment details and notice of payment Customer s Financial Institution STEP 2 Sends batched EDI file with payment details Biller s Financial Institution Clearing CPA ACSS CPA s Scope Settlement Transfers funds between settlement accounts of financial institutions 1.3 Proprietary Contracts In addition to entering into the Corporate Creditor Agreement with its FI, as required under Rule H6, it is common practice for FIs to require billers to also enter into a separate proprietary contract. In some instances, the provisions in the proprietary contract can differ from certain requirements of Rule H6. Proprietary contracts are used, among other things, to establish a legal relationship with billers with whom an FI has no current business relationship (i.e., to keep the FI informed of any changes that may occur with the biller e.g., it ceases to exist or cancels the service, etc.). 1.4 Opting Out of Rule H6 Currently, not many billers, particularly small and medium-sized billers, choose to participate as corporate creditors pursuant to the CPA s Rule H6. While it would be preferred if all billers were to participate in the CPA s bill payment framework, there are economic reasons why some choose to opt out. In particular, a biller s technological capacity may be limited or its volumes are relatively small, thereby resulting in costs that exceed the value proposition to the biller. In addition, the Rule H6 framework requires that billers modify all of their invoices to include a CPA-assigned biller identification number (CCIN). For low volume billers, there is little or no financial incentive to pursue these changes. Page 5 of 15

As a result, there is consensus that CPA s Rule H6 does not offer the proper incentives to attract all billers. Alternative arrangements are described below. 2. Other Bill Payment Arrangements in the Clearings 2.1 AFT Payments Members anecdotal reports suggest that up to 80% of billers have elected to operate outside of the CPA s Rule H6 framework although in many cases, bill payments destined to them clear through the CPA s clearing and settlement systems in another form. When a CCIN is not used to identify a biller, an FI may register a biller using an alternative identification number such as one related to the biller s banking information (e.g., transit, account number, etc.). The biller s FI may thus receive funds for payments made by the biller s customers at other FIs via an Automated File Transfer (AFT). Remittance details will then flow to the biller in an alternate format, for example by fax or email. In many of these cases, the biller is not able to use an automated process to transfer the information into their accounts receivable system directly. Where a manual process is involved, the time required by the biller to update each individual customer account can be lengthier. Essentially, there is a time in transit period that must be considered when making/receiving these payments. Further, given that billers leveraging non-ccin inter-fi bill payments operate outside the CPA s Rule H6 framework, they are not required to use the date that the customer paid the bill as the effective date for the payment. While the technology and biller identification process differ from that of the H6 framework, most non- CCIN inter-fi bill payments will also flow through four generally unrelated systems. The CPA provides the critical clearing and settlement function while a number of other proprietary systems complete the bill payment process end-to-end. 2.2 Financial Institutions Third Party Service Providers (PSPs) During the last few years, it has become apparent that a number of Payment Service Providers (PSPs) have been offering and providing certain payment services to Canadian FIs, notably Indirect Clearers (ICs), that appear to piggy-back upon the ACSS. When an IC retains a PSP to provide Internet or telephone banking services to its customers, the process used generally unfolds as follows: (1) An IC customer initiates an electronic payment to a biller through the IC s systems that may actually be serviced by a PSP; (2) The IC debits the customer s account for the amount of the payment; (3) The IC credits that amount to a separate settlement account; (4) The PSP acting for the IC in some capacity (e.g. it may be an agent or an independent contractor), issues a pre-authorized debit (PAD) through its own FI (who may not be the IC s Clearing Agent) against the settlement account in the amount of the customer s payment. The PAD will then go through the ACSS to the IC s Clearing Agent before being passed back to the IC; and Page 6 of 15

