FinTech leaders and industry associations applauded the open banking update in Tuesday’s federal budget, but said there are still unanswered questions about the technical standard at the heart of the future consumer-driven finance system and when it will launch.
The government announced Tuesday the Financial Consumer Agency of Canada (FCAC)—the country’s top consumer-protection watchdog—will oversee the new system. It plans to introduce legislation in spring 2024 to expand the agency’s mandate. The legislation is also set to include framework elements around the system’s scope and technical standard. The remaining elements of the framework will be delivered in a second piece of legislation in the fall.
“The devil is in the details, but in today’s announcement we see a government tangibly moving forward with open banking, and that’s good news.”
The government stopped short of setting a date for when the system will become operational for Canadians, though it said in the Fall Economic Statement it was targeting sometime in 2025. At the time, it said it planned to table legislation as part of the 2024 budget.
A consumer-directed finance system will allow Canadians to securely share their financial data with third parties, such as FinTech companies, and make it easier to switch financial institutions.
Currently, financial data sharing often happens through an insecure method known as screen-scraping, which can also put consumers in violation of their banks’ terms of service.
Alex Vronces, executive director of Fintechs Canada, told BetaKit the announcement was the “most substantial and specific update the sector has gotten since the government started talking about open banking.” He noted the language around consumer-directed finance—and its placement within the budget— indicates the government now understands it can be a tool to address affordability issues by fostering greater competition in the financial sector.
However, he said, the lack of an update on a go-live date was “a little alarming. … [The government] didn’t backtrack, but it didn’t say it is going to happen. That gives the sector something to chew on.”
Vronces said Fintechs Canada had seen a “huge vibe shift” from government in the latter half of 2023, leading up to the fall economic statement. He attributed that to a combination of the FinTech-led campaign in the fall that resulted in tens of thousands of emails being sent to members of Parliament, the United States moving ahead with its own open banking framework, and the government itself needing to make a dent in Canada’s affordability crisis.
Under the the initial stage of the new system, banks and other financial institution participants will be required to share data related to chequing and savings accounts, online investment products, and lending products including credit cards, lines of credit, and mortgages.
“This is open finance, not open banking,” Steve Boms, executive director of the Financial Data and Technology Association of North America, said in an interview. “It encapsulates this notion that the borders between a bank and some other types of financial providers are relatively meaningless to the average consumer [who] just wants to be able to use a tool that can help them build their wealth, save more, see what they have, all of those things.”
In comparison, he said, the United States’ nascent open banking system only covers chequing and savings accounts, credit cards, and other small accounts.
Nicholas Schiavo, director of federal affairs for the Council of Canadian Innovators, called the framework “welcome news” in a press release. “The devil is in the details, but in today’s announcement we see a government tangibly moving forward with open banking, and that’s good news.”
Hanna Zaidi, vice-president of payments strategy and chief compliance officer at Wealthsimple, told BetaKit the update was a “good step forward” but said she wanted greater clarity on when Canadians could expect to begin sharing their data.
She noted the update lacked information on the technical standard for the system. “People are asking me, ‘What are the use cases?’ And I can’t speak to those use cases because I don’t know what technical standard we’re using.”
Zaidi said she also wants to see the government mandate minimum data fields for data sharing within the standard. Without set rules, each financial institution may choose to share information in a different way. As an example, she said, a FinTech startup could choose to share a customer’s name, address, and transaction history from their chequing account, while a major bank shares their account number, balance, and address.
“If you compare the two, there’s not a lot of convergence, which means I can’t draw insights,” Zaidi said.
While information on a technical standard is still to come, the government said it is intended to be “fair, open and accessible” in order to meet public policy objectives for the system, “including interoperability with the coming American framework overseen by the U.S. Consumer Financial Protection Bureau.”
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Boms said that goal was “fantastic from a trade perspective,” and opened the door to the possibility that Canadian FinTechs could achieve accreditation at home and offer their services in the U.S. using the same technical rails.
Governance over the system was a thornier question for the Canadian consumer-driven banking system, as compared to other countries, as not all financial institutions are overseen by the same regulator. Major financial institutions, including most banks and insurance and trust companies, are federally regulated by the Office of the Superintendent of Financial Institutions and the FCAC, while most credit unions are overseen by provincial regulators.
In the initial phase of Canada’s system, the government will mandate participation for banks that meet a certain threshold for retail volume, which scopes in the country’s largest banks. Smaller federally regulated banks can also opt into participation.
To respect the jurisdiction of provincial regulators, the government plans to allow provincial credit unions and Crown corporations acting as banks the ability to opt into participation in the system and supervision and governance by the FCAC. It will create a new role through the spring legislation, called the senior deputy commissioner for consumer-driven banking, which is meant to ensure provincially regulated entities wouldn’t be subject to direct oversight by a federal market conduct regulator.
Vronces said the FCAC was the best possible agency for the task, given that consumer protection is at the heart of its mandate, and called the opt-in workaround a “really elegant way to create a national framework.”
While Zaidi said she’s glad the government has selected an existing regulator rather than taking more time to stand up a new one, she’s concerned the agency doesn’t have competition in its mandate.
“In order for open banking to be successful, because the whole principle behind this is competition, you need to have a competition mandate as part of your ability to execute on this,” she said. “What I would want to see is, [is the government] expanding their mandate? … All of this comes down to execution.”
Boms said the FCAC’s effectiveness will depend on getting the right personnel into oversight roles. “It’s a highly technical, nuanced space,” he said.
Any entities seeking to join the system will have to submit an application to the FCAC. Tiered accreditation—setting different requirements for entities depending on the level of data they’re permitted to access—won’t happen in the initial phase.
Andrew Escobar, a former FinTech executive at US-based MX and former member of the Canadian Internet Registration Authority, said he sees that as a missed opportunity, as it potentially risks excluding certain FinTech companies that might see the compliance requirements as too onerous from the initial system.
Feature image courtesy of Pixabay.
