Federal efforts to bring ‘open banking’ to Canada are being welcomed by industry players – but there is also criticism that any changes, after years of waiting, may not come soon enough to encourage innovation or enable smaller financial players to compete with larger institutions.
Open Banking allows consumers or business customers to share personal and financial information between accredited banks and other companies. For example, have a budgeting app collect transactions from multiple bank accounts and compile them for you, or have price comparison software that analyzes your shopping behavior.
Recent moves by Ottawa are “definitely a game changer,” said Parna Sabet-Stevenson, a lawyer specializing in financial services and technology at Toronto law firm Gowling WLG.
She says promises in the latest federal budget would eventually allow Canadians to securely share their financial data and ultimately give companies large and small access to competitors’ customer data, encouraging them to come up with new products and services.
That access would only be possible with consent, and would be secure and standardized across Canada, which Sabet-Stevenson said addresses concerns raised by major financial institutions in the past.
Lawyer Parna Sabet-Stephenson says Ottawa’s recent moves toward open banking are “absolutely a game changer” for Canadian financial technology companies. (Vedran Lesic/Radio-Canada)
Federal politicians have been talking about open banking since 2018, but last week’s budget finally set aside some actual cash: $1 million for the Financial Consumer Agency of Canada by 2025 to prepare to oversee a new framework and open banking system, with another $4.1 million. million over a period of three years for the Ministry of Finance.
“Open banking means you, not your bank, have control over your financial information,” says Hanna Zaidi, Toronto-based vice president at Canadian fintech Wealthsimple, which has long advocated open banking.
Hanna Zaidi, from fintech Wealthsimple, compares open banking to being able to keep your phone number if you change phone companies. (Sarah Palmer/Wealthsimple)
Zaidi says that with open banking, a Canadian applying for a financial product, such as a mortgage, may not have to manually gather all their information for an application.
All of a consumer’s necessary data, such as bank balances and existing credit limits, could be securely collected through the promised open banking framework, which could also make it easier for Canadians to switch banks or compare financial products than it is today.
To wait long
But fintech companies are frustrated that Canada is lagging behind peer countries in rolling out open banking, such as Australia.
“WTF is going on, Canada? Why can’t we do this?” said Andrew Dale, an executive at business-focused financial firm Float.
Dale points out that it took Australia less than two years from the first announcement of a review in 2017 to legislation in 2019 for similar principles, and it has delivered almost fifteen times the funding.
A pedestrian passes a bank in Toronto’s financial district in July 2019. (Brent Lewin/Bloomberg)
During their long, decade-plus wait for open banking, some in the industry have attributed Canada’s slow pace to big banks trying to keep new entrants out of the market.
“I don’t think they have an interest in it happening quickly,” said Julien Brault, whose company makes the budgeting app Hardbacon.
“There is no political price to pay if open banking is not implemented,” he said, but it would “change everything” for budgeting software in Canada if an open banking framework is implemented.
Without it, apps like his have to use slower, less reliable methods to collect financial information from their users.
Many rely on “screen scraping” to access data from larger banks, typically involving a customer giving up their banking passwords, which the federal government and some financial institutions describe as risky and less secure.
Dale, with Float, says he believes it doesn’t have to be that difficult to implement regulations that give consumers the power to choose who can access their financial data and when.
Andrew Chau, co-founder of Neo Financial, says he believes open banking will lower costs for Canadians by increasing competition. (Anis Heydari/CBC)
“We have six banks in this country that have to work with the government to do something. It’s not like the US where we have thousands of institutions,” Dale said.
CBC News asked the Canadian Bankers Association (CBA) if it, or its member institutions, are against speeding up the process.
The CBA did not directly address this question, but said in a written statement that it strongly supports moving forward with a “consumer-driven banking framework.”
“Banks strongly support a resilient, consumer-centric framework that realizes the benefits of robust, secure and consumer-driven data exchanges while appropriately managing the risks posed by the interplay between more relevant data, newer players in the system and increasingly sophisticated fraud,” the report said.
Sabet-Stevenson speculates that the big banks had “no desire” to move to open banking a few years ago because they didn’t want to share customer data.
But she also says she believes they have since changed their perspectives.
“We’re way past that,” she said.
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Open banking could also allow banks large and small to identify consumer trends and target more customers, said Scott Talbott, executive vice president of the Electronic Transactions Association, a trade group that represents the payments industry.
“While you’re sharing your banking information, another bank might say, ‘Hey, we noticed you have a lot of savings and we’re offering you a product that might be a better fit or better fit for you. Come see us. ‘”
Even if things move more slowly than some would like, Andrew Chau says open banking would benefit consumers by making companies like his more competitive with the big institutions.
“With increased competition, you obviously get better prices when it comes to banking fees, when it comes to the costs you might pay for borrowing money, or even when it comes to earning higher interest rates on your savings,” says Chau, co-founder of Calgary-based Neo Financial, which offers the Hudson’s Bay credit card and a range of other financial products.
Switch settings
Chau says consumers now have a lot of difficulty switching financial institutions because they have to manually switch payment institutions and alert financial partners, and they may also have difficulty transferring other investments or loans.
His perspective is that Canadians will face direct financial consequences if they are delayed “five, seven or eight years” compared to European countries or Australia.
“It’s consumers who are paying a higher price due to slower timelines,” Chau said.
Banks would also be able to collaborate more easily once a legal and technical framework for open banking is in place, said Lynnette Purda, professor of finance at the Smith School of Business at Queen’s University in Kingston, Ont. .
“There is a clear movement from a competition perspective to cooperation and collaboration and partnership,” Purda said.
But even with partnerships, industry players like Neo’s Chau or Wealthsimple’s Zaidi indicate the benefits will require government involvement.
They both compared the introduction of open banking to when federal regulators required Canadian phone companies to allow consumers and businesses to keep existing phone numbers.
“Apply that same kind of transfer of your data to your financial services information,” Zaidi explains, implying that regulation is necessary for open banking, otherwise established players won’t facilitate it.
“It will force financial institutions to compete for your business. It will reduce costs. It will become a platform for innovation and new use cases,” she said. “That’s what we hope.”