Canada is often said to be facing an infrastructure deficit, having failed to adequately invest in transit, roads and water systems. But the country is also encountering a financial services infrastructure deficit. That is to say we lack the infrastructure and related government policies needed to safely, efficiently and effectively enable financial data to be moved and shared by consumers.
Much like the physical systems required for transportation, financial services infrastructure improves national well-being and has the potential to bring benefits to all citizens. For those of us in the banking, payments and financial services sectors and in regulatory, policy making and consumer advocacy roles, the time has come to erase this deficit, which manifests itself in unnecessary costs for customers and their financial services providers, limited transparency for those providing financial advice and roadblocks to innovation.
Open banking provides the clearest opportunity to set Canada’s financial infrastructure on the right course and is already achieving success around the world. With 40 countries developing their own open banking plans, Canada needs to take bold action.
Where does Canada stand? The government first declared its interest in open banking in the 2018 federal budget. This interest was repeated in the 2019 budget. In 2019, the Senate produced a well-researched report urging decisive government action. In parallel, the Minister of Finance commissioned a report from an expert advisory panel. We hope this report will be released early in 2020.
Beyond this process, open banking has generated considerable interest from consumer advocates, the banking industry and emerging fintech players who have explored the benefits and risks. Among those who have thought seriously about the issues, our sense is that there is overwhelming support: open banking will keep financial information safer and provide more choice at a lower cost for Canadians.
There is general agreement with the Senate report that “consumers and small businesses would also benefit from increased competition and innovation in the financial sector.” Small and medium-sized businesses (SMEs) stand to gain significantly. As a recent C.D. Howe report highlighted, Canada lags international peers in allocating capital to SMEs. Part of this deficiency is attributable to challenges that banks have in getting the information required to assess credit for SMEs — a problem that can be alleviated by open banking.
Given the widely held view that open banking is a good idea, why is Canada holding back? One reason appears to be a lack of political desire. Recent discussions with elected officials have suggested that their perception is there are no votes in open banking and this may hold back progress on this important issue. As more Canadians understand the benefits, we believe there will be votes for politicians who engage with the open banking agenda. Open banking is clearly an issue whose time has come. We urge one of the soon-to-be-announced parliamentary committees to truly understand the benefits.
That said, we are encouraged by Canada’s Digital Charter. Principle 4 of this charter espouses the core idea behind open banking: that consumers have rights to their data and can share it or transfer it. We would like to see the Department of Finance work more closely with the Ministry of Innovation, Science and Economic Development to bring these principles to life.
In banking circles, there is a debate about the relative prioritization of open banking and improving data security standards. Working on these two issues together is the only path to success. By their actions, customers are showing a strong desire to access their data in convenient forms. Absent open banking, consumers share passwords and access to their accounts with various providers, leaving them vulnerable to data breaches. It’s a compromise they should not have to make. Developing a secure financial services infrastructure, that is available to all credible participants and that keeps the entire system safe, is the only practical route forward.
Implementation of open banking requires government leadership. In Canada’s concentrated financial services market, voluntary actions by incumbent players will not likely result in optimal outcomes. Our financial services sector more closely resembles those in Australia and Britain, where government has shown leadership, and less like the United States where open banking is evolving through market forces. In the U.S., we are seeing tension as large players try to use their authority to stifle industry innovation and competition.
Our hope is that a year from now we can look back on 2020 and say Canada really advanced its financial services infrastructure through decisive moves on open banking.