The Canadian fintech review: Open banking

Brigitte Goulard (00:06): So Marissa, first question: What is open banking?

Marissa Daniels (00:10): Open banking is a framework that allows customers to securely share their financial data with third-party service providers through the use of application programming interfaces or “APIs”. And open banking promises to provide a more competitive and accessible landscape for customers to access various financial services. Open banking isn't a new thing. It's available in various countries across the globe, each of which have their own unique regulatory frameworks.

Marissa Daniels (00:51): Data security is, I think, probably one of the key arguments in favour of an open banking framework and the advisory committee's report on open banking noted that over 4 million Canadians are already sharing their financial data with third-party service providers through the use of screen scraping, which is said to be a bit of a less secure way of sharing your financial data because it requires you to share your secure login credentials from your bank with this third-party service provider. And so the thought is that open banking with a more regulated framework that has, as part of the framework, technical standards and various kind of rules and criteria around data security and privacy, it will enable Canadians to essentially keep engaging in the practices that they're already engaging in, which is using these third-party services, whether it be budgeting tools or product comparison tools, things like that. But through the use of APIs, which should provide a bit more security with respect to sharing your information.

Brigitte Goulard (02:06): So they'll be happy that their data is secure. But will they also be able to control the data because it appears that they'll be able to share it with various other providers? People are used to sharing with their FI, but what about sharing with a third party? Like do they control the data?

Marissa Daniels (02:24): Yeah. So there also is, I think, the notion that open banking, a framework, would provide a bit more control over your financial data and the movement of that data and would allow customers to direct their FIs to share their financial data with specific third-party financial service providers, regardless of whether the financial institution has a pre-existing relationship with that service provider. So not only will it give customers more control, but it also will be, I think, a more convenient and probably much more seamless process for transferring your data.

Brigitte Goulard (03:10): I assume that because they'll be able to be working with various fintechs, wouldn't that also introduce more competition in the system?

Marissa Daniels (03:17): Absolutely. I would say that with more data security and more regulation, I think people's comfort level with sharing their financial information with these third-party financial services providers is going to increase. And that increased kind of uptake is going to facilitate a lot more development in the fintech space and a lot more competition. And having kind of a regulatory framework will provide, I think, a landscape for a lot more development, which is not only great for the industry, but I think is also potentially really great for customers who are going to have a lot more optionality and a lot more available to them in terms of financial products and services.

Brigitte Goulard (04:09): I've been hearing that in Canada we may be adopting a little bit of a different approach that might be found in other jurisdictions, and it's been referred to as the “hybrid approach”. Can you explain a little bit what that means?

Marissa Daniels (04:21): Our Advisory Committee report refers to a “made in Canada hybrid approach to open banking”. And what that means is a framework that recognizes the distinct roles of both government and industry. And so in order to develop our open banking framework in Canada, government's role will, mostly and has mostly, been focused around the development of policy and the consultation process, and industry will be responsible for the implementation and administration of the system.

Brigitte Goulard (05:02): I understand that this is taking much longer than we expected. The Minister of Finance appointed the Open Banking Committee in April 2018. So why is this taking so much time? What other components of open banking do we need to have in place in order for this to happen?

Marissa Daniels (05:19): That's a good question, Brigitte. It is certainly taking longer than people expected when the final report was released, they announced a January 2023 target date, which is fast approaching. And I think some of us are losing confidence that everything might be in place for that time. But I think it's partly because I think quite a bit needs to still be worked out in terms of what our open banking framework will look like. Specifically, I think there are a few key initiatives that need to sort of be in place in order for an open banking system that appropriately balances innovation and competition with the need to safeguard privacy and security of customer information, as well as support the integrity and stability of the financial system. And these three things would be: First, the coming into force of the Retail Payment Activities Act, which will regulate fintechs that are offering payments services, the second is the real-time payments system that is expected to be in place in 2023, and the third pertains to privacy laws. And specifically in 2022, we saw the introduction of a couple of new pieces of privacy legislation and I think there's still a lot of open questions about how open banking might interact with certain privacy laws, and specifically with respect to some of the new laws related to cybersecurity protocols that are in place. It seems that smaller fintechs will want to participate in the open banking system, might need to adopt cybersecurity protocols that are at the level of that which would be expected from banks. I think aside from that, there are also a number of open questions about who the appropriate regulatory authority might be, particularly since there are questions about jurisdiction and participants will be either provincially or federally-regulated. I think there are a lot of questions still about data security and potential for data breaches. But at the same time, I think there's a lot of market readiness for open banking. Like you said, we've been talking about it for some time. And as we saw even a few months ago in the news, a few banks are already working with various fintechs to develop APIs and, you know, are already kind of moving ahead with putting these things into place for open banking.

Brigitte Goulard (08:16): Excellent, excellent news that people are actually moving towards, even though we may not have a framework to deal with yet.