Lynx Payment System: How Canada’s High-Value Payments System Works

High-value Payment Systems are specialized banking systems responsible for moving large amounts of money between banks and financial institutions. It’s a secure “express lane” for big money transfers. In Canada, the HVPS in use is called Lynx. 

Operated by Payments Canada, Lynx replaced the two-decade-old Large Value Transfer System (LVTS) in 2021. It uses an RTGS framework to settle large, irrevocable, and time-sensitive payments in real time. Read on to learn more about how Lynx works and how it compares to other payment settlement systems.

Lynx is Canada’s high-value payment system that uses a real-time gross settlement (RTGS) framework to clear and settle large-value, irrevocable, and timely payments between financial institutions.

It was launched in 2021. Before that, the Large Value Transfer System (LVTS) served as Canada’s high-value payments system for more than 20 years. But LVTS did not work on an RTGS system, which is the global standard for wholesale payments. Hence, Lynx was introduced. 

The Bank of Canada oversees Lynx; meanwhile, its operations are managed by Payments Canada, which manages Canada’s payment clearing and settlement infrastructure.

Lynx Payments Canada was introduced to replace the two-decade-old Large Value Transfer System (LVTS). It was introduced by Payments Canada in 2021, the organization responsible for Canada's payment infrastructure since 1980 (known as the Canadian Payments Association until rebranding in 2016).

Before Lynx, LVTS accumulated the payments of a business day and settled net amounts owing between the transaction participants at the end of the day. In contrast, Lynx operates on an RTGS basis, settling payments in real time.

LVTS had the following key problems:

• Increased credit risk exposure among participants because the transactions used to be settled at the end of each day. The implication being that if one institution failed during the day, others could face losses.
• Complex collateral arrangements, with two tranches, each having different risk-control limits and collateral requirements. It required the Bank of Canada to provide a residual guarantee in case multiple participants defaulted.
• Outdated technology after operating for over 20 years, and a payment infrastructure that needed upgrading to meet modern payment standards and support newer messaging protocols like ISO 20022 

Lynx was introduced to replace the outdated LVTS, aiming to:

• Improve risk management, because in the RTGS system, money moves instantly from one bank's account to another, so there's no accumulation of debts during the day.
• Align with global RTGS standards, making it easier for Canadian fund transfers to integrate with international payment systems.
• Support ISO 20022, the international financial messaging standard that allows for remittance data like invoice details to travel with each payment, and improve fraud detection and data reporting.

Let’s understand the step-by-step process of how Lynx functions and settles interbank transactions through its RTGS system:

1. Bank submits payment instruction

Say there’s a large-value transaction taking place between two banks, Bank A and Bank B, wherein Bank A needs to send a payment to Bank B. Bank A sends a “payment instruction” to Bank B. This payment message follows the ISO 20022 financial messaging standard. 

2. Liquidity check performed

Before the payment is processed, Lynx checks Bank A’s settlement account with the Bank of Canada. Lynx checks whether the bank has sufficient funds to transfer. If yes, the payment proceeds; if no, it is queued until the bank receives more funds.

3. Funds reserved

Once liquidity is ensured, Lynx reserves the funds in the sending bank’s settlement account (Bank A in our case). This ensures that these reserved funds cannot be used for payments elsewhere and that the money transfer can be completed safely.

4. Real-time gross settlement occurs

Lynx then settles the transaction immediately, with the settlement recorded in the books of the Bank of Canada. The system debits Bank A’s account and credits Bank B's account. And since it is a gross settlement, each transaction is processed separately rather than being netted against other payments.

5. Finality confirmed

After settlement, the transaction becomes irrevocable, and both banks receive instant confirmation.

The above example clearly demonstrates how the RTGS (Real-Time Gross Settlement) system works with Lynx, wherein

• Each payment is settled individually without accumulating different payments and netting them against one another. 
• Immediate finality of Lynx payment is ensured, as payment cannot be reversed.

Just as Lynx is Canada’s high-value RTGS system, Fedwire is the United States' RTGS system, operated by the Federal Reserve System. 

On the other hand, CHIPS (Clearing House Interbank Payments System) is a high-value payment system (mainly used for international USD payments) operated by The Clearing House Payments Company, which uses a net settlement method instead of RTGS.

Here’s the comparison table for easy understanding.

These payment systems are often compared to give a global perspective on major high-value payment systems in North America.

A secure and standardized financial messaging system is key to transmit payment instructions and information between banks. 

Lynx payments Canada uses SWIFT (Society for Worldwide Interbank Financial Telecommunication) as its financial messaging service provider. Basically, SWIFT is the network for sending payment messages over which Lynx participants exchange payment instructions. 

However, Lynx Release Two, which went live in March 2023, introduced end-to-end support for the ISO 20022 financial messaging standard. So, Lynx participant banks have now migrated from using SWIFT's traditional payment Message Types (MT) to the new MX messages, which are XML based and can carry more information than their predecessor.

By adopting ISO 20022, Lynx payments Canada ensures:

• Standardized message formats across borders enabling smoother international transactions
• Interoperability with payment systems worldwide
• Reduced friction in cross-border money transfers through common data standard

Lynx participants include major Canadian banks such as Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce (CIBC), National Bank of Canada (NBC/BNC) and Royal Bank of Canada (RBC), among others. 

