Fintechs are voicing concern about how the advent of the chosen governing body for open banking in Canada’s financial industry will impact third-party competition, amidst speculation that such a utility will soon arrive.
Opinions around this controversial topic remain split, as some are opting for an industry-led approach to governance in open banking, while others are leaning towards the regulatory-led alternative.
In 2023, Canada’s financial industry is preparing to make open banking development a defining feature, but it remains uncertain about the identity of its governance frameworks. As a result, concerns around the matter are now higher than ever, and the industry is left in limbo in the interim.
Chris Ford, president of the Canadian software development company Intelliware, discusses how fintechs can better position themselves within an industry-led framework and the pros and cons of industry-led and regulatory-led open banking in Canada.
He aims to appease concerns about the impact of a utility being chosen as the governing framework for the country’s open banking industry and what fintechs should expect:
How fintechs can better navigate open banking governance in Canada
Open banking – a system that allows consumers to share financial data with third-party service providers – has been making waves worldwide. Through open banking, third-party businesses leveraging individual customer and transaction data can incorporate data into new and potentially innovative customer experiences. User banking information can be accessed via application programming interfaces (APIs) that banks will implement to an agreed standard. This will ensure greater value and more personalised products and services to end users.
Like other countries, Canada is moving forward with a national programme to advance open banking. This decision was reached after a period of consultation, which recommended an industry consortium-led approach to the definition and implementation of open banking. However, with ongoing discussions on how Canada should best implement open banking, players in the industry, fintechs and financial institutions, are debating on whether an industry-led or regulatory-led approach should be adopted.
Regardless of which approach prevails, it is crucial to unpack how this programme will impact Canadian businesses, particularly those in fintech.
An industry-led approach to open banking
As the Canadian banking lobby is powerful, we should not be surprised that since 2021, an industry-led approach has been gaining widespread support.
The industry has a proven track record of building and operating technology for more than 50 years in Canada, including utilities and joint ventures like Moneris, Symcor and Interac. There is also an argument to be made that banks are the most qualified to provide leadership in this domain as they are also highly trusted, credible gatekeepers of customer data.
By advocating for self-regulation, one of the advantages is that industry players can develop a functional roadmap that is faster to implement based on existing technology and resources. Banks may also be more incentivised to implement an API-based open banking functionality that supports open banking initiatives from which both they and third-party providers can benefit.
However, an industry-led approach can result in frustration for fintechs and third parties who will be beholden to a blueprint that is determined by the banks versus by their needs.
For example, if an industry approach prevails, these businesses might be able to access APIs and services faster but not necessarily get the data they need most. Presently, banks enjoy a direct relationship with customers and will resist disintermediation.
In an industry-led model, banks will likely favour open banking solutions that do not jeopardise their existing relationships with customers. Therefore, we can expect banks to slow or avoid the realisation of scenarios that result in competition or disintermediation.
In the event an industry-based utility like Symcor is appointed to govern open banking in Canada, the concern is that fintechs will be subject to open banking policies which might not always align with their best interests. This will depend largely on the interest and influence that the industry has over the utility.
If an industry-led approach is to be adopted, financial institutions, fintech companies, and other stakeholders within the industry should collaborate to establish a framework for sharing and utilising customer financial data securely and responsibly. The success of an industry-led approach depends on the willingness of all parties involved to work together towards common goals and objectives.
A regulatory-led approach to open banking
With a regulatory-led approach calling for government oversight of open banking, we can expect a standardised governance framework that establishes a blanket standard for data sharing, determining which parties can participate in open banking while overseeing compliance with the standards set to ensure consumer privacy and security are protected.
Within this, we will see banks, fintechs, and financial institutions operating within a single regulatory framework. Theoretically, a regulatory approach has the advantage of prioritising the needs of individual Canadians and the widest spectrum of businesses in a balanced way.
Regulatory initiatives such as Truncation and Electronic Cheque Presentment [TECP] and more recently, payments modernisation and real-time-rails, are both examples of national regulatory initiatives that have been imposed on the industry with this intention.
Compared to other countries like the UK, the Canadian bank lobby has always had a strong hand in the definition and implementation of regulatory programmes. This means the goal of objective oversight may not be possible even with a regulatory-led approach. Furthermore, Canadian regulatory initiatives have not always correctly anticipated the needs of Canadians, and industry-the TECP programme was famously cancelled before it was fully implemented.
Conversely, a regulatory-led approach might result in Canadian banks being less flexible in the information they provide. Services and data that directly threaten their existing business will be much slower to be implemented if they are implemented at all.
Furthermore, fintechs that import financial data will be exposed to the same risks and obligations as banks from a personal information privacy and security perspective. This is a hefty obligation because not all businesses are ready or equipped with sufficient resources or expertise to bear such a responsibility. Lastly, fintechs may experience increased exposure to fraud depending on the types of services and products they choose to offer.
In the event that a regulatory-led approach triumphs, fintechs might still experience delays in accessing the data needed to stay competitive because banks, which traditionally control customer financial data, might be less incentivised to share information with third-party service providers.
Preparing for an open banking future
Ultimately, open banking will allow fintechs and new entrants to offer financial services that compete directly with incumbents today. This is true no matter the approach to governance. The biggest opportunities will be in the identity, personal information and personalisation domains because access to consumer financial data will allow businesses to better understand their users, becoming more flexible and responsive to market needs.
In preparation for a future where open banking is more widespread, business leaders within the fintech and financial services spaces will have to monitor the proposed business scope and implementation timing for open banking capabilities.
Early adopters of open banking features are likely to reap the biggest rewards and competitive advantages. No matter the approach chosen to govern this space, it will be challenging to predict just how much banks and fintechs will have to pivot or adapt because, in either scenario, the functional roadmap is going to be defined by a large group of stakeholders with competing interests. My biggest piece of advice to fintechs is to continue closely watching the progress of open banking as it continues to evolve.