Presentation to the Canadian Payments Association

An address by Richard E. Waugh
President and Chief Executive Officer

Scotiabank
June 16, 2005
St. John's, Newfoundland

"…all of us who make up and support the payments system cannot afford to be complacent about the future - because the challenges for financial institutions to succeed are relentless, and the sophisticated and varied needs of our clients are never ending."

Check Against Delivery

Thank you, Ken [Morrison, President, Future Solve, and payments consultant to Retail Council of Canada], and good morning, ladies and gentlemen.

It's a great pleasure to be here with you today - and a particular pleasure to be here in St. John's.

Scotiabank has a long and proud history - in Newfoundland - and in meeting the financial needs of the people and businesses in this great province.

In fact, it's been our great pleasure to serve this province for more than 110 years, since we opened our first branch in St. John's in 1894.

Since then, our Bank has become an important part of what is truly a world-class financial services industry here in Canada.

Our financial system is stable, strong and secure - handling the finances of individuals, businesses and governments - and our system is recognized around the world as best in class.

Canada is the world's second-largest country in area. From St. John's looking west, we can see the entire country - and it's incredible to think that our payment systems and infrastructure enable Canadians to conduct business and move funds with certainty from here to Vancouver in real time.

Or that a customer north of the Arctic Circle in Inuvik has access to most of the products and services available thousands of kilometres south in Toronto.

This is something even the U.S. financial system has yet to duplicate.

Looking east, we can see the rest of the world.

We stand almost at the point where the first wireless technology bridged the distance between the continents.

Today, that ability to build bridges to the world -- to take a world view to meet the challenges of connecting people and businesses across the country and across borders -- is more important than ever for financial institutions and organizations, such as the CPA.

Scotiabank's history, much like Newfoundland's, is filled with stories of overcoming the challenges of geography -- of building communities through trade and technology that have improved the standard of living for people on our own and foreign shores.

Clearly we, as Canadians, have many great strengths, including the success of the Canadian financial system and its efficiency in handling all types of payments.

That strength has come through industry and government collaboration to establish common standards and innovation.

However, all of us who make up and support the payments system cannot afford to be complacent about the future - because the challenges for financial institutions to succeed are relentless, and the sophisticated and varied needs of our clients are never ending.

Above all, I believe economic growth and continued success for Canadian business - for all of us - is dependent more than ever on government, industry and financial institutions collaborating together.

Today, I want to focus my remarks on the continuous need for innovation in domestic and international payments - increasing efficiency and competitiveness in the delivery of services to business and consumers - and establishing common standards and a supportive and pragmatic regulatory framework.

I'll start by talking about recent successes here in Canada, but then I want to turn to international markets - and the increasing need to carry innovative ideas to the global arena - in particular, to meet the demands of businesses looking outside Canada to grow. As I see it, we must increasingly measure ourselves and our challenges not only on a national scale - but on an international scale.

To begin with, I know we're doing a great job in Canada in terms of innovation and taking new approaches. I can think of two examples that clearly show this.

First, consider the innovation that enabled our national ABM and point-of-sale networks to support important consumer payment options, such as Interac debit cards.

Now, with evolving Internet technology, there's the CPA rule that recently came into effect to facilitate the introduction of online payment services - services that will allow consumers to pay for purchases directly from their bank accounts via the Internet.

Under the new rules, consumers will be able to make payments similar to the way they currently do through Internet banking.

This provides two key benefits: consumers can initiate a transaction within the secure parameters provided by their financial institution - knowing that no other party will be able to access their financial information.

And merchants are immediately assured that the consumer retains sufficient funds to pay for the purchase.

Another example of innovation is the current framework for moving cheques through Canada's clearing system.

Admittedly, it's based on legislation that has been in place - substantially unchanged - for more than 100 years.

However, today an industry-wide project to modernize the Canadian cheque clearing system and enhance its efficiency through technology is in development.

Under the new process, financial institutions that receive cheques on deposit will capture images of the front and back of these items and present them electronically to the financial institutions on which they are drawn - eliminating the need to deliver paper cheques. The shift to image-based processing of cheques will improve efficiency of cheque clearing and enable new processes that will greatly reduce cheque fraud.

