Cross-Border Differences in Payments and Banking Landscape

As businesses expand on both sides of the U.S.-Canada border, they must be prepared to manage the many unique aspects of each country's complex financial environment. Differences affect financial services and processes, as well as legislation, governing bodies, fraud protection, and customer preferences.

The banking landscape in the United States is substantially more complex than the consolidated infrastructure and unified policy in Canada. The U.S. is home to more than 6,500 banks, while Canada is dominated by just five, each offering a full suite of treasury services. This means companies looking to do business in Canada need only to manage their banking relationship with one institution. This scenario helps companies gain efficiencies in their treasury operations, as well as favorable pricing and single-source reporting.

It also means that companies must choose their banking partner very carefully. When considering prospective Canadian banking partners, treasurers should look at how well-aligned the bank is and whether it will be able to support the company's growth strategy. Another consideration hinges on how the bank's business units in Canada operate—autonomously or through central governance—and how that model impacts the bank's ability to integrate into the company's operating model.  

The United States and Canada also differ in important ways when it comes to payment processing and clearing. In the U.S., low-value electronic payments are enabled through the Automated Clearing House (ACH) format, while in Canada, they are enabled through the electronic funds transfer (EFT) format. These formats are similar, yet unique. They provide different levels of data to accompany the payment, and they require alternative approaches for passing payment addenda to beneficiaries to facilitate reconciliation.

Electronic data interchange (EDI) is the format offered by Canadian banks, allowing for enhanced remittance information to be passed over EFT, and on par with certain formats of ACH (CTX). To modernize Canada's payment system, better aligning with remittance options available in the U.S. and around the globe, the Canadian Payments Association is implementing an internationally recognized payment messaging standard, ISO 20022, over the next few years.

The various formats are not exchangeable in the absence of special arrangements. A U.S. company can send an international ACH (IAT) payment to a beneficiary in Canada, provided its U.S. bank supports this service. But IAT payments are subject to substantial lead times, so they're generally used only for non-urgent payments. Companies can achieve optimal payment type choices if they partner with a bank domiciled in Canada or, better yet, a bank with a presence in both countries.

One other issue that corporate treasurers with cross-border operations must be aware of is that the payment-clearing system is much faster in Canada than in the U.S. In Canada, funds are available as soon as the payment recipient makes a deposit. This is great if you are on the receiving end, but not so great if you are the payer.

In the United States, fund availability is based on the policies of each individual bank, so bank selection may have implications for cash flows. But in Canada, payers don't have the benefit of any float. Thus, companies doing business across the border need to carefully manage their cash flows to ensure that bank accounts are adequately funded as soon as a check or other payment made to a Canadian organization hits the recipient's bank.

Effectively managing these issues is key to avoiding complications in operations—for example, by preventing days sales outstanding (DSO) from ballooning. Companies can simplify cross-border cash management with the help of an adviser that understands the nuances in policy differences between the two countries, and facilitates transactions between them.

Fighting Fraud in the U.S. and Canada

There are also differences between the American and Canadian banking environments when it comes to protection against payment fraud. In Canada, there are fewer tools to protect a company against fraud in its electronic payments. However, fraud is far less prevalent in Canada, largely due to chip and PIN card technology.

The differences in security measures like EMV compliance are also significant, with each side of the border presenting different security benefits and mitigation options. While the U.S. is beginning to enact more stringent compliance mandates, Canada's infrastructure has been in place for some time, and the country remains far less vulnerable to fraud.

Debit block for EFTs is not as prevalent among Canadian banks as ACH debit block is in the United States. However, Canada compensates for this by having longer recourse timeframes for disputing unauthorized debit transactions. For example, a claim for reimbursement by a customer for a disputed pre-authorized debit can be made within the following timeframes:

• If a pre-authorized debit (PAD) agreement is in place between the trading partners: 10 business days after the date on which the PAD was processed to the payer's account
• In the absence of a PAD agreement: 90 calendar days after the date on which the PAD was processed to the payer's account

The timeframes for recourse related to other types of fraud also differ greatly. Recourse for business electronic payments in the U.S. is typically limited to 24 hours. In Canada, for an altered check—when an original check has been changed—businesses have up to 90 days after check presentation to dispute the item, although for counterfeit checks, which are reproductions of an original check, the recourse timeframe is 24 hours.

Treasury Factors in Planning Cross-Border Operations

The differences between the American and Canadian financial services sectors create real challenges for the treasurer of a corporation looking to set up cross-border operations. Still, the economic benefits of doing business cross-border can greatly outweigh the regulatory complexities and banking industry differences.

The following tips can simplify cross-border operations, helping businesses gain a competitive advantage by harnessing the benefits without being overwhelmed by the differences between the two markets:

Keep close watch over cash flow timing.  The overall collection process for checks and electronic payments appears to be quite similar on the surface, but there's a big difference between the U.S. and Canada in the clearing process for each payment type. The corporate treasury team needs to know the timeframes for clearing processes and settlement windows on both sides of the border. It must account for float, or lack thereof, because that will impact corporate cash flow. Businesses must pay close attention to these differences when determining their cash position.

Take advantage of new reporting tools.  In order to make sense of the incongruities between the American and Canadian financial landscapes, it is imperative that businesses find a financial reporting tool that can consolidate processes and remittance information across the organization, on both sides of the border. While regulatory policies and infrastructure may vary, there are tools available to help make sense of it all and keep the business running efficiently. Having full transparency to banking transactions in real time is essential to effectively managing cash flows.

Have a support system of experts.  Now may be the best time in years to invest in cross-border operations. Tapping into the knowledge of financial professionals who are subject matter experts on both sides of the border will help you navigate the market and ensure your success.

Keeping these points in mind, business leaders must also determine what operational structure makes the most sense for their organization. Traditionally, cross-border operations meant opening physical locations across the border, but today that isn't necessarily the case. Some companies have employees in Canada, but all their Canadian employees work remotely without an official corporate office in the country. This structure is common among businesses that rely on regional sales teams in the field to drive growth.

Businesses can also achieve a cross-border presence through third-party distributors who work on behalf of the organization. And with the rise of e-commerce and online-only businesses, many companies are going virtual and offering their services or products to Canadian customers without ever establishing a physical presence in the country.

Corporate Policies to Improve Cross-Border Efficiency

Companies that successfully navigate these complexities may give their bottom line a big boost by doing cross-border business. Investing time up-front to establish internal processes and standards from the very beginning will minimize problems that can occur with ambiguity.

Even very small details can impact efficiency and overall business success. For example, staff may have a difficult time deciphering which payments are in U.S. dollars and which are in Canadian dollars when looking at a purchase order or invoice. Company policy may head off confusion by dictating that suppliers use a specific symbol for each currency on invoices. Standardizing processes around these types of policies, and creating best practices from the very beginning, can reduce miscommunication among staff, suppliers, and customers.

As the U.S. economy continues to strengthen, now is the time for companies to invest in business expansion. Organizations that take advantage of the technology, tools, and support from their banking partners are poised to take advantage of the powerful trade partnership between the U.S. and Canada.

Effectively executing a cross-border strategy is a big step for any business. In order to successfully expand the business's footprint, take the necessary time up front to prepare the organization for the ultimate goal of any management decision: profitable business growth that provides a good return on investment.

Kevin Kane is the managing director and head of sales for Treasury & Payment Solutions in the U.S. for BMO Harris Bank. During his 30 years in the financial services industry, Kevin has gained sales and leadership expertise within a variety of sectors, including commercial lending, large corporate, and business banking.