Canadian consumers are being left to share their financial data in potentially risky ways as the government winds its way through a belaboured open banking review process.
As global competitors flock to countries with established open banking regulations, consumers and fintech companies are using workaround processes to access online banking services. Open banking advocates say the delayed regulatory review could cause Canada to fall behind further and restrict the ability of domestic fintechs to scale. Critics, meanwhile, warn the new regime could bring risks of its own, including the potential for more cyberattacks on banks.
Meanwhile, open banking remains an elusive term to most Canadians.
So what is it and why does it matter? The Financial Post’s Stefanie Marotta breaks it down.
What is open banking?
In a nutshell, opening banking is a regulatory framework that would allow consumers to determine how to share their banking data with financial service providers, or move their information from one institution to another.
The framework, which has already been adopted by the United Kingdom, could reduce barriers to switching that encourage customer loyalty and allow upstart fintech companies to compete more directly with incumbents — developments that could put pressure on the bottom lines of Canada’s Big Six banks.
Critics of open banking allege that the regime change could put privacy at risk by exposing large financial institutions to cyberattacks.
A government advisory committee, however, found that the current process already fails to secure data sharing and limits consumer choice.
“There’s been a bit of fear-mongering by some of those who might not want to see this come to fruition — that an open-banking ecosystem could put consumers and the safety and soundness of the financial system at risk,” said Steve Boms, executive director of the Financial Data and Technology Association of North America (FDATA). “When that’s something that government leaders are confronted with, you want to be really careful and thoughtful about how or whether to proceed in the face of that argument.”
What is Canada’s current regulatory environment?
Currently, fintech companies use a form of technology known as screen-scraping. Consumers share the usernames and passwords from their financial institutions to allow applications to access their bank transaction history. As many as 4 million Canadians use data-driven financial service providers that require screen-scraping, according to a 2020 report by the government’s advisory committee.
But this process also puts consumers at risk. Screen-scraping could violate a bank’s terms, and the customer could be liable for any potential losses incurred if there is a data breach or if their account is compromised. The process also poses barriers to a fintech company’s growth, hindering Canada’s ability to compete globally.
“It’s a really crushing landscape,” said Hanna Zaidi, Wealthsimple director of regulatory research and development and Open Banking Initiative Canada board member. “Banks technically own your financial data, and there isn’t any legislation that says otherwise. So all your financial history, information, behaviour is the property of whatever financial institution that you bank with, so fintechs have to use screen-scraping tools to get access to a segment of that data.”
What does open banking look like globally?
As Canada spins its wheels, other countries have already started implementing new regulations — and are seeing their fintech sectors expand, creating jobs in the process.
Britain introduced open banking in 2018, and a number of fintech companies have since relocated their headquarters to the U.K. — including global fintech startup Revolut, which left the Canadian market in the spring. Australia launched its regime last year, and Singapore and Brazil have started making incremental changes to their regulatory frameworks.
Meanwhile, delays in Canada’s shift to open banking weigh on home-grown fintech companies and compromise the country’s ability to attract global players.
“That’s significant investment and job creation that goes to other markets, and Canadian consumers also aren’t getting the benefit of the tools that those fintechs are providing, whereas consumers and businesses in other markets do get those tools,” Boms said.
“We saw almost half of the global fintech investment pre-COVID going to the U.K., and it wasn’t because there was political stability or a low-cost taxes, it was because there was certainty around the regulatory regime.”
What is the Canadian government doing about it?
Open banking has been on the federal government’s radar for years. Prime Minister Justin Trudeau’s government said in its February 2018 budget that it would review the “merits” of open banking. It took seven months before former finance minister Bill Morneau launched a four-person advisory committee, including Colleen Johnston, a former executive at Toronto-Dominion Bank; François Lafortune, a Montreal-based entrepreneur and investor; Kirsten Thompson, a Toronto-based lawyer at Dentons Canada LLP; and Ilse Treurnicht, the former head of the Toronto tech hub MaRS Discovery District.
