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Implementing open banking on a broad scale would require the establishment of a secure framework to transfer data.

Leo Wolfert/iStockPhoto / Getty Images

The introduction of “open banking,” which would allow Canadians to share their financial data more easily among financial services providers, has the potential to reshape the financial advice business.

“Its potential is very positive,” says Ian Russell, president and chief executive of the Investment Industry Association of Canada.

Namely, open banking would result in fewer barriers for financial services firms and their clients, such as eliminating the often lengthy process of gathering relevant information from many different accounts at various providers.

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“Typically, consumers may bank at one place, get their mortgage elsewhere, have a credit card with another place and then have a wealth advisor at yet somewhere else,” Mr. Russell says.

As such, financial advisors often cannot see all these accounts to understand their impact on a client’s overall wealth. With open banking, “a client with an advisor who can see all these accounts will receive better advice,” Mr. Russell says.

Furthermore, open banking could lead to greater competition. As consumers would be able to port their data more easily, firms with superior, innovative services would be able to win clients over.

But implementing open banking on a broad scale would require the establishment of a secure framework to transfer data. That’s one reason many stakeholders are calling for a government-led framework similar to those implemented in Britain, Australia and the European Union in recent years.

Adam Felesky, CEO of Portag3 Ventures, a Toronto-based venture-capital firm that makes early-stage investments in fintech firms, says the federal government must take the lead because Canada’s financial services industry is concentrated among large players – notably the Big Six banks. And because open banking would allow clients to switch providers more easily, established firms have been slow to support it.

Indeed, the federal government is examining the issue, with the Department of Finance Canada launching consultations on the topic this past January. In addition, the Standing Senate Committee on Banking, Trade and Commerce released a report in June calling for the government to enact changes to the Personal Information Protection and Electronic Documents Act to include consumer data portability as a right.

The report also recommends promoting better public education on open banking, establishing an innovation sandbox for third-party companies to develop new products and ensuring fair competition so the ecosystem is not dominated by established firms.

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Yet, some observers worry the government is moving too slowly. And without regulations in place, consumers will continue to share sensitive data in potentially insecure ways with companies that offer innovative services, says Michael Geist, technology law professor at the University of Ottawa and Canada research chair in Internet and e-commerce law.

“Open banking is already here, in a sense,” says Mr. Geist, who spoke before the Senate committee.

That’s because many Canadians already use third-party fintech services – from robo-advisors to applications that track spending habits – that use technology to help consumers move their data more easily.

“So, people are using them – even when they involve risks,” he adds.

Mr. Felesky points out that an estimated 3.5 million Canadians use third-party fintech providers. Among them are Intuit Inc.’s online budget planner Mint and Wealthica Financial Technology Inc.’s namesake platform, which aggregates a person’s investments in real time. Other firms, such as Flinks, serve the financial services industry itself by assisting in porting and aggregating client data from various providers.

“The challenge facing all these companies is that they’re stitching the data infrastructure,” he says.

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Mr. Felesky further notes that these companies use technologies such as “screen scraping,” which is considered a workaround in lieu of a standardized application programming interface (API) infrastructure for open banking.

These technologies often leverage artificial intelligence and similar innovations to extract online account information from one service and transfer the relevant data to another service that seeks that information.

But screen scraping is not an ideal solution, says Eric Arnold, CEO of Planswell, a Toronto-based fintech firm that provides free financial plans online to Canadians.

“Screen scraping is just so painful,” he says, adding that it often fails because larger financial services institutions often take measures to thwart it, including slightly altering online banking interfaces so the software can no longer glean data.

What’s more, consumers may be violating their financial institution’s terms of service when they share account information with a third-party service, Mr. Arnold says.

Although he says he has never heard of these rules being enforced, financial services institutions have them “in their back pocket” if client information is stolen.

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Indeed, large financial services institutions have cause for concern. Canada’s major financial services institutions have “traditionally been the gatekeepers for a lot of sensitive information,” Mr. Russell says.

“One thing they’re worried about is open banking taken to its extremes … where clients unwittingly provide information to smaller institutions” with substandard security, he adds.

Brett McDonald, a senior consultant with Strategic Insight in Toronto, agrees that “security is a super important topic.” However, he points out that many large Canadian financial services firms already have a presence in Britain and other jurisdictions that have government-mandated open banking. That experience should help industry players in Canada adopt a coherent open-banking infrastructure more easily.

Yet, technological challenges are not the biggest obstacle to embracing open banking, Mr. Felesky says. “We believe the top Canadian banks are in a position to turn on an API infrastructure fairly easily.”

Rather, he says the status quo creates “a paperwork moat” that protects established firms and makes it onerous for new competitors to gain market share.

But Mr. Russell says that Canada’s largest investment firms do support an open banking framework because it will benefit them as well. Among the upsides are accelerated client on-boarding and know-your-client processes.

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Equally advantageous is the ability to unite all of a client’s financial information under one umbrella and gain a “more fulsome” picture, says Curtis Findlay, a retired advisor and chair of Advocis’ technology task force.

What’s more, he adds that “Canada needs open data systems to better capitalize on next-generation client services” that involve automation, machine learning and data analytics.

Nevertheless, Mr. Russell says the investment industry is also calling on the government to be cautious because of the potential privacy risks.

“Large Canadian institutions already run very competitive wealth-management businesses, but their biggest concern is a breach of client confidentiality through open banking,” he says.

Although caution is warranted, Mr. Geist says the government must act soon because millions of Canadians are already sharing their sensitive financial data – albeit without any regulation around it.

“We’re not in an environment in which we can take our time to lovingly craft regulatory frameworks,” he says.

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