Last fall, the federal government finally passed the remaining legislation to bring a consumer-driven banking framework into effect. Commonly known as open banking, the system aims to give consumers more control over their financial data and allow FinTech firms to offer more products without relying on risky data-sharing practices like “screen-scraping.” The model’s defenders argue it will introduce more competition into Canada’s banking landscape and—if done right—allow more small players to break into the data monopoly held by large financial institutions.
Financial Data and Technology Association (FDATA) is a North American industry association that’s been advocating for open banking in Canada and the US since 2018. BetaKit spoke with FDATA executive director Steve Boms about what he thinks policymakers should do to ensure open banking’s roll out doesn’t lock out smaller payment startups.
This interview has been edited for length and clarity.
The feds have passed open banking legislation. How close are Canadians to reaping the benefits?
We’re closer than we’ve ever been, but there’s still quite a bit of work to go.
We’ve now transitioned from the ideation phase to the implementation phase. We believe that we will see tangible open banking use cases in Canada sometime next year. But we need to see how fast the government can get the implementation running before we can give a more granular estimate.
Is there anything policymakers can do differently to achieve this goal sooner?
There definitely is. We submitted a proposal to the Department of Finance and to the Bank of Canada for what we’re calling the “sponsored fintech model.”
Here’s the issue that we see: the government decided that everybody who is going to offer an open banking product, tool, or service needs to be accredited. On its face, that’s great for customer protection—in practice, though, smaller Canadian fintechs are just not going to have the ability to come into the system. It will just concentrate the market even further, and it risks limiting the types of use cases that small businesses and consumers in Canada can access.
What’s an example of how this “sponsored” system could work for small FinTechs?
Let’s say that I’m a small FinTech in Vancouver and I’m starting out of my garage. I do not have the capital, the resources, or the scale to spend hundreds of thousands of dollars on all manner of customer protection and liability insurance. I have 10 customers, right? I’m tiny. If there’s no way for me to access the system, I cannot scale, I cannot grow, and I cannot bring my products to market.
Image courtesy FDATA.
The proposal that we’ve brought forward says that a FinTech company is going to have to partner with an aggregator—Flinks, Plaid, whomever—who will act as the sponsor of a smaller FinTech. It will take on some of those regulatory responsibilities for small entities, basically like a step stool.
Let’s say the FinTech now has 100,000 customers or is making $10 million a year—your FinTech must then itself be accredited. It’s reached a critical scale or risk profile where it can no longer rely on its aggregator’s accreditation. But until then, we’ve got to create an on-ramp for smaller entities to offer their services.
You mentioned we might see practical use cases for open banking next year. At what point will consumers start to feel the impacts of financial data portability?
Consumers have limited access to open banking today, right? If you’re a small business owner, maybe you use Xero for your accounting management. Those tools will continue to exist—they’re just going to transition into a regulated framework. One notion I would like to dispel is that consumers would notice that change. If this all goes well, it’s seamless, but it’s safer and it’s more efficient.
RELATED: Canada’s FinTech industry enters new era as Bank of Canada taps first payment service providers
Once the accreditation framework is finalized, once there’s a go-live date for APIs that the banks will provide, then you’ll start to see a number of use cases. For example, if you’re a new Canadian who doesn’t have a traditional credit report, but you do have a chequing account from somewhere else, you can say, “Look, I paid my rent every month on time, and I’m credit-worthy,” so you can gain access to the financial system easier. Those are use cases that cannot be deployed widely in Canada today.
What else are you waiting to see from regulators?
The first is a wonky, but really important one: the minister’s announcement of the technical standards for the API. [Editor’s note: The API is the application programming interface that will allow financial apps or websites to securely share information.] If you are a FinTech or a bank, and you really want to start driving the ball forward, you can’t do that until you know what technical specifications you need to build towards.
On a policy note, we are expecting the proposed regulations for accreditation at some point over the next couple of months. If you’re a FinTech, that will be instructive to help you start designing your compliance routine.
Feature image courtesy Wikimedia Commons. Shared under license CC BY-SA 3.0.