6 minute read 20 Oct. 2020
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How Canada should approach open banking

Authors
Abhishek Sinha

EY Canada Partner, Banking & Capital Markets

Senior leader focused on the transformative impact of technology on various industries. Dreamer. Futurist. Dad.

Paul Battista

EY Canada Managing Partner, Financial Services

Experienced change and transformation leader. Culture vulture. Committed to improving the lives of youth and the disadvantaged.

Anthony Rjeily

EY Canada Consulting – National Leader, Business Consulting

Business transformation leader. Known for building trustworthy relationships with clients and team members to drive design-led, value-based outcomes rooted in people, technology and innovation.

6 minute read 20 Oct. 2020

Show resources

  • How Canada should approach open banking (pdf)

Open banking brings new opportunities for Canadian consumers and institutions. But mitigating risks and getting the policy piece right is key. 

There’s no doubt about it: open banking is poised to transform the financial services industry. In many parts of the world, it already has. Here in Canada, we’re positioned to be a real leader in promoting consumer choice and privacy, while establishing a competitive marketplace through open banking. The question is: can we overcome hurdles to seize this opportunity?

Open banking brings big benefits for customers. The opportunity for banks is even greater. But getting the ecosystem right in Canada means assessing risks, building strong policies, and engaging in the conversation now.
Abhishek Sinha
EY Canada Partner, Banking & Capital Markets

What’s open banking up against in Canada?

EY’s Open Banking Opportunity Index pegs Canada as a global tech hub. We have a thriving FinTech industry, solid access to private capital, and government-sponsored programs to support start-ups. Despite that, the industry here is taking a “go slow” approach to open banking, leaving Canada lagging behind in 8th place overall.

What’s in the way? The regulatory environment is challenging Canada’s open banking journey. Consumers are far less likely to consent to open banking without stronger measures around privacy and managed consent. The Index shows 41% of consumers shared negative feedback around cybersecurity fears. Another 15% of negative commentary was tagged to data protection concerns.

Open banking enables data sharing in entirely new ways. The approach is ripe with possibility across the ecosystem – whether you’re a consumer, financial institution, FinTech or other business. It offers consumers more choice and control over their money and financial information, while enabling companies to offer a bigger variety of innovative services built specifically with, and for, their customers. What does that mean? Data aggregation offers consumers a consolidated snapshot that can empower their financial decision making and reporting at times like tax season. Personalization can mean tailored service offerings based on a consumer’s data and financial lifecycle. The possibilities are endless.

Still, it won’t work here if Canadian consumers don’t have confidence in the system. From concerns around security and fraud to inadvertent digital and financial exclusion that could leave certain market segments behind: consumers are worried.

Meanwhile, open banking brings new risks for the institutions themselves. Banks could become disintermediated as third-party providers become part of the consumer relationship. Changes in liquidity concentration could be an issue. And underlying concerns around new costs tied to additional regulatory and compliance requirements factor high on the risk list, too.

How do we mitigate the risk to unlock the opportunity?

Unlocking open banking’s potential will mean taking a big-picture view of the risks, and mitigating for them through a strategic approach. We can learn a lot from parts of the world that are further down this regulatory path. The European Union’s General Data Protection Regulation, for one.

Make no mistake about it: key principles should form the foundation of the approach. Enhancing consumer choice by promoting competition; fostering innovation by establishing a level playing field for established players and new entrants; protecting and promoting customer data privacy; and protecting against systemic risks to the Canadian financial system and economy. All four of these principles have an important part to play. Focusing on those elements alone, though, could mean Canada’s adoption of open banking would be driven largely by how willing banks are in pursuing it on their own. Simply put, that’s not going to cut it.

In reality, Canada and Canadians would benefit from following a prescriptive approach to open banking that would promote adoption and more stringent alignment to the guiding principles above.

What can Canadian policy makers focus on to successfully enable open banking?

1.  Clearly define roles in the open banking system

More accessible data, participants, and risks bring expanded requirements. Looking to other countries’ experiences can help Canada address requirements for anything from maintaining consumer privacy to ensuring a level playfield between incumbents and new entrants. The UK, Australia and others can all offer food for policy development thought. 

