Sue Britton was feeling “super optimistic” when the Advisory Committee on Open Banking sent out a package for phase-two consultation participants with an outline of the workshops it wanted to hold and its recommendations for an eventual framework.

“It was very exciting to see such a focus on both the consumer and the small business and innovation,” she said. “To see the purpose was to not only protect the consumers but give them access to innovative products in a safe way, I thought that was super exciting.”

Roughly four months and one federal budget later, there’s a big asterisk to her optimism.

“I said I was,” the founder of the FinTech Growth Syndicate emphasized in an interview with BetaKit. “I’m not so optimistic anymore.” 

“Insecure and terrifying”

More than two years after the federal Ministry of Finance announced it would launch consultations on open banking, Canada’s FinTech startups are still waiting for a framework that would lay out the rules of the road for consumer-directed finance. In conversations with more than 10 members of the FinTech community and other stakeholders about the state of the consultations and Canada’s payment system modernization, interviewees told BetaKit the advisory committee was leaning toward recommendations that would support innovation and competition in the landscape. But many expressed frustration at the glacial pace of progress on consumer-directed finance.

“What we really need is the support of the federal department of finance in order for open banking to be a priority,” said Karim Gillani, general partner at Luge Capital. “Until we have that support, I think these consultations won’t yield much in terms of results.”

“Everyone is benefitting from the openness of the current system while also biting their teeth like, ‘Okay, when is that data breach going to happen?’”

When Finance Minister Chrystia Freeland tabled the first federal budget in two years, multiple sources said they were watching the document for a nod to both long-awaited pieces of modernizing Canada’s financial system. Open banking was left out of the budget, but the federal government promised to table legislation for a retail payments oversight framework (RPOF), which would create a public registry of regulated payment service providers and ensure those providers comply with financial and operational requirements.

“To continue to promote growth and innovation in digital payment services, such as digital wallets, while ensuring that these payments services are safer and more secure, the government proposes to introduce legislation to implement a new retail payments oversight framework,” the budget said. The federal finance ministry did not respond to BetaKit’s request for comment by time of publication.

“We are disappointed by the lack of commitment for financial innovation and a framework for open banking in Canada, especially after a round of industry consultations and promising signals from the government,” said Benjamin Bergen, executive director of the Council of Canadian Innovators, in an emailed statement. “Canada is home to some of the world’s most promising FinTech companies, and Ottawa can support them by introducing regulations that allow for increased competition and delivery of innovative and affordable services to Canadians.”

In an interview days before the budget, Nick Catino, head of policy and campaigns at Wise (formerly TransferWise), said leaving open banking and payment modernization out of the federal document would be “a pretty big missed opportunity. … There’s a clear connection in response to COVID and these types of issues that I fear could be under-appreciated.”

In a pre-budget submission to the finance department, Wise advocated for the government to advance the RPOF, amend the Canadian Payments Act to allow “associate membership” access to Payments Canada’s eventual real-time rail and advance an open banking framework. Catino said in an emailed comment to BetaKit after the budget that the framework is a “win for Canadians” but that Wise hoped the government “does not lose sight of other payments modernization priorities it has proposed in recent years.” 

With the federal budget out of the way, Canadian FinTech startups are now keeping an eye out for the advisory committee’s final report on its findings, which the government is planning to release in the next four to five weeks per sources who spoke with BetaKit.

The first phase in the federal government’s open banking review, which took place in 2019, assessed whether open banking would deliver positive results for Canadians. The January 2020 report from those talks ultimately called on the government to develop “a bold, clear and concrete timeline for delivering consumer-directed finance” (a Senate committee report released in June 2019 also pushed the government to move ahead on a framework). The phase-two talks covered implementation concerns around consumer data rights and mitigating privacy and data security concerns.

Open banking, or consumer-directed finance (CDF), refers to a framework where consumers and businesses have the right to their financial data and can authorize third-party financial service providers to access their financial transaction data securely, as well as give authorized third-party financial service providers the ability to initiate payments on their behalf, all through APIs.

As multiple FinTech experts and the advisory committee’s report on phase-one consultations noted, open banking is already well underway in Canada. According to the report, roughly 3.5 to 4 million consumers are sharing their financial data with third-party financial service providers, albeit insecurely, through screen-scraping. But the country is lagging behind others, such as the United Kingdom, Australia and the European Union, in developing a formal open banking system.

“Open banking is a massive step in democratizing a more competitive and fair banking market in Canada.”

“We have open banking today in a very insecure and terrifying form,” said Christian Lassonde, managing partner at Impression Ventures. “Everyone is benefitting from the openness of the current system while also biting their teeth like, ‘Okay, when is that data breach going to happen?’ Because it’s going to happen.”

