Open Banking: An Essential Choice for Canadians
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Dec 2, 2021
The Empire Club of Canada Presents
Open Banking: An Essential Choice for Canadians
Chairman: Kelly Jackson, President, The Empire Club of Canada; Associate Vice-President, Humber College
Manjula Selvarajah, National Columnist, CBC
Andrew Moor,President & CEO, Equitable Bank
Kirsten Thompson, Partner & National Lead, Transformative Technologies and Data Strategy Group, Dentons
Distinguished Guest Speakers
Hanna Zaidi, Chief Compliance Officer, Payments, Wealthsimple
Abraham Tachjian, Director of Digital Banking, PwC Canada
It is a great honour for me to be here at the Empire Club of Canada today, which is arguably the most famous and historically relevant speaker’s podium to have ever existed in Canada. It has offered its podium to such international luminaries as Winston Churchill, Ronald Reagan, Audrey Hepburn, the Dalai Lama, Indira Gandhi, and closer to home, from Pierre Trudeau to Justin Trudeau. Literally generations of our great nation's leaders, alongside with those of the world's top international diplomats, heads of state, and business and thought leaders.
It is a real honour and distinct privilege to be invited to speak to the Empire Club of Canada, which has been welcoming international diplomats, leaders in business, and in science, and in politics. When they stand at that podium, they speak not only to the entire country, but they can speak to the entire world.
Welcome Address by Kelly Jackson, President, The Empire Club of Canada
Good afternoon fellow directors, past presidents, members, and guests. Welcome to the 118th season of the Empire Club of Canada. My name is Kelly Jackson. I am the President of the Board of Directors of the Empire Club of Canada, and Associate Vice-President, at Humber College. I'm your host for today's virtual event, “Open Banking: An Essential Choice for Canadians.”
I'd like to begin this afternoon with an acknowledgement that I'm hosting this event within the Traditional and Treaty Lands of the Mississaugas of the Credit, and the homelands of the Anishinaabe, the Haudenosaunee, and the Wyandot Peoples. In acknowledging Traditional Territories, I do so from a place of understanding the privilege my ancestors and I have had in this country, since they first arrived here in the 1830’s. As farmers in Southwestern Ontario, I imagine they felt a deep connection to the land, and yet likely did not recognize how that connection was built on the displacement of others. Delivering a land acknowledgement, for me, is always an important opportunity to reflect on our human connection, and responsibility to care for the land; and to recognize that to do so, we must always respect each other, and acknowledge our histories. We encourage everyone tuning in today to learn more about the Traditional Territory on which you work and live.
Before we get to today's event, I wanted to highlight our next event, because it is a very special virtual award ceremony, that will be recognizing Chief Perry Bellegarde as this year's Nation Builder of the Year. The event is on December 9th at 12 noon, Eastern Time. I invite you to join us, as we celebrate his impact as a First Nations leader, and Indigenous and human rights advocate over the past year. We have a great lineup of VIP testimonials and entertainment, as well as a live interview with CTV National News’, Omar Sachedina, and Chief Bellegarde. More details, and complimentary registration, are available at empireclubofcanada.com.
The Empire Club of Canada is a non-profit organization. And I'd like to take a minute to recognize our sponsors, who generously support the club, and make these events possible, and complimentary, for our supporters to attend. Thank you to our elite event sponsors PWC and Wealthsimple, and our supporting sponsors, EPAM, and Publicis Sapient, and thank you, also, to our season sponsors, Bruce Power, LiUNA, and Waste Connections of Canada.
I want to remind everybody who's participating today, that this is an interactive event. And to those who are attending live, we encourage you to engage with our speakers, by taking advantage of the question box, by scrolling down below your on-screen video player. We have reserved some time for audience questions at the end of the discussion. And if you require technical assistance, please start a conversation with our team, using the chat button on the right-hand side of your screen. We also invite you share your thoughts on social media, using the hashtags displayed on the screen throughout the event. To those watching on demand at a later date, and to those tuning in on the podcast, welcome.
It is now my pleasure to call this virtual meeting to order. I am delighted to welcome our panel to the Empire Club of Canada's virtual stage. We have here today, Andrew Moor, President and CEO Equitable Bank, who will be delivering a presentation entitled “Open Banking: A Social Imperative for Canada.” After the presentation, Andrew will then join Kirsten Thompson, Partner and National Lead, Transformative Technologies and Data Strategy Group, at Dentons, and Manjula Selvarajah, National Columnist for the CBC, who will moderate discussion on the topic of open banking, and what it means for Canadians. I’d now like to introduce Hanna Zaidi, Head of Cash Compliance at Wealthsimple, to deliver some opening remarks. Hanna, welcome.
Opening Remarks by Hanna Zaidi, Chief Compliance Officer, Payments, Wealthsimple
Thank you so much for having me. So, I'm the Chief Compliance Officer for Wealthsimple Cash, and for some background, Wealthsimple is a Canadian FinTech headquartered in Toronto, with more than 2.5 million clients, and 900 employees, across 9 provinces in Canada. We offer managed accounts, group retirement savings plans, self-directed investing, crypto asset trading, tax filing, and a payments product that I oversee. We're really happy to be supporting the Empire Club today on this important topic, that will impact many Canadians in a meaningful way. Open banking is a subject that I spend a lot of time engaging on publicly, because a mandated framework would transfer the balance of power from banks to consumers, by giving them the right to access, share, and move their own financial data as they see fit. This is a particularly challenging concept for Canada, which has historically accepted limited competition around a range of regulated industries, including banking, often resulting in high fees, and little choice for consumers. We need to shift our mindset. Open banking, blockchain, digital identity, the move towards greater individual empowerment is consistent with Canada's most treasured values, which are fairness, inclusion, and accessibility. By establishing a framework for a fairer and more accessible financial system, the underbanked, and lower- and mid-income Canadians can stand to be the biggest beneficiaries. There's reason to be optimistic. In September, our CEO Mike Katchen sat down with the Liberals, Conservatives and the NDP, to discuss what they were hearing on the campaign trail, job creation and innovation in the tech sector, and the potential for open banking. All three parties confirm their support for innovation-friendly financial services regulation that increases competition, and benefits consumers. The Liberals have committed to open banking being in place for Canadians by the beginning of 2023. This is the right thing to do, and a rare opportunity to move forward a complicated policy file for a minority government. It's incumbent upon all of us to support the government in meeting this commitment. I look forward to hearing Andrew Moor up next, and working with all of you to make the changes that will impact many Canadians in a tangible way.