2.  Prescribe open access to data

Striking the right balance between enabling data sharing and maintaining consumer privacy is huge. Canada should consider updating the Personal Information Protection and Electronic Documents Act (PIPEDA) to bring it closer to standards already in effect in Europe and elsewhere. Refreshing it with a focus on data portability, the right to erasure, and default opt-in language matters.

3.  Create trust in the ecosystem by authorizing third-party providers

An open banking ecosystem means sensitive data will extend beyond financial institutions – driving the need for greater trust. The way Canada validates parties in other jurisdictions will be fundamental to fostering that trust. That could mean a bank-specific model, where third-party providers register with each financial institution on an individual basis. Or, a centralized model, where third-party providers register with the authorities once and gain access to banks’ APIs without contractual agreements. Both models bring unique pros and cons. Canada could choose a step approach culminating in a centralized third-party provider validation mechanism, possibly improving speed to market, and making for a more competitive landscape at the same time.

4.  Manage consent and authorization between consumers, third parties and financial institutions

Consumer consent should be transparent, temporal and purpose-driven. Consent and authorization management models are typically bank-specific. To work effectively, the concept of real-time updating needs to apply to the consent management piece. That’s because the faster consent withdrawal reaches a bank, the faster a bank can protect funds for a consumer who has withdrawn before a third-party delivers a service. That might throw a wrench in some third-party providers’ aim for seamless service. But it also mitigates direct debt fraud, and it’s prescribed in other jurisdictions like the UK.

5.  Educate consumers and provide mechanisms for dispute resolution

Consumers need coherent, simple messaging to truly understand what open banking means, and in turn, open themselves up to its possibilities. In EY’s UK Open Banking FinTech Snapshot, consumer education was named the top area where more could be done to help open banking succeed. Canada will need streamlined procedures to resolve potential disputes, including between financial institutions and third parties when there’s a disagreement over responsibility for an unauthorized transaction or data exchange. The industry needs to speak the same language around open banking. That means having specific provisions in place for dispute resolution, and settling liabilities.

6.  Adopt industry standards uniformly

Customers – and the economy – need clear protection from systemic risks as we evolve to an open banking environment. Whether developed through industry-led initiatives, legislative action, or a combination – Canada should require participants to meet certain standards. Without them, and the broad acceptance to back them, open banking can’t succeed. API standards; governance; systems and processes around whitelists, dispute management, security and privacy… the list is long. But covering it comprehensively tees open banking up for the greatest possible success. 

Where do we go from here?

Canada is well positioned to be a leader in promoting consumer choice, privacy and a competitive marketplace through open banking.

Like anything new, open banking brings risks. Mitigating them with thoughtful and considered policy development can help unlock the potential this type of ecosystem brings for not only established and emerging financial institutions, but Canadian consumers, too.

We can foster an environment where consumer choice, innovation and a level playing field thrive while still ensuring consumers are protected, and systemic risks to the Canadian economy are managed. It begins with asking the right questions, building strong policies, and engaging early.

Summary

Open banking is poised to transform the financial services industry, and Canada’s no exception. But there’s work to be done on the regulatory front if we’re going to truly embrace an ecosystem where we’re managing the right risks, and enabling open banking to thrive. Building a prescriptive regulatory approach grounded on four guiding principles can help move the dial on open banking, and unleash its potential for Canadian consumers and institutions alike.

About this article

Authors
Abhishek Sinha

EY Canada Partner, Banking & Capital Markets

Senior leader focused on the transformative impact of technology on various industries. Dreamer. Futurist. Dad.

Paul Battista

EY Canada Managing Partner, Financial Services

Experienced change and transformation leader. Culture vulture. Committed to improving the lives of youth and the disadvantaged.

Anthony Rjeily

EY Canada Consulting – National Leader, Business Consulting

Business transformation leader. Known for building trustworthy relationships with clients and team members to drive design-led, value-based outcomes rooted in people, technology and innovation.