(5) When the PSP receives the amount of the PAD, it issues a payment instruction to its FI to pay that amount to the original biller of the IC s customer. Payment may be bundled with other payments to that biller and may be settled through either the ACSS or the LVTS. As the biller s FI and the customer s FI generally do not interface (unless the PSP happens to bank with the same FI as the biller or customer), this scenario has led in some cases to confusion for consumers and billers as to their roles and responsibilities. 2.3 Bill Consolidators In a Consolidator Model, the customer s bills are collected from multiple billers and aggregated at a central web site operated by an independent financial service provider. In this model, third parties i.e. bill consolidators act as middlemen to route payment and remittance data. In this situation, a customer enrolled in an electronic bill presentment and payment (EBPP) program securely accesses the bill consolidator s site to both view and pay his/her bills. The main advantage to consumers is that they can view and pay all their bills at once (as opposed to receiving an invoice from the biller and performing a separate operation to pay it electronically online). Consolidators claim to operate scalable, resilient and secure information and payment processing infrastructures. Due to their size and the volume of payments they process, consolidator infrastructures are expensive to build and maintain. To be profitable, they usually have to limit the number of features they can offer a consumer and the amount of integration they can provide to any individual biller. An example of the consolidator model in Canada is Epost, a service offered by Canada Post Corporation that provides an EBPP solution for Canadians. Epost effectively hosts consumers bills from participating billers on its website and permits consumers to pay those bills either at the Epost website (via electronic funds transfer from an FI through the ACSS or by credit card) or online at certain Canadian FIs (8 banks and certain western credit unions) through the ACSS. At this time, it appears that fewer than 100 billers currently participate in Epost. 5 2.4 Biller-Direct Model As the name implies, in the Biller-Direct Model, the customer goes directly to each biller s website where bills are presented for viewing and payment. Once the customer provides the instruction to pay the bill, the biller generally issues a PAD against the customer s account in the amount of the payment. Payments made through the biller s website are usually credited the same day. Despite this obvious advantage, the Biller-direct Model may be an unrealistic choice for some billers notably small and medium sized billers as it requires investment in time, money and resources. Some billers may not have the required in-house operational expertise or facilities necessary to develop, secure, implement and maintain their own commercial grade EBPP site. Further, for consumers the Biller-Direct Model requires users to log on to each biller s site and pay their bills separately. Although popular in the United States, the Biller-Direct Model is used much less in Canada, generally limited to larger-scale billers. 5 This number is based on a review of the Epost website, www.epost.ca, accessed on January 29, 2008. Page 7 of 15

3. Proprietary Bill Payment Arrangements Outside the Clearings 3.1 On-us Bill Payment Arrangements Some bill payment schemes operating in Canada fall outside the scope of the CPA s rules and standards altogether. On-us transactions (i.e. transactions involving two accounts held at the same FI), for example, do not involve an inter-fi exchange and thus are not cleared through CPA-operated systems. In this case, a biller will have established separate accounts with numerous FIs to accept its bill payments. In these situations, consumers pay their bills at one of the FIs where the biller holds an account (i.e., on-us payments) and therefore these payments do not enter the clearings. With on-us payments, the biller typically receives funds more quickly (e.g. same-day); however, this requires businesses to maintain multiple accounts at multiple FIs. 3.2 Credit Card Schemes Certain credit card invoice payments clear through parallel systems run by some of the credit card companies themselves. In this case, no element of the credit card invoice payment flows through the CPA s clearing system, and, as a result, the payment falls completely outside the scope of the CPA s by-laws, rules and standards. Final settlement between financial institutions at the end of the day occurs through the CPA s Large Value transfer System (LVTS). C - BILL PAYMENT ISSUES With all the different processes involved in making a bill payment and the complex web of arrangements behind the scene that ultimately make it happen, the obligations of parties involved can vary considerably. This situation has led in some cases to confusion for consumers and billers as to their rights, roles and responsibilities and has resulted in technical, process, and market challenges for the bill payment industry in Canada. At the Bill Payments Forums, held in November 2007, participants raised a number of issues in respect of bill payments that fall within four broad key areas of concern, including facilitating faster payments, scope (new players and new service offerings), consistency (common standards and process), and transparency (clear roles and responsibilities of parties engaging in bill payments). 1. Facilitating Faster Payments: Biller Reconciliation and Remittance Data Today, the adoption of more efficient electronic systems at each level of the payment chain has greatly enhanced the efficiency of the processes supporting bill payments and reduced lead times considerably. Nevertheless, there is no online, real-time, end-to-end processing (i.e. from customer to biller) to support bill payments in Canada. Despite the adoption of more efficient electronic systems, there continues to be some pressure to reduce the time it takes to credit end-customers. Specific issues raised by participants in respect of expediting payments include: Page 8 of 15

