The Big Idea: How Open Banking Can Solve Canada’s Financial Security Problem –

The risk-averse Canadian banking system is full of potential dangers for customers. A simple security update would change everything.

An illustration of a gray safe with wads of cash inside

(Illustration by Pete Ryan)

Alexander Vronces is the CEO of Fintechs Canada. He writes about the intersection of financial technology and public policy in Canada.

When I started working as a policy analyst in Canada’s financial sector a little less than a decade ago, I expected to find a boring but resilient banking system. The Big Five (TD, RBC, BMO, CIBC and Scotiabank) were founded before Confederation and have dominated the market ever since. Among analysts around the world, even those as high-profile as the World Economic Forum, Canada’s banks have a reputation for being risk-averse. That’s not necessarily a bad thing. Boring survives financial crises, just as Canada did in the late 2000s. Meanwhile, south of the border, major banks failed due to the disorderly lending and mortgage defaults that followed, upending the economy. of the United States. But to my surprise, I quickly learned that our banking system is risky sometimes. Not with our deposits, but with our data.

Since the advent of online banking two decades ago, a trove of information has been just a few clicks away: our account balances, payment histories, and lines of credit, among other things. Financial technology companies, or fintechs, have also proliferated, boosting their services with this data. A 2022 study by the Financial Consumer Agency of Canada revealed that one in three Canadians has used a fintech application. In fact, more Canadians have used a fintech app than even know what it is.

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Let’s say you’re a recent immigrant who can’t qualify for a loan because you don’t have a Canadian credit history; He can share his monthly rent payments with Borrowell’s Rent Advantage app to build his credit score. Or maybe he is a small business owner and doesn’t want to rely on spreadsheets to manage his books. Accounting platforms like Quickbooks use your transaction data to automate your accounting. If he has trouble tracking investment accounts at different banks, an app called Wealthica allows him to manage them in a single dashboard.

The problem is that most banks in the country don’t offer Canadians a way to share all that data securely. According to federal government estimates, nine million Canadians have simply been giving away their online banking usernames and passwords to fintechs, who then log in on the users’ behalf to access any information they need. In some cases, the use of these fintech applications can void the agreements and guarantees that Canadians have with their banks. This means that users will have no one to rescue them if one day they wake up and discover that their accounts have been wiped clean by scammers.

The solution is for the government to introduce consumer-driven or “open” banking, a regulatory measure that has already been legalized (and cleaned up exactly this mess) in the European Union and the United Kingdom. The measure will also soon arrive in the United States. where the US financial consumer protection agency is leading the charge.

Open banking works in two ways. First, the law requires banks to offer their customers a more protected way to share financial data through an application programming interface, or API. An API is basically a translator for computer applications. It allows two systems (in this case, a bank’s server and a fintech application) to exchange data, without the need for users to reveal sensitive credentials. (You’ll have benefited from an API if you’ve ever logged into a retail or online news account with your Google, Facebook, or Apple login.) This technology has been around since the 90s and is often used in other sectors. but right now, the big five banks do not allow customers to use it to share data with fintech applications.

Under an open banking system, customers also gain more control and greater protection. An open banking framework allows users to meaningfully decide who and what applications can access their data, for how long, and for what purpose. It defines how that consent must be obtained, as well as the cybersecurity requirements that banks and applications must meet. Perhaps most importantly, open banking also helps customers hold their banks or fintechs accountable if they mess with their data.

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When open banking is rolled out in Canada, its immediate benefits will be mostly invisible, like a security update on your smartphone. However, over time, the benefits are expected to become more transformative. Europe, the United Kingdom and Australia implemented the measure in part to increase the level of competition between banks and third-party financial services providers. One of the reasons banks refuse to protect their transaction data is obvious: they don’t want to be pushed away by their competitors. Open banking will make customers more likely to shop around, and banks will have to fight harder to stay in business, lest customers close their accounts and go elsewhere.

This exodus is even more likely when you see how dissatisfied many Canadians are with the financial institutions of their choice. (About a third of us, according to a JD Power study from late last year.) The Canadian Federation of Independent Business also regularly asks its members to rate banks, and the country’s largest and most profitable institutions tend to fare worst: in customer service. , access to financing and fees, which can exceed the interest many Canadians can earn on their savings. (The average amount of fees paid changes by generation: $760 for millennials, $2,200 for boomers and $2,800 for members of Generation X.) Open banking could help fintech companies offer Canadians better rates in general. In Germany, fintech companies that specialize in lending are more likely to lend money at lower interest rates when they can access financial data.

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With enough competition, visionary entrepreneurs can create financial services that Canadians don’t even know they need yet. For example, UK fintech app Tred allows users to track the carbon emissions associated with their transactions and suggests ways to reduce them. I like to imagine my bank becoming a kind of app store, directing me to a curated portfolio of tools that will improve my life while still being the vault for my money. It’s impossible to predict what will happen, but the likelihood of a radically different financial landscape (beyond the Big Five) is significant.

As for when Canadians might finally see open banking come into effect, it all depends on when the federal government decides to make good on a years-long promise. Ottawa first said it would look at open banking in the 2018 federal budget. Then, during the 2021 election, the Liberals said they would launch it by 2023. In the 2023 fall economic statement, they promised to introduce open banking legislation as part of the 2024 Budget.

Sometimes I wonder if all these delays suggest that the Canadian government knows it is about to start a revolution. Among those in the financial sector, the zeal is palpable. Some have heralded open banking as the dawn of a new era. To me, the open banking revolution is about keeping Canadian banking boring. It’s not about opening the vault of financial data; That has already happened. This is about securing the vault and giving Canadians the right to decide when it can be opened.

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