Canada’s risk-averse banking system is full of potential dangers for customers. A simple security update would change everything.
Alexander Vronces is the executive director 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 under a decade ago, I expected to find a boring but resilient banking system. The Big Five—TD, RBC, BMO, CIBC and Scotiabank—were founded pre-Confederation and have dominated the market ever since. Among analysts around the world, even those as high up as the World Economic Forum, Canada’s banks have a reputation for being risk-averse. That isn’t 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 unruly lending and the mortgage defaults that followed, turning the United States’ economy upside down. 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 treasure 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, which power their services with that data, have also proliferated. A 2022 study by the Financial Consumer Agency of Canada revealed that one in three Canadians has used a fintech app. In fact, more Canadians have used a fintech app than even know what one is.
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Suppose you’re a recent immigrant who can’t qualify for a loan because you don’t have a Canadian credit history; you could share your monthly rent payments with Borrowell’s Rent Advantage app to build your credit score. Or maybe you’re a small business owner who doesn’t want to rely on spreadsheets to manage your books. Accounting platforms like Quickbooks use your transaction data to automate your bookkeeping. If you’re having trouble tracking investment accounts at different banks, an app called Wealthica lets you manage them on a single dashboard.
The problem is that most of the country’s banks don’t give Canadians a way to share all that data securely. According to estimates from the federal government, nine million Canadians have simply been giving away their online-banking usernames and passwords to fintechs, who then log in on users’ behalf to access whatever data they need. In some cases, using these fintech apps can void the agreements and warranties Canadians have with their banks. This means users won’t have anyone to bail them out if they wake up one day to find their accounts have been cleared by scammers.
The solution is for the government to introduce consumer-driven or “open” banking, a regulatory measure that’s already been legalized—and cleaned up this exact mess—in the European Union and the U.K. The measure is also coming soon to the United States, where the American financial consumer protection agency is leading the charge.
Open banking works in two ways. First, the law compels banks to give their customers a more protected way to share financial data using 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 app—to exchange data, without the need for users to give up sensitive credentials. (You’ve benefited from an API if you’ve ever logged in to 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 don’t let customers use it for data-sharing with fintech apps.
Under an open-banking system, customers also get more control and greater protections. An open-banking framework allows users to meaningfully decide who and which apps can access their data, for how long and for what purpose. It defines how that consent should be obtained, as well as the cybersecurity requirements that banks and apps must meet. Perhaps most importantly, open banking also helps customers hold their banks or fintechs liable if and when they play loosey-goosey with your data.
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When open banking rolls out in Canada, its immediate benefits will be mostly invisible, like a security update on your smartphone. Over time, however, the upsides are expected to be more transformative. Europe, the U.K. and Australia implemented the measure partly to increase the level of competition between banks and third-party financial service providers. One oft-speculated reason banks refuse to secure your data transactions is obvious: they don’t want their competitors to lure you away. Open banking will make it so that customers are more likely to shop around, with banks having to fight harder to keep their business, lest customers close their accounts and go elsewhere.
This exodus is all the more likely when you see how dissatisfied many Canadians are with their financial institutions of choice. (Roughly a third of us, according to a J.D Power study from late last year.) The Canadian Federation of Independent Business also regularly asks its members to grade banks, with the country’s biggest and most profitable institutions typically faring the worst—in customer service, access to financing, and fees, which can exceed the interest many Canadians are able to 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 Gen X.) Open banking could help fintech companies offer Canadians better rates overall. In Germany, fintech companies that specialize in lending are more likely to loan money out at lower interest rates when they’re able to access financial data.
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With enough competition, visionary entrepreneurs may come up with financial services that Canadians don’t even know they need yet. As an example, the U.K. fintech app Tred allows users to track the carbon emissions associated with their transactions and suggests ways they can reduce them. I like to imagine my bank becoming an app store of sorts, referring me to a curated portfolio of tools that will make my life better, 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—one beyond the Big Five—is significant.
As for when Canadians might finally see open banking come into effect, that all depends on when the federal government decides to fulfill a years-old promise. Ottawa first said it would study open banking way back in the 2018 federal budget. Then, during the 2021 election, the Liberals said they’d launch it by 2023. In the 2023 fall economic statement, they promised to introduce open banking legislation as part of Budget 2024.
Sometimes, I wonder if all these delays suggest that the Canadian government knows it’s about to start a revolution. Among those in the financial sector, the zeal is palpable. Some have heralded open banking as the beginning of a new era. To me, the open-banking revolution is about keeping Canadian banking boring. It’s not about cracking open the vault of financial data; that much has already happened. It’s about securing the vault and giving Canadians the right to decide when it can be opened.