Canada headed for a hybrid open-banking regime

The federal government mandated the Financial Consumer Agency of Canada to administer and enforce the nation’s consumer-driven banking framework last month. Success will depend on how the private sector uses the framework. 

Open banking allows financial institutions, with consent, to securely share client account details with third parties such as other banks and wealth management firms. Currently, data sharing services depend on screen scraping, which requires clients to share their login details with third parties, raising security risks.

With open banking, the government sets financial data exchange standards, mandates participation and sets rules concerning cybersecurity, technical standards and dispute resolution, said Hwan Kim, a partner with Deloitte Canada in Toronto who specializes in the financial services sector.  

“They’re not the players, but they’re setting the playground,” Kim said of the government’s role. 

The private sector, meanwhile, will be responsible for implementing open banking’s many uses. 

Canada could be headed to a hybrid open-banking model where industry pursues market-driven objectives under parameters set by the government, said Saba Shariff, senior vice president with Symcor, a payment processing company based in Mississauga, Ont. She is responsible for the company’s products and overseeing the design and launch of new services.

For example, budget implementation bill C-69, which completed first reading on May 2, includes deposit accounts, investment accounts, payment products, and lines of credit as part of its definition of financial data. 

Once the rules are set, the success of open banking will depend on whether the private sector can make the best use of the framework, Kim said. 

Budget 2024 promoted broadened access to credit as one way to use open banking.  

One company that extends credit to people who may not qualify for traditional loans, such as newcomers and young adults, is Vancouver-based Spring Financial. 

The application process either includes screen scraping or sending bank statements to the lender, said Tyler Thielmann, president and CEO of Spring Financial. Nine in 10 of his borrowers apply through a mobile device, which makes it difficult to email or fax documents. 

“It’s a very arduous process and there’s so much friction in it. It’s very painful,” Thielmann said, referring to traditional processes. “We’re walking literally hundreds of customers through this process every day.” 

Further, screen scraping doesn’t work all the time, Thielmann said, and consumers must download their statements or scan paper copies when it fails. Open banking would remove this friction by providing lenders with a direct application programming interface (API) connection to a borrower’s bank. 

Currently, screen scraping is done through an intermediary called an aggregator, which scrapes a consumer’s account and transmits that information to the receiving financial institution, Thielmann said. Even when open banking is fully implemented, fintechs will still need to use an intermediary as fintechs don’t usually have direct APIs to banks. 

One such intermediary is Symcor. One of the company’s current services is clearing payments for financial institutions, utilities and insurance providers. Symcor has been working on an open-banking data exchange for Canada since 2018 and can build an API on a bank’s behalf. 

Symcor chose to follow the standard from the Financial Data Exchange (FDX), a non-profit industry body, which was implemented in 2018 and is now used by more than 60 financial institutions in Canada and the U.S., Shariff said. 

“If the government was to come out and choose something other than FDX, we can mitigate the gap,” she said. “We’ll update [it] on our end.” 

Any company can receive financial information through open banking as long as they pass regulatory accreditation and receive consumer consent, Shariff said. Consumers could be willing to share information as long as the company offers something meaningful in return. 

“We don’t know what all the use cases are going to be,” she said. 

Retailers with loyalty programs, for example, don’t have information on consumer habits beyond their own network. Having access to consumer transaction data can help them understand where people shop, what they buy and how to customize offers to customers, Kim said. 

Companies with a younger customer base will likely benefit from open banking as young people are more likely to be comfortable with new digital features, Kim said. Those with more frequent digital engagement with their customers will also come out ahead. 

This article was updated on May 9 with additional information about screen scraping, and on May 10 to accurately reflect Shariff’s role.