Beyond the glaring security risks to Canadian consumers, the lack of framework has major implications for Canada’s FinTech startups.

“The longer we wait to get moving, the more the opportunity cost,” said Steve Boms, executive director of the Financial Data and Technology Association’s (FDATA) North America chapter, which represents FinTech startups operating in open finance. He pointed to London-based Revolut’s mid-March decision to (temporarily?) exit the Canadian marketplace. “Revolut is the latest in a series of FinTechs that have decided the Canadian market just is not able to support [them] at scale.” 

FDATA has been vocal about the need to move quickly, writing in a March 15 letter to the Department of Finance that the ministry should appoint a full-time senior staffer with the sole responsibility of overseeing the design and delivery of a CDF regime “as soon as possible,” and create a CDF “implementation entity” that’s tasked with open finance policy design and implementation.

Daniel Eberhard, CEO of challenger bank KOHO, noted that the Canadians who would most benefit from an open banking ecosystem are those who are “the most disenfranchised” and underbanked. “Open banking is a massive step in democratizing a more competitive and fair banking market in Canada, especially when it comes to lower and middle-income Canadians.”

Getting it read-write

Despite the delays, multiple interviewees told BetaKit the most recent consultations indicated the advisory committee was heading in the right direction.

“We are happy, there’s a sense of openness that we couldn’t take for granted that we got from the officials, and a sense of urgency that is also not something we took for granted,” said Frédérick Lavoie, founder and president at Flinks. “That, for us, is a strong signal that the next step is a framework where there’s no doubt about the future [and] where the right scope of data is going to be laid out.” 

He added that FinTech startups had approached the consultations with an aim to advocate for a framework that wouldn’t “hamstring” the market. “That was a threat until recently,” he said. “I think there was a sense of a threat that had the effort focused on gaining that safety around a minimum viable frame of reference so that we could move forward.”When Finance Minister Chrystia Freeland tabled the first federal budget in two years, multiple sources said they were watching the document for a nod to both long-awaited pieces of modernizing Canada’s financial system. (Source: Flickr)

The consultations addressed key questions of what rights consumers should have to their data, and how to ensure a future open-banking ecosystem is safe for consumers and businesses. “They’re not resolved, but the government has started to solidify its thinking on that,” said John Pitts, global head of policy at Plaid. “I, at least, saw really interesting progress on both.” 

At the beginning of the consultations, Pitts said, there was a “building narrative” largely driven by the big five banks that an open banking framework should start first with transaction data for a few years and “see how it goes” before expanding to other use cases. 

“Even thinking about it that way really doesn’t recognize the rights of the Canadian consumer and what they’re doing right now,” Pitts said. Data viewed by the advisory committee found that if a CDF system only covered transactional information, roughly 94 percent of Canadian apps would not be able to offer their services. “Once that became apparent, the tone of the conversation shifted to what consumer rights should be.”

The government is reportedly considering a data rights approach that will first grant Canadians “read access,” where consumers can authorize third-party financial service providers to access their data, before eventually moving to “write access,” which would allow consumers to authorize third-party providers to make changes in their bank account on their behalf.

In order to guarantee those rights, the government needs to pass Bill C-11, the Digital Charter Implementation Act, which will give Canadians data mobility rights to share their personal information between organizations, the right to require that organizations dispose of their personal information or withdraw their consent, and more. The bill was introduced in the House of Commons on Nov. 17 and entered second reading on Nov. 24, but stalled for months. Minister of Innovation, Science and Industry François-Philippe Champagne spoke to the bill most recently on March 26, prior to the bill being debated again on April 19.

“I think if you get a very clear signal, even without the new legislation…you’re going to see industry race to deliver that.”

“The tricky part is the consultation started before we had privacy legislation that gave Canadians a right to data mobility to give [open banking] a legislative leg to stand on, but I don’t know if that’s really the government’s fault,” said Alex Vronces, executive director of Paytechs of Canada. “I do think it’s a problem though that this stuff starts but then takes a backseat to other things with government.”

In early March, Champagne said on Twitter the bill was “a top priority for me as Minister [and] for our government as a whole,” and went on to accuse the federal Conservative Party and leader Erin O’Toole of “systemically obstructing the [government’s] agenda, [including] pandemic-related support for people and businesses, by playing legislative games.”

John Power, a spokesperson for the minister, told BetaKit in an email the Ministry of Innovation, Science and Economic Development was working in “close collaboration” with the Department of Finance to ensure Bill C-11 will support an open banking framework (a government fact sheet on the bill gives an example of individuals directing their bank to share their personal information with another financial institution as an example of the data mobility rights Canadians would gain). 

However the larger issue of write access — including payment initiation — wasn’t included in the consultations, multiple sources confirmed to BetaKit.

