Explainer-What open banking means for Canada's saturated banking market

FILE PHOTO: The Canadian flag flies on Parliament Hill in Ottawa August 2, 2015. REUTERS/Blair Gable/File Photo

By Nivedita Balu

TORONTO (Reuters) – Canada, a laggard in open banking concept, announced new measures that could allow consumers’ financial data to be shared, a move that could encourage innovation, competition and make it simpler to switch bank accounts in an already saturated market.

The federal government, which had promised to address open banking last fall, said in its budget on Tuesday the Financial Consumer Agency of Canada(FCAC) will be mandated to oversee and enforce the consumer-driven, or open banking framework.

While more details are awaited, Ottawa’s latest move could make Canada one of the last G7 countries to adopt open banking.

In Canada, where only 2% of its total population of about 40 million do not have a bank account, the banking space is highly regulated with only six major players controlling more than 90% of all banking assets, while fintech firms have started to emerge.

WHAT IS OPEN BANKING?

Also called consumer-driven banking, it is the process of banks and other traditional financial institutions giving customers and third parties easy digital access to their financial data.

The term can also refer to allowing a third party to initiate transactions from a customer’s account, such as sending a payment or withdrawing money.

An estimated 9 million Canadians are already sharing their financial data by providing confidential banking credentials to service providers that can be accessed through screen scraping. Open banking could create a safer way to share financial data with other third parties in a secure environment.

WHAT DOES THE BUDGET SAY?

The government laid out an initial plan that promises open banking to be a reality likely by 2025 and is expected provide updates in the spring and fall on how participants can enrol.

Geoff Rush, KPMG Canada’s national industry leader for financial services said he was expecting more details on scope and timing, and requirements for accreditation, but the announcement was a move in the right direction.

The government said it would soon table framework legislation that will expand FCAC’s mandate and establish rules and regulations.

“Unfortunately, no timeline has been specified for the full implementation of the framework. The industry would want to see a more concrete commitment as to the timeline for implementation,” said Parna Sabet-Stephenson, a partner at law firm Gowling WLG.

WHAT DOES IT MEAN FOR CONSUMERS?

Industry players and experts are hopeful it will be up and running by 2025, considering two legislations tabled for spring and summer.

Toronto-based investment platform Wealthsimple’s VP of payments strategy Hanna Zaidi noted that an open banking system puts Canadians in control of their financial data than the banks, and could make it more affordable.

WHAT RISKS ARE INVOLVED WITH OPEN BANKING?

Experts have argued that consumers are increasingly concerned about the privacy and security of their personal data, with nearly eight in 10 Canadians raising concerns that their personal data was more exposed than ever before according to a January survey by Interac.

The budget promises that consumer-driven banking will protect Canadians and the financial system from risky practices like screen-scraping. The framework will establish oversight of financial data sharing activities and address security risks, it said.

Industry experts highlight that Canada currently has a bill before Parliament, Bill C-27, on privacy legislation that would enshrine an individual’s right to data mobility. The bill needs to be passed to enable open banking, they said.

WHAT DOES IT MEAN FOR FINTECH FIRMS?

Canada’s fast-growing fintech space could also benefit from a push to open banking as the space evolves and are looking to work with more consumers and partner with banks when possible .

“All fintechs want is to be able to compete on a level playing field, where consumers vote with their dollars. The consumer’s right to choose, enforced by the government, will give them that,” said Alex Vronces, executive director of industry association Fintechs Canada.

WHAT DOES IT MEAN FOR BANKS?

Most banks are well prepared for the move, experts said, and will be able to adopt newer technology even if at comes at a cost.

The move could also enable higher participation from credit unions and smaller banks where they could be positioned to change the banking landscape from being fully dominated only by big banks to a thriving ecosystem.

“Having a framework to transfer data that moves away from screen scraping would be welcomed by the banks. It remains to be seen if legislation will go as far as prohibiting screen scraping,” Sabet-Stephenson said.

(Reporting by Nivedita Balu in Toronto; Editing by Aurora Ellis)