Federal government review of Open Banking opportunity a leap in the right direction
Canada is lagging behind in the FinTech space, particularly when compared to the EU.
FinTech provides opportunities for high-quality jobs and economic gains, but in order to take advantage of these opportunities, we must demonstrate our own leadership or risk a downward spiral.
One key FinTech area in which Canada must make advancements is Open Banking. Open Banking is when customers have the right to share their banking information from their financial institution with other financial service providers.
Technology fuels new opportunities
Technological developments have given rise to the emergence of a range of complementary services such as account information services and payment initiation services. Open Banking uses application program interfaces (APIs) so consumers can share their financial data with regulated FinTech companies and new market entrants. This allows customers to have an overall view of their financial situation at any given moment, across all banking relationships.
At present, Canadian financial institutions do not allow their customers the choice to give bank account access to other institutions.
Leveling the playing field
Buried deep in the 2018 Federal Budget (on page 355) is the announcement of a review of Open Banking. This simple act of allowing the choice to share information opens the door to an equal playing field for financial service providers allowing for greater efficiencies, choice, and transparency. It is the backbone of what has come to be known as “Fin Tech,” digitally driven innovation in the financial sector bringing new services in retail and investment banking as well as education and financial literacy.
Open Banking is not a new concept – the EU has already gone in this direction and recently adopted its second Payment Services Directive (PSD2), which forces banks to open up their data to regulated new market entrants in the FinTech sphere. Our own Competition Bureau noticed a couple of years ago that Canada is lagging behind its international peers when it comes to Fin Tech adoption and launched a market study.
Open Banking means more choice
Key to the Bureau’s recommendations was the idea that “Policymakers should embrace broader ‘open’ access to systems and data through APIs. With better access to consumer data (obtained through informed consent), Fin Tech can help Canadians overcome their inability or unwillingness to shop around and switch between service providers.”
While traditional financial institutions may cite cyber security, data protection, and the need for regulation as a reason to pump the brakes, this reasoning does not hold much water. Firstly, cyber security now transcends pretty much everything we do and must be interwoven across socio-economic policy.
Secondly, it suggests that data is somehow safer when centralized by a financial institution, which is clearly not the case as recently shown with Equifax.
Learning from the European model
As laid out in PSD2, forcing banks to open up data does not mean a free-for-all: companies will be regulated, needing to accept liability and standards to protect data. PSD2 balances the need to enable existing and new service providers, regardless of the business model, to offer their services with a clear and harmonized regulatory framework. Protection of personal data is also cherished in PSD2.
To have access to bank feeds, third-party payment service providers should provide regulatory authorities with a transparent and detailed risk assessment that describes security controls and mitigation measures. National supervisory authorities will also need to apply regulatory technical standards such as customer authentication, and security measures. The European Commission’s General Data Protection Regulation (GDPR), which comes into effect in May 2018, is also policy base for a proper use of innovative data-driven financial services.
If the EU can align 28 countries and pave the road through PSD2 there’s little argument to suggest one country cannot. To ensure access to innovative financial services, we have to be expedient and the time is now. To address this need, The Information and Communications Technology Council (ICTC) is studying the possibilities of open banking for Canada and will be working with stakeholders to develop recommendations for the federal government’s review.
Jeremy Depow is Vice President of Policy and Research for the Information and Communications Technology Council (ICTC), where he manages the development of forward-looking policy recommendations backed by evidence-based research to ensure Canada’s competitiveness in today’s global digital transformation.