Similar legislation is also evolving in many countries, enabling financial institutions to no longer rely on the exchange of physical cheques for clearing purposes.

We need government to agree to the legislative changes to Canada's Bills of Exchange Act being proposed by the CPA.

Which leads me to the next area I want to focus on - and that's the growth of global commerce - and the growing importance of cross border payments.

Clearly, we need to maintain the strength and viability of payments in Canada. However, total payments business here represents a very small fraction of world payments activity.

The reality is that it is increasingly a world without borders - and we have to be prepared to follow our customers as they look for growth in international markets.

Before I go further, let me be clear that my views are, of course, highly influenced by my experiences at Scotiabank - an organization with extensive international operations.

You may know, we are Canada's most international bank. Scotiabank has more than 1,800 branches and offices in some 50 countries.

In most of these countries we operate not only as a multinational bank, but also, most importantly, a local bank, offering full services to our customers, generally under the Scotiabank banner.

Our Bank has always seen the value of international markets, assisting Canadian businesses as well as local customers.

Our interests run deep - particularly in the Caribbean and Latin American regions, as well as Asia - areas we see as high-growth markets.

In my view, the growth of global commerce is driving a new relationship between business clients and the financial institutions that have a relationship with them.

It's making cross-border payments - and international knowledge and competencies that will be a key element in the banking relationship.

The world as a whole is open for business like it never has been in human history. Improved macroeconomic performance, financial sector reforms, trade liberalization, privatization and deregulation of the '90s have all been big factors in re-energizing economies like Mexico's, like China's, like India's and on and on.

You can see the impact in global trade.

Consider that the value of worldwide export volumes has been growing by almost 10% per year on average over the last couple of decades. It now totals roughly US $7.5 trillion, compared to $4.2 trillion in 1994.

I have just returned from a trip to Asia, and it is truly incredible how the economies of India, China and many other countries are growing.

Internal and external trade in the region is powering a tremendous change and significant wealth creation.

In China, I heard from a group of senior Communist Party and government officials who completely embrace a market-based philosophy - and who are seeking help and investment from the world's largest private banks.

In India, while there was a more cautious and, if you will, conservative pace to open market principles, they too are looking more and more to compete on a global basis.

For us, with slow growth prospects in mature markets, businesses big and small - our clients - are increasingly looking to international markets - to China, to India, to Mexico and other countries - for growth.

Some of the most appealing things about these countries stem not only from the important structural and institutional changes that have and are being made to these economies - but from the simple reality of demographics, population growth and under-banked economies.

As businesses operate in these new environments, they face different challenges - and international financial institutions can play a key role in addressing these.

Let's turn to Mexico as an example of both the opportunity and a unique challenge businesses face.

Mexico - a key partner in NAFTA - has by far the most youthful population in North America, with a median age of just 22, compared with 35 in the United States and 38 in Canada.

Consider the potential this has for the future.

Over the next several decades, Mexico's labour force expansion and potential growth rate are forecast to remain well above those of both Canada and the U.S.

Facts like these are attracting more and more corporations to this market. But there's a clear need to offer unique solutions to the unique challenges each market puts forward.

That's absolutely the case in terms of payments - and let me offer you a good example of how our Scotiabank subsidiary in Mexico - Scotiabank Inverlat - was able to provide an innovative idea for a key client.

As background, in Mexico, businesses have typically paid employees in cash - and have had to rely on armoured car services to transport it to various operations. Part of the reason for this is that Mexico's workforce is highly mobile - often without bank accounts - which hinders direct deposits.

Also, there are a number of rules - especially in highly unionized and seasonal industries - that require mobile workers to be paid on the same day they work.

This was the backdrop of the problem for our client. And a great solution was to create a payroll card that offered a more efficient payroll process while addressing the realities of a mobile workforce.

The process provides employees with stored value cards. Employees don't need to have bank accounts to use their funds.

They can access their pay in cash through the ABM network located right on the business premises. And the company can use a secure and safe way to pay - with card stock maintained by the company - which can activate or deactivate cards online in real time.

This was a great approach to a challenge unique to Mexico.

Increasingly, the ability to offer innovative payment solutions to multinational business clients with the appropriate services in each specific local market - whether it's Mexico or Malaysia - will be a key competitive advantage.

