Innovation sector could fall behind without Liberal follow-through on open banking, say advocates

Canada is at risk of losing innovators and fintech business if delays continue in the federal Liberal government's overdue promise to implement an open finance regime, according to industry players. “Open banking is very commonplace in other advanced economies, and fundamentally it's about protecting Canadians’ privacy and financial well-being by making the data sharing that's already happening more safe and secure,” said Nick Schiavo, director of federal affairs for the Council of Canadian Innovators. “Without open banking, it's another way that Canada can fall behind when it comes to innovation. You have some fantastic fintechs here in Canada, but it's harder for them to continue to stay here when they're up against a regulatory framework that doesn't allow for innovation, that doesn't allow for access for Canadians.” Fintechs in Canada are still waiting for the Liberal government to enact an open banking model, which was promised to launch no later than the start of 2023 in the party’s 2021 election platform. Open banking is a system that allows for financial data to be shared between banks and third-party service providers through the use of application programming interfaces (APIs). Where banks traditionally hold onto financial data within their own closed systems, open banking allows clients to authorize their bank to share their financial data with other organizations through a secure fintech app. A possible benefit to open banking is that it may allow small businesses to streamline operations and provide faster access to credit, according to a Department of Finance Canada press release issued on March 22, 2022. Open banking may also improve user experiences and financial outcomes for Canadians by providing access to a broader variety of financial services, such as budgeting and savings tools, according to the press release. Schiavo told The Hill Times that the Liberals have broken their promise of open banking by early 2023, but he still hopes to see the pledge fulfilled in the near future. The Hill Times reached out to Finance Canada for a status update of the plan to implement an open banking system in Canada. Benoit Mayrand, a Finance Canada communications adviser, responded with an emailed statement on June 8 confirming that Canada should have open banking sometime before the end of this year. “The federal government remains committed to presenting a read-only model of open banking in 2023. The establishment of an open banking system will help Canadian consumers and small businesses safely and efficiently access tools to help them improve their financial outcomes,” reads the statement. Schiavo said that open banking allows for more safe and secure data sharing, which means the cybersecurity risks will only increase the longer Canadians have to wait for the new system. In the meantime, some bank customers share financial data using workarounds, such as “screen scraping," a program used to copy information that shows up on a digital display so it can be used for another purpose. Fintech apps that use screen scraping require clients to provide their online banking username and password, which allows them to automatically log into that customer’s bank account. If a customer shares their online banking details with another party, such as a fintech app, they may risk losing the protection their bank offers against unauthorized transactions, and could therefore be responsible for any losses resulting from those transactions, according to the Financial Consumer Agency of Canada (FCAC). Nick Schiavo, director of federal affairs for the Council of Canadian Innovators, says it is 'irresponsible for the government to leave the hard-earned money of Canadians vulnerable' without open banking rules. Photograph courtesy of Nick Schiavo “I would say, with cybercrime on the rise, it's irresponsible for the government to leave the hard-earned money of Canadians vulnerable without these regulations. Fundamentally, this is about safety and it's about security,” said Schiavo. “It's, again, irresponsible not to move forward in a way that gives Canadians more control more access over their own money, and opportunities to do things with that money.” Mike Cascone, the head of government experience (Canada) for software company Xero, said open banking would help small business owners in accessing accurate financial data more quickly. “ will allow small business owners to see up-to-the-second information, completely accurate on something as simple as payments receivable and outgoing payments,” he said. “If you've ever tried to send a wire transfer or something, you know it takes a bunch of time, right? Small business owners often don't have that information, so they don't know when the money's coming in. Will it take five days to clear? Will it take a week? When is that money coming in? What does that look like in terms of my forecasting?” On Sept. 26, 2018, then-finance minister Bill Morneau launched an advisory committee to review the merits of open banking. That advisory group released its final report on Aug. 4, 2021, which included 34 recommendations for the implementation of an open banking system in Canada. Included in the report is a recommendation that the governance on open banking “must be impartial, transparent, and representative of all parties in an open banking system,” and that an open banking system should establish common rules to ensure a consistent and high standard of consumer protection safeguarding the transmission of data, while avoiding regulatory overlap in respect of how the data is used. Tourism Minister and Associate Minister of Finance Randy Boissonnault (Edmonton Centre, Alta.) announced that Abraham Tachjian, a director in the financial services practice at PwC Canada, was selected as the open banking lead. Tachjian's responsibilities include engaging stakeholders to develop an accreditation framework, a common set of rules, and technical standards for an open banking system, according to a Finance Canada press release issued on March 22, 2022. Since April 2022, Tachjian, with the support of the Open Banking Secretariat within the Department of Finance, has participated in more than 200 stakeholder consultations, and led four industry working groups on accreditation, liability, privacy and security, according to a Finance statement emailed to The Hill Times. “Canadians deserve a secure open banking system that is regulated, efficient, and protects their personal information. This is an important next step in the process of implementing the Advisory Committee’s recommendations, in order to convene stakeholders to design and implement the foundational elements of an open banking system that benefits both Canadians and businesses,” said Boissonnault in the Finance press release. Peter Misek, co-founder of the startup venture fund Framework, told The Hill Times that Canada is at a crucial point for the innovation ecosystem. Misek said that venture capital firms that fund fintechs would prefer to invest in companies that can leverage open banking frameworks to provide financial products and services to consumers and small business. Peter Misek, co-founder of the startup venture fund Framework, says open banking would provide a 'framework and a playing field' that would allow investors to accelerate in Canada. Photograph courtesy of Peter Misek “We consciously are making choices in that sector to not invest in Canada, or we're investing in Canadian firms that effectively operate in the United States. If we're going to work in a market