A long-promised revolution in banking is headed to Canada, but you might not notice when it arrives.
Change is in the works that will give Canadian consumers and businesses significantly more control over their financial data, including who they share it with, in what’s known as open banking.
The federal government has promised framework legislation in next month’s budget to bring the system to Canada after years of kicking the possibility down the road.
Evangelists for the open banking shift underway globally praise it as a way to boost competition, dramatically shift how payments are made and overall move to a more people-oriented financial system.
“It’s about having that fairer, more inclusive, more open society,” said Helen Child, founder of Open Banking Excellence, a forum for those working in the system.
Open banking works by giving consumers the option to share their banking data with other firms. The most common use is granting access to budgeting or money management apps and companies, so that a customer can pool different bank accounts and credit cards into one place.
Other emerging uses include simpler payments, automated accounting, and business finance management.
One of the biggest areas of growth is in credit assessments. Under open banking, lenders could directly access an individual’s banking data, so they can look beyond credit scores. Consumers can also use it to build their credit scores, for example by proving reliable rent payments.
“It drives financial inclusion,” said Child. “It’s democratizing data.”
The model, which the federal government refers to as consumer-driven banking, is part of a wider shift to giving people more control over the data companies are gathering about them, said Abhishek Sinha, national banking technology leader at EY Canada.
“It’s a significant social movement and social progression, following the steps of what’s happening in the rest of the developed world and even a lot of developing countries.”
But while there’s potential to shake up the current system, some are skeptical as to how much, and how quickly any change might happen.
Even with safeguards in place to make it secure, it will likely take a lot of work to convince Canadians to trust the system — and new competitors, said Sinha.
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“I think gaining trust in Canada is going to be extremely hard for the fintech community; that is their Everest to climb.”
The system also had fairly low pickup when it launched in Europe in 2019, said Aris Bogdaneris, Scotiabank’s head of Canadian banking, at an investor day.
“We prepared for it, and we tried to make sure we were ready and resilient,” said Bogdaneris, who worked at ING in the Netherlands before switching to Scotiabank last year.
“It didn’t really materialize at all. It was like Y2K.”
Even in the U.K. where it was pioneered in 2018, only about 11 per cent of British consumers were using open banking as of last June, according to Open Banking Ltd., tasked with implementing the system in the country.
In Canada, with more bank concentration and a conservative banking culture, adoption will likely be slower, said Marc-André Pigeon, assistant professor at the Johnson Shoyama Graduate School of Public Policy.
“The banks just have so much influence that it will be hard for others to get in there.”
The government seems to be most of all pushing the security benefits of the shift, said Pigeon.
Competition seems to be a lower priority, he said, with a cautious approach that will see startups in the space needing accreditation.
“I’d say the design, the way we conceptualize the design, is a go-slow approach.”
There is also the question of how much consumers bother to comparison shop, or to look into alternatives without something going wrong with their existing providers, Pigeon noted.
“We have to get a step back from the rhetoric and remind ourselves that hey, we’re dealing with people, and we all have our weaknesses and strengths, but we often don’t have time to do these things, right?”
Osler financial services lawyer Elizabeth Sale said she wasn’t sure how much it would change things once in place, beyond for those people already using these systems through less secure means.
“Typically, when I see consumers and people talking about it, it’s clear to me that it’s not well understood,” said Sale.
She said terms like open banking or consumer-driven finance don’t really help with that because they don’t give any intuitive sense of what it is.
“That needs to be overcome, people need to actually understand what it is.”
Proponents say it takes time for momentum to gather and for people to understand and trust it.
“We have to be realistic when we are talking about disrupting one of the world’s oldest and most established industries,” said Nicholas Schiavo, director of federal affairs at the Council of Canadian Innovators.
There is an education component needed, but overall Canadians don’t need to understand the system itself so much as its benefits, he said.
The current lack of competition in banking means high fees, which a report out last month from North Economics estimated run upwards of $7.7 billion a year.
“Canadians know very well, whether it’s with telcos or grocery stores or banks, what a monopoly looks like, and what that means for them and their wallet,” said Schiavo.
He also pointed to growing momentum elsewhere, including the U.K. where payments under the system were up 88 per cent in the first half of last year from the year before, while small business use stands at about 17 per cent and growing.
As open banking spreads globally to places like Australia, India, Singapore and progress is made toward it in the U.S., there are also signs that new entrants are catching on faster.
It took about five years for the U.K. to reach five million connected accounts, something Brazil reached less than a year after launch.
The more companies that enter the space and provide more useful solutions, the more it will catch on, even if people don’t quite understand how it works, said Child.
“You need to know it’s convenient. It makes your life simple and fast,” she said. “That’s what it’s about.”