(a) Large corporate payees seek to enhance and automate their accounts receivable processes to provide straight-through-processing so as to increase efficiencies and reduce costs. A key element to expedite biller reconciliation is the inclusion of more remittance data with payments recognizing the diverse needs of small, medium and large businesses; (b) If the biller has a policy to credit a payment only after it has been received, verified and processed, customer payments may not be reflected in the customer s account with the biller until several days after payment was made by the customer and cleared by financial institutions. In short, while the speed at which financial institutions clear funds is important, the promptness of billers reconciliation processes and their policies for crediting payments to customer accounts also play an important role in determining when a bill payment gets credited to a customer s account with the biller. Hastier reconciliation and greater disclosure from billers in this regard is thus necessary; (c) Consumers expect real-time or near real-time crediting to their account, in order to avoid penalties and interest charges. Participants noted that in the case of electronic bill payments, customers expectations about the immediacy of electronic payments may have, in some cases, surpassed the ability of the bill payment systems to meet those expectations with current systems. (d) Legacy systems of financial institutions need to be considered in examining potential enhancements in response to issues raised by stakeholders. Indeed, what may appear like a simple, straightforward and seemingly real-time transaction for customers actually results in a series of complex behindthe-scenes procedures and arrangements involving several parties. 2. Scope: New Players and New Service Offerings Increasingly, new types of businesses and third-party payment processors want to participate in the bill payment market; however, CPA Rule H6 currently limits participation to corporate creditors (i.e. billers) that issue invoices to their customers. As a result, non-invoice issuing billers that offer alternative bill payment products and services have had to look to other options. Specific issues raised by participants in respect of scope: (a) Given that the innovative product offerings in the marketplace extend beyond the traditional business model of billers (e.g., invoice issued for goods and services) and the current H6 definition of bill payment, some participants requested the Rule be less prescriptive. For example, these payments could be viewed more simply as a payment pursuant to a commercial contract, initiated by a payor, that requires both payment and remittance data to flow to the payee. Some financial institutions however, expressed the view that funds transfers that do not involve paying a bill for goods/services should not be considered a bill payment. (b) With new players in the bill payment space, non-traditional billers reported a need to clarify which entities are able to participate in the CPA bill payments framework, Rule H6; (c) FIs raised a concern over their ability to appropriately manage risk (e.g. know your customer and anti-money laundering) if a wider range of billers are to be accommodated under a revised bill payment framework; and Page 9 of 15

(d) From a global perspective, Canadian businesses continually expand their markets beyond the borders of Canada. As a result, participants generally felt that there is also a need to facilitate crossborder payments to support businesses expanding into international markets. 3. Consistency: Common Standards and Process The bill payment market currently includes a range of bill payment products and arrangements that are not subject to a single framework of rules and requirements. This patchwork results in the inconsistent treatment of bill payments and subsequent confusion among bill payment users. Inconsistent reconciliation practices make it challenging for consumers to avoid late fees and interest charges. Specific issues raised by participants in respect of consistency: (a) Recognize the need for a more comprehensive bill payment framework to accommodate all bill payments, regardless of the technology used to exchange payments and payment data (e.g. AFT, EDI, other); (b) Certain billers and third-party service providers suggested moving towards common payment file standards, common remittance data standards, and leveraging universal payment codes; and (c) There is a need for a consistent approach across FIs in providing bill payment administrative services such as sign-up, processing, and notification to enhance the biller experience. 