where you don't have an open banking framework, we might as well work in the biggest market there is, which is the United States,” said Misek. “Open banking would say to any investor, ‘hey, you should be looking at investing in companies that want to innovate in financial products and services, because they now have a framework and a playing field that would allow them to accelerate.’” On June 1, 2023, FCAC published a report based on the results of public opinion research the agency conducted into Canadians' awareness and understanding of open banking and fintech services. FCAC argued that consumer education will be important for open banking in this country, because Canadians' understanding of what open banking is and how it works is low. About nine per cent of Canadians surveyed had heard of open banking, and only 15 per cent of respondents said they would participate in open banking after it had been explained to them, according to the report. Alex Vronces, executive director of advocacy organization Fintechs Canada, told The Hill Times that the term “open banking” is a bit of a misnomer. “It's not really about opening the vault of financial data. It's really about strengthening the vault — about making the vault harder to crack open, and setting the terms and conditions under which that vault can be opened,” he said. “Open banking is a regulatory initiative to put customers of banks and fintechs in control of their financial data, letting them share it safely, securely and efficiently with accredited third parties of their choosing.” Vronces said that without open banking in Canada, investors will be drawn to other jurisdictions, such as Australia and the United Kingdom, which have open banking systems. “Canada has no framework in place that defines the who, what, and how of data sharing in the financial sector. It's all sort of left to commercial contracts and unsupervised market conduct,” he said. “If you're an investor, why are you going to invest in fintech in Canada when we've yet to modernize our financial sector legislative framework to give the market more regulatory certainty, and to promote more responsible, supervised innovation?” “From the perspective of the fintech entrepreneurs, it's not good because the inability to have a stable, secure, solid connection makes it difficult to build your products makes it difficult to serve your customers,” he added. When asked about the Liberal government missing its deadline for enacting open banking, Vronces said the system is complex, and “there are always delays when it comes to this type of project.” “When you have this many moving pieces, it's going to take some time. Yes, we all want it to happen faster, but I think it's an inescapable reality that projects of this size, scope, and level of complexity aren't going to be delivered precisely according to schedule all the time,” he said. Andrew Graham, co-founder and CEO of Borrowell, a Toronto-based financial institution that helps Canadians better understand their credit scores, told The Hill Times that a delay in implementation of open banking in Canada is a concern, but it’s also important to get it right. “There are certainly costs to delay and other countries are not waiting. Virtually every other member of the G7 has an open banking system in place, and Canada's falling behind its peers,” he said. “This is such an opportunity to make financial services work better for Canadians that … there's just a lot to be gained by getting this right and getting it launched.” Graham argued that open banking would make it easier for fintechs to offer their products and services. As an example, he pointed to Borrowell’s Rent Advantage program, which allows Canadians to use their rent payments to build credit history with Equifax Canada. “We allow consumers to report rent payments to Equifax … and that's very helpful if you're trying to build credit, perhaps to be able to buy a house or buy a car down the road. Services like that work better, they're easier, they're cheaper … with a robust open banking system,” he said. “What open banking does is it allows consumers and small business owners to share their data in a secured way, if they want to.” Jcnockaert@hilltimes.com The Hill Times Canada open banking timeline On Sept. 26, 2018, then-Finance minister Bill Morneau launched an advisory committee to review the merits of open banking On Jan. 11, 2019, the Department of Finance launched consultations on open banking, and released a consultation paper on its merits. On Jan. 31, 2020, the advisory committee released a report entitled Consumer-directed finance: the future of financial services, which outlined principles intended to guide the federal government's approach to consumer-directed finance. Those principles included advice that “consumer-directed finance should be focused on enabling consumer choice and meaningful control.” On Aug. 4, 2021, the advisory committee released its final report, which included 34 recommendations for implementing an open banking system in Canada. The report suggested that the initial phase should be implemented quickly, with the system operational by January 2023. On Sept. 1, 2021, the Liberal election platform was released, including a promise to “move forward with a made-in-Canada model of open banking that will launch no later than the beginning of 2023.” On March 22, 2022, Tourism Minster and Associate Minister of Finance Randy Boissonnault announced Abraham Tachjian, a director in the financial services practice at PwC Canada, as the open banking lead. Innovation in Canada (2017-2019) Larger businesses (250 or more employees) were more likely to be innovative (85.8 per cent) than businesses with fewer employees, with 79 per cent of firms with fewer than 100 employees being innovative in the 2017-2019 reference period. Ontario had the highest share of innovative businesses (83.1 per cent), followed by the "rest of Canada" category (including Manitoba, Saskatchewan, Alberta, British Columbia, Yukon, the Northwest Territories, and Nunavut) at 79.4 per cent, Quebec (77.9 per cent), and the Atlantic region (68.5 per cent). During the three-year period, 52.7 per cent of businesses introduced or brought into use product (good or service) innovations. The rate was even higher for business process innovations (72.7 per cent). Among companies that introduced business process innovations from 2017-2019, 39.3 per cent reported that their innovations resulted in cost savings related to the production of goods or services. Additionally, one-third of businesses were able to save on costs related to support business functions. A higher proportion of large firms reported cost savings on the production of goods or services (51.5 per cent) and support business functions (44.5 per cent) from their business process innovations. For small businesses, 37.6 per cent saved on the production of goods or services, while 32.4 per cent were able to save costs on support business functions. Slightly more than half of all businesses in Canada reported that they faced obstacles related to innovation in 2019. These obstacles included lack of skills (29.7 per cent) and uncertainty and risk (29.3 per cent) as the most frequent barriers. Source: Survey of Innovation and Business Strategy, 2017-2019, Statistics Canada

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Innovation sector could fall behind without Liberal follow-through on open banking, say advocates

Canadians are still waiting for an open banking system, which the Liberal government pledged would happen in early 2023.

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