As an industry, we need to continue to focus on increasing efficiency and competitiveness in terms of our delivery of services to business and consumers - with a global view. And a key challenge will be to address the issue of scale.

A recent Boston Consulting Report on the global payments business highlighted the growing need to address this issue.

While the report showed that the overall payments revenues (fees) would increase to nearly $390 billion by 2011 - one-third higher than a decade earlier - it also indicated that there will be a steady erosion of profit margins unless there are massive investments to upgrade cross-border payment systems and improve customer offerings -- this requires scale.

What the BCG report is highlighting is the never-ending need to invest in new technologies and platforms to increase flexibility, handle greater volumes, provide a broader range of web-based services and more.

It is essential for our industry to stay focused on this need if we are to continue to play a central role - not only to ensure the strength of own institutions - but to continue to support the competitiveness of business.

But clearly, with new processes and technologies, there is a significant amount of uncertainty and risk.

Not only is there the ongoing issue of customer acceptance of new services, due in part to fear of compromising their security and confidentiality - there's also the cost effectiveness of any particular innovation, including regulatory requirements - requirements that are increasing significantly since 9/11 - especially Anti-Money Laundering and Anti-Terrorist Funding rules.

There are also multiple technologies - which must be weighed and considered against limited resources. Large investments in technology are an ongoing reality for our industry and our clients.

Obviously, size is a factor here, where only the largest players have sufficient capital and can benefit from economies of scale.

To succeed, financial institutions will have to continue to form strategic partnerships to find top-line growth - while at the same time taking a new look at how they do business - a more holistic, integrated approach to find economies - as well as synergies.

At our Bank - indeed, at all Canadian financial institutions - we think we have tremendous opportunities to leverage our existing capabilities to offer clients global solutions that are consistent, not only across Canada, but across different markets.

I'm confident that we can continue to offer best-of-class electronic banking solutions for businesses that maximize their working capital, streamline operations and reduce their liquidity risks by taking a client-focused, global approach.

But as customer demands continue to increase and new technology is introduced, there is a need for legislation and regulation to keep pace.

And there is a growing need to establish common international standards.

Consumer and business customers rightfully expect their financial institutions to provide solutions to simplify payment operations worldwide, making them more flexible and less costly.

Considering that there are a great many payments systems in North America, let alone the rest of the world, there is an important role government can play in facilitating the development of truly international standards.

This is best done by supporting associations such as the CPA when rules and policies need to be changed to meet the new business realities.

My last point before I close is that the new significance of Anti-Money Laundering and Anti-Terrorist Funding rules should also not go unnoticed as they affect banks, our clients and the payments system.

The governments fear that terrorists have and will in the future use our payments networks to finance their activities, and it is through us they can trace and prevent terrorist activity.

Not only are “know your customer” requirements now heightened for financial institutions in the payments system, we are now responsible for monitoring how funds are used.

This requires real-time monitoring of virtually all depositor payments, regardless of amount, for unusual behaviour.

So, we are investing significant amounts in technology and manpower to police this activity on behalf of authorities in Canada and elsewhere.

As I've said, from my perspective, globalization is a reality.

Our economic growth is dependent on governments, industry and financial institutions working together - focusing on innovation in domestic and international payments, increasing efficiency and competitiveness in the delivery of goods and services to businesses and consumers, and developing common standards and a supportive regulatory framework.

The CPA's mandate is to provide a sound, safe and efficient payment system in Canada.

As government, industry and financial institution partners, it is our role to support them to be able to address the evolving business markets and respond quickly to international forces.

Notwithstanding the many challenges we face, I am absolutely confident that if we adopt an even more collaborative framework - the future for our industry, for our customers and for Canadian businesses will allow us to grow here and abroad.

Before I close, I would like to take the opportunity to thank all the members of the Canadian Payments community, past and present, for making Canada a leader in providing same-day settlement and clearing.

I have the utmost confidence that the CPA will continue to provide the leadership that is required to keep Canada at the forefront, throughout the evolution of the Canadian and global payment and settlement systems.

Thank you for inviting me to be with you this morning to open your 2005 Payments Panorama conference. Please enjoy the rest of the conference.