4. Transparency: Clear Roles & Responsibilities of Parties The roles and responsibilities of the parties engaging in bill payments today under the various schemes are not clearly defined. As a result, there is a strong consensus that greater transparency in the treatment of bill payments in Canada is needed. Specific issues raised by participants in respect of transparency: (a) There is inconsistency and lack of transparency of many bill payment services and in particular, value-dating practices. Consumers do not understand how their bill payments are processed in the clearings or reconciled by billers, nor the time-frames required for payments to reach their accounts with their billers. Similarly, corporate creditors need a better understanding of their obligations with respect to the payment date to use when posting payments to customers' accounts. Added disclosures on the part of the biller or consistency in practices could assist in controlling late penalties/charges. (b) Financial institutions seek a transparent framework for bill payments of billers able to participate in the CPA framework to ensure that they can meet their know your customer and other requirements (e.g. anti-money laundering), and appropriately manage their credit risks. (c) There are ongoing concerns regarding risks associated with conducting payments in an online environment (e.g. security, fraud, identity theft, authentication, etc.). Page 10 of 15

5. Issues/Concerns within the CPA s Scope Area of Concern Issue Within CPA's Scope Facilitating Faster payments: Biller Reconciliation and Remittance Data Scope: New Players and New Service Offerings Consistency: Common standards and process Billers want more remittance data to be transmitted with bill payments. Consumers expect real-time or near real-time crediting to their account. FIs legacy systems pose a challenge to improved systems. New players in the bill payment space, including bill payment intermediaries (e.g. FIs payment service providers, bill payment consolidators) Innovative product offerings extend beyond traditional biller invoicing FI ability to manage risk Leverage CPA systems to facilitate cross-border payments Comprehensive bill payments framework regardless of technology used Common standards Consistent approach to FIs administrative services related to bill payments (signup, notification, etc.) Remittance data associated with bill payments exchanged via EDI and AFT (AFT files are subject to limitations of CPA Standard 005). Currently, the entire end-toend paper-based bill payment process is addressed in CPA rules, while only one leg of electronic transactions inter-fi clearing & settlement is covered. A more holistic approach can be considered (e.g. standards, processing times, value date, etc.) A more inclusive CPA bill payment framework can be considered A less prescriptive approach to Rule H6 can be considered in terms of eligible participants Identification and mitigation strategies for risk should be taken into consideration A framework that addresses bill payment arrangements regardless of technology can be developed Where applicable, common standards can be established Corporate creditor agreement process can be streamlined Issues for Further Consideration Specific elements of proprietary FI, PSP, or biller services/systems that do not leverage CPA systems for clearing and settlement, nor are impacted by its Rules. FIs due diligence on know you customer (KYC) Leg of bill payment transactions processed in other jurisdictions Proprietary FI or biller services/systems (e.g. layout of invoices, display of biller list on FI websites, etc.) Proprietary FI/biller agreements Page 11 of 15

Area of Concern Issue Within CPA's Scope Transparency: Clear roles and responsibilities of parties engaging in bill payments Transparency of parties responsibilities and liabilities Provide adequate disclosures to consumer regarding value date, payment errors, security, fraud, etc. Define roles and responsibilities of parties to a bill payment transaction as per CPA Rule FIs disclosure of service offering (e.g. lead-time requirements) Issues for Further Consideration Billers disclosure practices to consumers about late fees, interest charges, etc. D - INTERNATIONAL BILL PAYMENT PRACTICES 1. Australia: BPAY In Australia, the electronic bill presentment and payment (EBPP) scheme, which allows payors to issue payment instructions via the telephone or the Internet, operates through centralized facilities and has no connection to the Australian Payments Clearing Association Limited (APCA). Financial intermediaries extending services through the EBPP scheme include BPAY (owned by a consortium of banks via CardLink Limited), E-Bill (owned by Hermes Prisidia), and Australia Post (a government business enterprise and a large paper bill issuer in Australia). In-house clearing and settlement is generally performed. BPAY, created in 1997, is Australia s most commonly used payment method, with an estimated 31% of all consumer bills paid using the service. BPAY allows customers to pay their bills by electronic transfer from their bank account to the biller s bank account via Internet or telephone banking (75 percent of these BPAY payments are done via Internet banking). BPAY has the facility to host consumers bills from participating billers on FI s Internet banking websites, but its primary function is that it permits consumers to pay their bills directly from their respective FI s Internet banking websites as, what appears to be, on-us transactions. More than 14,000 billers currently participate in BPAY (compared to the fewer than 100 that participate in Epost) and every month Australians pay approximately 15 million bills worth over AU$11 billion with BPAY through over 180 banks, building societies and credit unions (compared to the approximately 40 FIs that participate in Epost). 