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Will Buckley is a director at fintech company Xero Canada.

The concept of open banking is rapidly gaining traction around the world and is poised to reshape the financial landscape in Canada.

Open banking refers to the use of application programming interfaces (APIs), which are available from a bank for third-party software providers to securely access features and data from that particular bank on behalf of their joint customer with the customer’s consent.

If implemented, open banking will provide improved outcomes for three Canadian stakeholder groups – business owners, financial technology providers (fintech) and financial institutions – by allowing businesses to have greater control over their financial data, including the ability to choose which third-party applications are granted access to it. With this in mind, it is crucial that policy-makers invest time with stakeholders to develop a clear roadmap to implementation that both mitigates risk and ensures open banking delivers on its promises.

For decades, financial institutions have been viewed as the sole custodians of financial data, but with the growing demand for fintech innovations from business owners and consumers, this idea needs to evolve. Historically, in order to access a customer’s financial data, fintech providers would work through outside plug-ins and third-party vendor technology. However, this process is roundabout and disjointed, resulting in slower service for business owners and concerns over data security.

Alternatively, using secure transaction feeds from financial institutions enables businesses to exponentially streamline their accounting processes. Having access to real-time financial information increases the ability to make quick, informed business decisions – and this is ultimately the power of open banking. Additionally, open banking expedites access to the information that banks need to make informed lending decisions and, in turn, allows customers to gain increased access to capital. However, financial institutions remain concerned about their ability to deliver continued data security and a seamless customer experience.

Globally, we have seen two distinct paths forward for the adoption of open banking. The first is the British/European Union government-led model, in which regulators have imposed policy without adequate input from stakeholders, forcing banks to rush to a hard deadline, which could be problematic. As they struggle to adapt their platforms and implement new technology, it is evident that this fragmented and inflexible strategy could jeopardize data security and customer service in Britain. Pushing Canadian banks to adapt too quickly could be particularly devastating, as many Canadian financial institutions have lower tech capabilities than their British counterparts.

The second is market-led, as seen in New Zealand, Singapore, Hong Kong and, most interestingly, the United States and Australia. First movers in Australia’s financial industry took the lead on building digital products and services to the benefit of their customers and have seen that help banks build stronger relationships with their customers. Three years ago, Xero partnered with National Australia Bank (NAB) to create the world’s first two-way data-sharing technology between a financial institution and an online accounting platform. NAB then developed a world first, launching loans software with full integration to the accounting platform. This was the spark for Xero to build similar integrations in the U.S. with Wells Fargo last year and, more recently, with Silicon Valley Bank.

Likewise, working successfully with fintech providers in the United States has successfully established the U.S. Financial Data Exchange (FDX), an organization that is working to unify financial institutions and fintechs around a single API standard. Most importantly, this unification means that no financial data will ever be accessed without the consumer’s full permission and control. The FDX API also enhances consumer protection because the financial-data ecosystem will no longer rely on the sharing and storing of login credentials and non-proprietary technology such as screen scraping.

Looking at these global examples, it is clear that Canada should embrace market-led innovation that ultimately paves the way for a broader government-led open banking discussion in which all parties agree on three guiding principles: data ownership, common security standards for banks and fintech providers and a timeline for launch.

There is now an opportunity for a government-led initiative to formalize security standards for future collaborations on the path to open banking. With these standards set, regulators can develop a timeline that works for all stakeholders and marks milestones to be worked toward simultaneously.

There are three key milestones to ensure success. First, financial institutions must develop their technical capabilities in the form of strong APIs that enable fintech providers to connect on behalf of the customer. This effort must specifically address the risks regarding consumer protection, privacy, cybersecurity and financial stability.

Second, financial institutions need to set up customer-security and data-governance policies that clearly outline that data is owned by the customer and that the financial institution is only a custodian; this will develop a trusted and transparent relationship between stakeholders.

Finally, stakeholders need to finalize an approved vendor list. This list will act as the controlled testing environment for open banking, prior to wider public release, with a select group of fintech providers who already interact with Canadian customers and are able to test and validate their banking partner’s technology and their ability to share information securely.

With this measured approach, the Canadian government will have established a significant catalyst for change in the financial industry that will foster a collaborative and decisive conversation around the adoption of open banking between the major stakeholder groups involved.

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