Ottawa has unveiled its plan to implement an open banking regime, opting for a government-led entity to oversee the system and bucking involvement from the industry’s larger lenders.
After weeks of pressure from financial-technology groups and opposition parties, the Liberal government said in its fall economic statement on Tuesday that it plans to introduce open banking legislation – dubbed the “consumer-driven banking implementation” – in its budget next year.
Open banking is a term for a new set of rules that would enable financial institutions to exchange information more efficiently and securely. The system would provide consumers with more control over how they share their financial data, making it easier for them to switch banks.
A point of contention in the rollout of the system in Canada has centred on whether the entity administering and supervising the open banking system would be led by a group of government-appointed regulators, or an organization overseen by the bigger banks. Ottawa said that it is opting for a government-oversight model, which is favoured by the smaller industry players and fintechs over a hybrid or industry-led entity.
“Something that we have been saying from the get-go is that we need to make sure that the oversight of consumer-driven banking is independent and arm’s-length,” Council of Canadian Innovators director of federal affairs Nicholas Schiavo said in an interview.
“The worst-case scenario would be to have a utility that is owned by the big banks heading up this system, because we know that that is going to do very little to open up competition and open up innovation, which ultimately is going to create the products and services that will save Canadians money.”
While Finance Minister Chrystia Freeland’s decision to create a government-led entity is applauded by fintech companies, it also bucks the open banking advisory committee’s initial recommendation. In 2021, the group said in a report that the government should create a hybrid entity “that recognizes the potential for government and industry to collaborate, each with appropriate roles.”
The Department of Finance did not respond to questions about why it chose a government-led entity and opted against implementing the council’s recommendation, but said in an e-mail that it is working on finalizing the open banking framework.
Other countries have already begun implementing open banking systems. Britain started introducing open banking in 2017, and Australia began the process in 2019. Both countries tasked government-led entities with supervising and enforcing the regime.
In October, the U.S. Consumer Financial Protection Bureau introduced its own proposed rules, saying that they would stop banks from “hoarding” a person’s data and bolster competition.
Financial-technology companies have called on the government to implement open banking, saying that it would lower barriers to entry for new players in Canada’s highly saturated banking sector. The government had previously promised an early-2023 launch for open banking. In the fall economic statement, it said it plans to provide another update in the budget next year.
In Canada, Symcor – a data exchange and payments processor created in 1996 as a joint venture between Toronto-Dominion Bank TD-T, Royal Bank of Canada RY-T and Bank of Montreal BMO-T – has called for a hybrid approach to open banking. The company provides a data platform that it says will help banks and fintechs connect the providers and recipients of financial data in an open banking regime.
“As we have seen through implementations in other markets, an either-or approach often comes with downsides,” Symcor senior vice-president of strategy, product and innovation Saba Shariff said in an e-mail statement. “Symcor’s role in actualizing consumer-driven banking remains the same – we would enable the secure exchange of data under the new government-approved framework.”
The Canadian Bankers Association did not respond to questions about Ottawa’s decision to take a government-led approach, but said in an e-mail statement that it welcomes “the clarity provided in the Fall Economic Statement” and it will “continue to work collaboratively with the government on implementing a consumer-driven banking regime in Canada.”
Without a simple or secure way to access customer data, fintechs use a technology called “screen-scraping” to access banking information to process transactions. Millions of Canadians share their bank login information with third-party applications to access their financial data, but that system comes with the risk of privacy breaches.
“You could argue that we’ve been trying an industry-led approach in Canada, where there have been no laws preventing the sharing of data, but it hasn’t been happening in any sort of organized way,” Andrew Graham, chief executive officer of fintech company Borrowell Inc., said in an interview. “The current system of data sharing where a consumer essentially has to use screen-scraping is not a good system. It fails far too much of the time.”