There are also credit unions. In fact, Central 1, which acts as the Canadian credit union system's financial institution connection point to Payments Canada, connects more than 250 credit unions to Lynx. 

And while corporations and businesses don't participate directly in Lynx, they still are major users of the system through their banking relationships. These businesses use Lynx through their banks for high-value payments, including wire transfers, mergers and acquisitions, real estate transactions, and securities settlements.

Lynx's payment system enables Canadian businesses to settle large-value payments in real time, securely. It’s used extensively to enable large corporate transactions, such as mergers and acquisitions (M&A) settlements, where very large payments must be completed with immediate finality. 

Corporate treasurers managing a firm’s cash and financial risk also depend on Lynx to move large funds between banks to manage daily liquidity positions. Since Lynx is RTGS-based, corporates involved in trade and financial markets use it extensively to meet time-sensitive cross-border CAD payments. 

While systems like Lynx handle these high-value payments well, businesses engaged in global trade often require additional infrastructure to manage cross-border transactions, foreign exchange, and payment reconciliation. This is where modern fintech platforms such as Xflow emerge.

Xflow complements traditional payment rails by providing faster and technology-driven international payment solutions. It helps businesses to send and receive international funds easily through APIs, multi-currency accounts, and local collection mechanisms.

By providing structured payment data, automated invoicing, and integrated FX tools, our platform serves as a reconciliation and operational layer for businesses handling money transfers across borders. Your business can track international payments, automate compliance documentation, and receive settlements significantly faster, often within about a day instead of the several days typical of the legacy system.

Now, let’s understand how Lynx's payment system manages liquidity risk better than its predecessor. 

1. Pre-funded accounts

In Lynx, all payments are pre-funded, meaning that payments are sent and settled only when sufficient funds are available. Since Lynx provides for real-time gross settlement, it does not involve credit risk exposures between participants. 

2. Collateralization

Participant banks (the settlement account holders) must be able to pledge eligible collateral to the Bank of Canada using the Canadian Depository for Securities' Clearing and Depository Services Inc. system (CDSX). 

Collateralization acts as a safety deposit. The collateral pledged to the Bank of Canada helps banks access temporary loans during the day. This ensures banks can keep payments flowing even when their account runs low, while the collateral protects the Bank of Canada if a bank fails to repay these intraday loans.

3. Settlement Finality

When settlement occurs, funds are made available to the receiving participant in real time, and the payment is deemed final and irrevocable. This immediate finality means beneficiaries can use received funds without risk of revocation, enhancing confidence throughout the payment chain.

4. Reduced Systemic Risk

Lynx’s fully pre-funded mechanism helps to fully mitigate the risk of financial default with regard to settlement. That is, there can be no uncovered credit losses and therefore, there is no need to borrow from a liquidity provider. 

Bank for International Settlements defines systemic risk as the risk that the inability of one institution to meet its obligations when due will cause other institutions to be unable to meet their obligations when due. They’ve also noted in published research that real-time gross settlement systems help to reduce the systemic risks in payment systems by providing settlement finality during the day. 

Lynx's RTGS architecture eliminates the domino effect that could occur in net settlement systems if a major participant were to fail.

Even though Lynx mainly handles large-value domestic CAD payments, it also plays a major role in transferring CAD to players in the international market. However, such international payments often face challenges, as different countries have different payment infrastructures with varying standards and operating hours. 

So, to bridge the differences between these systems, banks need to build good relationships with correspondent banks, where intermediary banks facilitate international transfers between institutions in different jurisdictions. As a result, Lynx indirectly interacts with global RTGS systems and international payment networks to support the settlement of transactions across borders. 

Canada is undertaking various initiatives to improve their payments system and bring it in line with the rest of the world. They are developing Real-Time Rail (RTR), which is a retail payments system that will allow individuals and corporates to send and receive instant payments 24/7, with the settlement happening in seconds. 

In addition to this, the Bank of Canada is exploring the possibility of developing a Central Bank Digital Currency (CBDC) as part of their long-term digital payments strategy. They have concluded that the need for CBDC is not currently necessary but are keeping an eye on the global developments in case the need for payments in the future requires the use of CBDC. 

These are key milestones in the payments modernization strategy for Canada, which aims to improve the country’s payments infrastructure through adoption of global standards such as ISO 20022, and the promotion of innovation in corporations.

The Lynx payment system is Canada’s modern RTGS infrastructure designed for high-value, time-critical payments between financial institutions. Operated by Payments Canada and overseen by the Bank of Canada, Lynx enhances liquidity control, risk management, and real-time settlement finality.

Alongside traditional banking infrastructure, fintech platforms such as Xflow are emerging as complementary solutions for cross-border payments. We provide a modern cross-border payment layer with transparent pricing and faster settlement. 

We charge a flat transaction fee with no foreign exchange markup, allowing businesses to convert currencies at near mid-market FX rates and receive funds as quickly as the next business day. You can explore our pricing structure here.