Soheil Karkhanechi is an entrepreneur, investor and chief executive officer of Legalender, a litigation finance firm focused on financing plaintiffs in consumer and commercial cases.
An important segment of Canada’s technology industry is falling behind the rest of the world. The culprit? Federal politics and political manoeuvring by the big banks. At risk is not only the continued success of a key part of our technology industry, but also consumer access to better and more reasonably priced financial services.
Technology has already vastly improved the way we access financial services. Much of the innovation in the past few years has come from financial technology companies known as fintechs. These companies strive to use technology to better deliver financial services. Fintechs have been central to the recent resurgence of the Canadian technology sector, and a robust fintech ecosystem is vital to the competitiveness of both the technology and financial-services industries. But the next wave of fintech advances will only be possible in an “open banking” environment and Canada is already behind its global competitors in adopting such a system.
Open banking is a global trend that allows consumers and businesses to share their banking data and processes with third-party service providers using secure digital channels. For consumers, open banking holds the promise of greater access and better prices. For fintechs, open banking is a necessary ingredient in the provision of the next generation of innovative financial services.
By analyzing and aggregating a consumer’s information, these companies can offer customized financial services that are not otherwise available or are only available at higher prices. For example, in an open-banking system, a shopper may be able to use a single app to monitor their entire financial circumstances, and receive live advice on financial or investment goals. Can I afford this new iPhone? A money-management app operating in an open-banking system would have the answer for you on the spot. Am I paying too much on my mortgage, given my particularly frugal lifestyle? There is an app for that, too.
Open banking is sweeping the world. Britain, the EU and Australia are just some examples of jurisdictions that have already adopted open-banking frameworks. The Canadian government seems aware of the inevitable coming of open banking, but progress in addressing the issue has been uneven and slow.
The Senate committee on banking, trade and commerce has called for “decisive action from the federal government to move forward with an open-banking framework.” A study conducted by the committee concluded that “if Canada misses the opportunity to create a regulatory environment conducive to open banking, Canada risks falling behind other countries.”
But the cabinet’s response to the open-banking trend has been less than robust. The Minister of Finance established an advisory committee in 2018 that has yet to issue any recommendations. The coming federal election is likely to delay matters even further.
The government’s ambivalent response is at least partially owing to pressure from the big banks, which have sought to slow and disrupt the adoption of a comprehensive open-banking framework. The Canadian Bankers Association submitted a report to the Ministry of Finance’s advisory committee, which reluctantly concedes that “open banking offers benefits to consumers”, but then goes on to focus entirely on what it calls the “risks of open banking.”
Ironically, there is nearly unanimous agreement that the lack of a robust open-banking framework only heightens the risk associated with the sharing of financial data, which Canadians already do regularly. Canadian fintechs currently use outdated “screen scraping” mechanisms to access their clients’ financial data. This exposes consumers to privacy and security risks that would be vastly reduced in an open-banking regime, where application program interfaces allow consumers to safely choose to share their data with accredited third-party service providers.
In the face of overwhelming evidence of the benefits and inevitability of open banking, the banks have adopted the tactic of calling for an “industry-led approach.” In Ottawa-speak, this is the equivalent of “let us do what we want” or “trust us, we got this.” In Canada’s notoriously concentrated banking market, the call for an “industry-led approach” is particularly alarming.
Innovations in fintech have already allowed Canadians to borrow less expensively, invest more efficiently and receive better rates on currency exchange. In the near future, fintechs could vastly improve financial services for consumers and businesses, increase competition and continue to be an engine of growth for Canada’s technology sector. But that will only be possible in an open-banking framework. Will Canada be ready?