Canada can embrace consumer-directed finance now, or fall further behind

By Jude Asare, Policy Analyst at the Council of Canadian Innovators

Banking has always been about relationships. Think back to all those bank visits you took with your parents or grandparents to see their banker at your local branch. They knew all about us and how fast we were growing, in addition to the account balances and credit limits of those who cared for us. It was an event to visit the bank — part of weekly routines before we had online banking and smartphone apps that managed our investments. Back then, customer trust and loyalty towards institutions was established by how well people were treated and how well bankers knew their customers.

Of course, banking has changed over the years, with more automation and digital technology; most of the transactions that used to happen at a bank branch now take place over the internet, or at an ATM. We rarely step foot into a branch or speak to face-to-face to a human anymore when we engage our financial system. And still, underneath it all, banking is still all about relationships.

As it stands, banks hold all the data, which means they have all the power and control in the relationship. In Canada, this power imbalance is further accentuated by the fact that Canadian industries are “on average twice as concentrated as their U.S. counterparts”. Also, 5 Canadian banks hold 89% of the market share in Canada.

Yesterday the federal government finally released its final open banking report containing recommendations on how to implement a framework that allows consumers to share their information safely and securely between financial institutions (FIs) and innovative financial technology companies, or fintechs.

It calls for a hybrid, made-in-Canada open banking system that has the following core foundational elements:

• Common rules for open banking industry participants to ensure consumers are protected and liability rests with the party at fault;
• An accreditation framework and process to allow third party service providers to enter an open banking system; and
• Technical specifications that allow for safe and efficient data transfer and serve the established policy objectives.

Further, it agrees with CCI’s view that the government should appoint an Open Banking czar to lead and shepherd the development of the framework. Open banking has been discussed by Canadian policy makers on and off for at least the last 4 years. We are hopeful this appointment comes quickly and engagement with the fintech sector takes place at a more frequent pace.

However, the roadmap towards implementation is long — between 12 and 18 months away — and during this time the government will need to help build confidence in the fintech sector by partnering with fintechs for the provision of government services as it does with FIs.

Throughout the pandemic, many countries strategically utilized their domestic fintechs to assist in supporting and the reopening of the economy:

• In the United States, domestic fintechs were involved in the dispersal of funding through the federal government’s Paycheque Protection Program (PPP).
• In the United Kingdom, the government has accredited several fintechs to be part of the Coronavirus Business Interruption Loan Scheme (CBILS).
• And the Government of Australia has lauded smaller lenders for driving innovation and providing competition for larger lenders through their involvement in the Structured Finance Support Fund (SFSC).

Canada did not leverage its domestic fintech’s during the pandemic to distribute federal aid to businesses or individuals. This was a missed opportunity. The competitors of Canadian fintech startups in the UK and US have been bolstered by their governments’ embrace of open banking and are already making great strides.

This underscores the need for the federal government to develop an economic strategy to support and build up Canada’s fintech sector. In the UK, the Chancellor of the Exchequer commissioned The Kalifa Review to look at what could be done to support the sector, and we encourage Ottawa to take a similar approach.

As CCI’s Patrick Searle told the Financial Post yesterday, “To date, Canada has been slow to roll out a regime for open banking and has fallen behind other jurisdictions in introducing an agile regulatory framework that allows new entrants and new technologies to safely and securely enter the regulated sector. Now is the time for Canada to adopt a consumer-directed framework for our financial system that helps drive Canada’s growing fintech sector while offering consumers modern, innovative, and safe ways of banking”.

A lot of the groundwork has already been done by relevant stakeholders. For instance, bodies like the CIO Strategy Council are engaged in discussions developing principles and rules that will protect the rights and data of customers. We believe they are far advanced in their work and that the principles they have established could lay the foundational rules for the implementation of consumer directed finance in Canada.

CCI ultimately welcomes the long-awaited report from Finance Canada and is hopeful the Government moves quickly in reviewing the recommendations while speaking with Canadian fintech leaders along the way. To read more about CCI’s position on open banking, read our recent policy brief here.

In the end, Canada can either embrace consumer-directed finance now, or fall further behind.

Jude Asare is a dual degree student pursuing a Masters in Global Affairs (Munk School of Global Affairs and Public Policy) and an MBA at the Rotman School of Management. He is passionate about studying the role governments play in driving markets and innovation. At Munk, his research interests have been situated at the intersection of innovation, sustainability and development. He holds a Bachelor’s degree in Economics from Cornell University and worked in Canada’s banking and finance sectors.