Open banking, the ‘life blood’ of fintech and new bank services, is set to arrive in Canada by 2023

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Financial technology startups and industry advocates are urging Ottawa to implement recommendations from its open banking advisory committee that would provide Canadians with easier and more secure access to their banking data.

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After more than a year of delays, the final report by the federal government’s advisory committee on open banking was released on Wednesday, detailing a regulatory framework to allow consumers to move their financial information freely between institutions.

The report calls on Ottawa to create and launch an open banking system by January 2023.

The recommendations land at a time when other countries have already blazed ahead, and Canadian fintechs say they are losing opportunities to innovate in the financial industry.

Open banking is a regulatory framework that would allow consumers to determine how and when to share their banking data with financial service providers or move their information from one bank to another. The regulatory change could also reduce barriers to switching financial institutions — a change that could put pressure on Canada’s Big Six banks, which have enjoyed a hold on customer loyalty.

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The ability of the end user to permit data access is the lifeblood of fintech

Steve Boms, executive director of the Financial Data and Technology Association of North America

“The ability of the end user to permit data access is the lifeblood of fintech,” Steve Boms, executive director of the Financial Data and Technology Association of North America (FDATA). “When a financial institution says that they won’t allow you to use that tool, the fintech can’t provide you with service. As a result, there’s less competition, which ultimately leads to higher prices.”

The report recommends that customers be allowed to authorize the movement of their own data and compel the banks to provide access to their account information, including chequing accounts and mortgages.

Without an easy or secure way to access customer data, fintech companies use a form of technology called “screen-scraping” to access the banking information they need to process transactions. Customers share their bank login information to allow third-party applications to access their transaction history, a process that could put the customer at risk of privacy data breaches.

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As many as four million Canadians use data-driven financial service providers that require screen-scraping, according to a 2020 report by the government’s advisory committee.

When attempting to use financial services from a provider other than a bank, customers typically provide access to their financial data through a third-party tool that asks for the username and password. In some cases, a customer attempting to log in through a third-party provider could receive an error message, and assume that they are unable to access their financial data due to a technical issue. But it is the consumer’s bank that is rejecting access, Boms said.

“It’s so opaque to the end user, and that’s why most people don’t realize it’s happening,” Boms said. “You may assume that it’s an error with the fintech or a temporary outage, but you don’t realize that your financial institution was effectively saying we’re not going to give you permission to use this tool.”

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While fintechs have been calling for easier and more secure access to data, the big banks have said that changes that are too broad or sweeping could harm customer privacy.

The Canadian Bankers Association said in a statement that it would continue working with government and stakeholders to “implement a system that optimizes the possibilities of open banking in Canada’s unique financial services landscape.”

But those in the fintech industry say the process has already dragged on for too long. The federal government received the final report from the advisory committee in April, but took four months to release it, on Wednesday.

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FDATA sent a letter to Finance Minister Chrystia Freeland in July to address the delay. It outlined the impact of a lack of open banking regime on consumers, as well as the fintech companies.

The Washington-based fintech lobby group cited a case where the Bank of Montreal prevented its customers from providing third-party providers with access to their banking information, according to the letter obtained by the Financial Post. It added that other banks have also acted in a similar manner.

A BMO spokesperson said in an email statement that it is an example “of scenarios that can be addressed with the implementation of a modern and progressive open banking regime in Canada.”

As many as four million Canadians use financial service providers that require screen-scraping while waiting for an open banking regime

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. In January 2020, then finance minister Bill Morneau released the advisory group’s initial report, which recommended that another report be produced on a proposed regulatory framework. The consultation process for the final review was delayed by pandemic.

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To keep the process moving forward, the advisory committee recommended that the federal government appoint an open banking czar at the Finance Department to oversee the design and consultation of the framework. A purpose-built governance entity made up of industry participants and consumer representatives would implement the open banking regime.

Lobby group Council of Canadian Innovators said that those roles are essential to making the concept of open banking a reality in Canada.

“There needs to be someone that shepherds and keeps this file breathing and alive, because over the past number of years, this file has stagnated,” said Patrick Searle, director of cyber initiatives at the CCI. “It has allowed economies around the world to move quicker than where we should be at.”

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As Canada delayed, other countries have already started implementing their own regulatory frameworks while garnering investment from fintech companies that set up shop in those markets and provided new jobs.

Britain introduced open banking in 2018, and several fintech startups have since relocated their headquarters to the U.K., including global fintech company Revolut, which left the Canadian market in the spring. Australia, Singapore and Brazil have also started phasing in regulatory frameworks.

London-based digital payments provider Wise Plc, formerly known as TransferWise, said it is committed to its business in Canada, adding that until open banking is adopted, Canadian customers will experience less efficient services than what it is able to provide in other countries.

“Canadian customers may have slower payment speeds and higher costs, and because of those delays, there may be less transparency into the status of that payment because of what is visible or not visible to us,” said Nick Catino, global head of policy and campaigns at Wise. “Our customers in other jurisdictions may have a better experience with quicker, lower-cost payments because of forward-leaning initiatives from those governments.”

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