6 The advantage of BPAY for billers is clear: Billers get next-day certainty of payment. Once the consumer has paid the bill, the information and payment is sent to the biller as cleared funds overnight. The unique biller codes and customer reference numbers allow data to automatically match records in a biller s account receivable system, effectively allowing billers to outsource a large chunk of the costs of processing payments. For FIs, processing costs have reduced by 30 to 40 percent per transaction a direct result of the volume, processing, and technology cost efficiencies of BPAY 7. For consumers, 6 www.bpay.com.au/about/bpay_today.aspx accessed on January 4, 2008. 7 Client Choice Research, How To Do Online Bill Payment Right: A Case Study From Australia s BPAY, Sept. 2007 Page 12 of 15

convenience, ease of use, control over when to pay, and security are some of the key benefits of BPAY. Another advantage is that BPAY is usually offered as a free service to consumers. 8 Membership in BPAY is open to financial institutions who are authorized deposit-taking institutions and who have an exchange settlement account with the reserve Bank of Australia 9. Merchants generally become BPAY billers by applying through their financial institution or via the BPAY website. The biller institution assesses the application, and, if approved, the merchant will enter into a biller agreement with the FI and BPAY, and be allocated a biller code. Traditionally BPAY has been offered by the major utility billers such as energy and telephone companies who provide a regular monthly bill, however today BPAY is open to any organization who wants to receive a payment through the service, including billers who provide a one-off good/service. BPAY also provides a service called a Master Biller service whereby a company can set up as a Master Biller with one or more Biller Codes and sign up Sub-Billers to these Biller Codes. This type of arrangement is generally leveraged by a biller that has too few payments to be signed up directly with a financial institution, such as real estate agents, childcare facilities and other small businesses. The most significant competitors to BPAY at present are over the counter payments at Australia Post 10, direct debit payments and credit card payments direct to billers over the phone or Internet. In 2006, direct debit was used for 24 per cent of bill paying; BPAY for 31 per cent. 2. United States: Electronic Payments Gaining Ground In the U.S., mail is still the most popular bill payment channel among consumers (58.5 percent) and business customers (70.1 percent), followed by credit card payment which permit users to maximize loyalty points and consolidate bills. 11 Nevertheless, electronic bill payment has been gaining ground. The latest Consumer Billing and Payment Trends found that 69 percent of U.S. online households are paying at least one bill online, up from 56 percent in 2005. 12 The rush to accept online payments has been a major driver for companies to sign onto electronic bill presentment and payment (EBPP) programs. 2.1 Reliance on Third Parties In the US, although the majority of electronic bill payments today are made at biller-direct websites (whereby the customer has complete access to billing details and generally same-day credit for payments made), the third party biller consolidator model is gaining ground. 13 It has been suggested that the trend is due to the technical complexity and sophistication required to develop an electronic bill payment services in such a large and diverse market. 8 Ibid 9 As of July 2007, all financial institutions are BPAY members. 10 Australia Post s bill payment service, Postbillpay, recently announced that it would be ceasing its Internet service due to limited uptake and use by customers. Source: Online Banking Review, June 2007 http://www.onlinebankingreview.com.au/aboutobr.asp 11 The Ascent Group, Inc., Billiing & Payment Profiles & Besr Practices 2007, May 2007 12 CheckFree Corp., Consumer Billing and Payment Trends 2007, www.checkfree.com 13 Personix, Electronic Bill Presentment and Payment: The Gateway to one-on-one Customer Relationships, 2007, http://www.outputlinks.com/uploads/personix_1010717_ebpp_wp.pdf Page 13 of 15