“We’ve not even got into that discussion [of write access], which is unfortunate because that’s really where the insights that the data gives you come to life, because you can then direct that FinTech or third party you’re working with … to take action for you,” said a venture capital source who asked for anonymity to speak openly about the discussions. 

They added that the advisory committee only offered a “general acknowledgment that we’ll have to answer that question at some point. There was and has been no clarity on what that would look like and when that would happen.” 

The third rail

Vronces said the government was “missing an opportunity” by excluding third-party payment initiation from the talks, given that Payments Canada is in the process of developing real-time rails (RTR). The rails are slated to be operational in 2022, with Interac and Mastercard-owned Vocalink selected as the exchange and clearing and settlement providers, respectively.

In a recent blog post on the Paytechs of Canada website, Vronces said that with the RPOF coming down the pike, and the government expected to make changes to the Canadian Payments Act allowing FinTech startups to access the payment system through “associate member” status, third-party payment initiators have the opportunity to be given access to the RTR. “The longer we neglect the subject, while the current technological and regulatory work comes to a close, the longer it will take for third-party payment initiation to come to fruition.”

“Canada is home to some of the world’s most promising FinTech companies, and Ottawa can support them by introducing regulations that allow for increased competition.”

However, the venture capital source pointed out, the still-in-development RTR is a “key ingredient” for third-party payment initiation, and the bar for security and liability is significantly higher when granting that level of access. Payment initiation also gets “a lot closer to what banks do today, and I think this creates a bigger conversation around competition and innovation, and what that looks like than open banking. So if we’re not fully ready to move forward on open banking, it’s inevitable that we’re not ready to have the payment initiation conversation.”

On the security and consumer protection side, the advisory committee seemed set to recommend the government set standards for companies wanting to access the open banking system to meet, and have prospective participants hire third-party auditing firms to certify them as having done so. 

The committee also seemed to lean toward allowing industry to tackle API development, rather than recommend the government create one and dictate it to all market participants. While a number of consultation participants are members of the Financial Data Exchange’s Canadian working group of more than 60 organizations, which launched in July and is currently developing a common API standard, Pitts said there was “significant discomfort” in the consultations with the nonprofit being designated the official standard from the beginning. “There was a desire by most participants to end up with one standard, but it’s more a question of timing — right now there are multiple competing APIs.”

In the interim period, while a framework is being developed, the Financial Consumer Agency of Canada called on the government in its open banking recommendations to develop guidance on an “interim liability allocation and access to redress” while screen-scraping is still in use, and set out a firm end date for the practice. It also recommended the open banking framework create barriers to prevent unaccredited firms from continuing to use screen-scraping.

Pitts said he expects the government to set out certain obligations for APIs and leave it to industry to “meet [the] objective however industry can” with one standard eventually winning out.

At FDX, the Canadian working group is split between two groups, with one involved in government and regulatory engagement and the other one focused on the actual technology standards. Tom Carpenter, director of public affairs and marketing at FDX, said the tech taskforce has been “going gangbusters,” but admitted the lack of clear signals from the government have slowed discussions.

“Who wants to do a whole bunch of work and see it become obsolete?” he said. “We really do need to see where the direction of the government is going. That’s a natural impact — we wish we could charge ahead and say, ‘hey, we’ll find out what they’re going to say later.’” 

He also noted policy debates have sometimes “leaked into” the working group’s technology discussions, citing an example of the work the nonprofit does around defining use cases that minimize the amount of data actually needed for a given purpose. “If you’re using screen-scraping, you’re sharing all your data whether you need to or not. Use cases allow the industry to define a set amount of data elements that are needed for a given purpose; that is totally agnostic to the question of how much access should a consumer have,” he said. “But if I’m a FinTech concerned about, ‘Am I going to get the data I need?’, I might see the use case as, ‘I don’t know if I want to play in that, I want to still talk about full access.’”

Carpenter said FDX isn’t anti-competition, and is trying to become the “market’s preferred standard” by creating a collaborative space where FinTech startups and financial institutions are willing to talk to each other and work together. “We know that if we don’t get that right, it could end up being a target for one side and a benefit for the other, and we don’t want that to happen.” 

According to Pitts, the ecosystem is waiting to see what signal the report sends. 

“It’s been over a year since the consumer-directed finance consultation process started — a year and a half if you go back to the initial consultations. The industry keeps moving quickly, banks and FinTechs are negotiating data agreements, [and] all of us are trying to negotiate a little bit based on what we think the government is going to do but all of us are waiting to see what that government signal is,” he said. 

“I think if you get a very clear signal, even without the new legislation…you’re going to see industry race to deliver that, even ahead of the government finally mandating it. It’s just a question of knowing what we are meant to deliver.”

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