For similar reasons, U.S. FIs also rely heavily on PSPs for bill payment ventures of all sizes. Although non-banks are not generally provided direct access to the core clearing and settlement payment mechanisms such as ACH, debit cards or checks, some can obtain direct access if they offer processing and clearing services on behalf of banks. In these situations, although there may be an operational relationship between a bank s PSP and the Fed, the legal relationship remains between the bank and the Federal Reserve. Some of the most popular Internet payment processing vendors used by FIs in the U.S. include CheckFree, BillMatrix, and Authorize.Net. Various U.S. federal and state banking regulators have the power to examine, review and supervise activities of PSPs in respect of their relationships with banks. U.S. banking supervisors have taken the position that FIs remain responsible for the end product or service offered to their customers regardless of whether that product or service is offered through or in conjunction with a PSP. In addition, with respect to U.S. ACH matters, NACHA s rules include specific requirements for how ACH member banks must interact with PSPs and manage associated risks. NACHA has also assembled risk management documents to provide guidance to ACH member banks including an implementation guide specifically designed for third-party senders. 2.2 Lead-Time Disclosure & Expediting Payments Like in Canada, although many consumers currently pay their bills online through their financial institutions, it may take up to several days for the financial institution to process the payment, send the funds to the biller -- sometimes with a paper check draft -- and for the biller to settle the account. As a way of managing customers expectations with respect to value date, financial institutions and billers will explicitly disclose the lead times required for the payment to reach the biller by the due date. As such, FIs and billers will either (a) explicitly state on the biller s invoice and bank s website itself that customers must make payment sufficiently in advance of the bill s due date to avoid late charges, and/or (b) not allow a customer to enter a payment date on the bank/biller s website that does not provide enough lead time to deliver the payment to the biller. Expedited bill payment services are also available at extra charge. At the end of 2007, Western Union and Yodlee announced the launch of the Expedited Bill Payment service, which would allow financial institutions and consumers to benefit from same-day and next-day online payments. ChoicePay, another example, allows billers and consumers to sign up for a service that will deliver same-day payment notification (provided payment is made before the specific afternoon cut-off time); with this service, most billers will know within minutes or hours of a consumer s payment made to them. 3. United Kingdom: Faster Payments In the United Kingdom, the Office of Fair Trading (OFT) and the banking industry have joined to create a new payments capability for the UK enabling faster payments. For standing orders 14, Internet banking and telephone transfers between banks, it is anticipated that the movement will be near real time thus shrinking the current 3-day gap between the initiation of a payment and the recipient being credited the funds. As a result, the banking industry has agreed, in principle, to replace the current batched approach (i.e. file of inter-bank transactions several times a day) leveraged for inter-fi clearing of direct credit payments, such as bill payments, with a new same-day payments capability based on a 14 An instruction a customer gives to its bank to make payments, usually on a regular basis, to a third party's UK bank account. Page 14 of 15

"transaction/real time" approach. The development of systems to support the UK s faster payments is expected to be completed at the end of 2008 significant changes are required to both the central infrastructure and banks own systems. Although the new system will enable customers to use the Internet or telephone to make payments that reach a recipient s bank account within a few hours, significantly reducing traditional clearing cycles, it will not address the delay required by billers to reconcile payments received and relevant remittance data. As a result this gap may continue to pose challenges in crediting customers accounts with billers in a timely manner. 4. European Union: Next Day Service The EU Directive on Payment Services in the Internal Market (formerly known as the "New Legal Framework") states that countries shall require the payor's payment service provider to ensure that after a payment has been accepted, the funds are credited to the payee s account by the next business day at the latest. In other words, by 2010, the slowest acceptable bill payment service in the EU will be a next-day service. Nevertheless, until January 1 st, 2010, a payor and his/her payment service provider may agree on a longer period of time not to surpass three days. The regulation will apply to all countries within the European Community, not just those that have adopted the Euro as a common currency. 15 15 http://www-03.ibm.com/industries/financialservices/doc/content/bin/fss_faster_payments.pdf Page 15 of 15