Andrew Moor, President & CEO, Equitable Bank
With that, good afternoon, everyone, and thank you, Hanna, for the introduction; Hanna is herself an expert in open banking, as you probably gathered. Thanks to your colleagues at Wealthsimple for the support of this event. And thanks to Sal, and Hanna Patterson, and Jody, for making this opportunity possible. For almost 120 years, the Empire Club has served as a leading speakers forum, tackling issues that affect the lives of Canadians. As a country that prides itself on the strength and stability of his banking industry, and as a beacon in the world for personal freedom, open banking is very much an issue that deserves to be tackled by this club. In open banking, we have a cause that goes straight to the heart of today's most pressing concerns, data rights, privacy, cybersecurity, economic growth, and personal freedom and equality. It opens up big philosophical questions, including what rights do we as citizens have in a digital society? How can those rights be best realized and protected? And do we believe in competition? For a club that encourages exchange of ideas, few topics are more appropriate, fewer still have the ability to affect the lives of Canadians in such a substantially positive way. As a banker, and champion of open banking, I'm honoured to lend my voice to this public policy discussion. At the outset, I've got to admit I have my own personal biases—it’s my deeply held belief that the Canadian banks are a benefit to the nation. Through a combination of prudent management and good regulation, they have withstood financial stress, they're well capitalized, they haven't required taxpayer support, and they're safe havens for savings, provide capital and reasonable terms to fund economic growth, and as research points to time and time again, are generally trusted by Canadians in all walks of life. For these reasons, we need all banks to get behind the open banking movement.
The title of my presentation, “Open Banking: A Societal Imperative for Canada,” was chosen purposely. Open banking is a policy prescription that can enjoy dynamism into our economy and society, by ensuring that citizens are free to use the data generated by their financial transactions to improve their lives, rather than having this data set in sealed siloes as it does now; I’ll provide use cases to demonstrate. Open banking is a counterpoint to what's unfolding in the technology world, as we see social media giants build data monopolies that erode consumer choice, and thwart industry competition. Personal data from activities such as lending, deposit taking, and payments, should not be used to advance the market power of any institution, it should instead be used, and accessible, to enhance the efficiency and productivity of the Canadian economy. As I see it, open banking is the tip of the spear that leads to open finance, the development of services beyond banking using the transformative impact of data sharing, and a more open digital economy, where our digital rights as citizens are clearly defined, to enable a more prosperous society. Effectively, we're talking about how we engage community and country building, using a clear roadmap to implementation, that is possible with political will. During my remarks, I will provide a practical description of open banking, a world view of the advantages already accruing to citizens and countries where it’s a reality and summarize where Canada stands today, from a government policy, and implementation perspective. I'm sad to say that, based on what's happening globally, the inescapable truth is that Canada is falling behind the curve. Our society can't afford to wait for another five years to catch up. For bankers’ intents, I should comment that the focus of open banking is personal and small business financial services, these are the activities that will be transformed, not corporate and investment banking, which are really outside the purview of open banking.
First, let me contrast open banking with the system we have today. Every time you make a payment, decide to invest, or take a loan, data is generated within the financial system. As the bank's intermediate these transactions, they gain valuable insights about you, every other person you do business with, and serve, and they use this to set customer-specific prices and develop and sell their own policies. In the current model, banks control your data, and whether by design or accident, make it hard to share. In this context, financial data includes saving and spending transactions, but also things like credit and employment histories that your bank collects. This closed system denies individual citizens the freedom to combine their financial data in ways that are useful to them and creates barriers to the development of novel financial services, by starving FinTechs of consumer insights needed for really purposeful innovation. Open banking is part of the solution. With your full consent, it opens access to the data you want, across every financial institution you deal with, and you can safely and securely choose to share that data with third parties, who use it to provide customized services. The central idea is, when consumers have the power over when and how to share that financial data, suppliers of capital and services will respond, by creating tailored products, including better-priced offerings, using that data. The outcome, greater competition and more innovation, will lead to far more consumer benefits for Canadians, across all parts of the economic spectrum. Former Finance Minister Bill Morneau captured this thought in a speech just last week, when he said that consumers and small businesses stand to gain the most; better access to credit, a boost to financial efficiency and inclusion of consumers, better financial awareness, more innovation, and also risk-mitigating features such as control over non-consenting data sharing and screen scraping. Today screen scraping, the practice of sharing personal usernames and bank passwords with third parties, is the only workaround, and it's not a good one. Not only is it slow and cumbersome, as most Canadians bank with several institutions that control specific parts of your financial data, it is far less, secure. If banks and FinTechs jointly collaborated to develop application programming interfaces, as we call it in the lingo API's, the tools that enable safe, authorized data sharing. Today when you give a third party your password for screen scraping, there's no limit to what they can do, once inside your account. Screen scraping is also prone to failure; every time a bank changes its website, extracting data becomes impossible. It doesn't have to be this way. Technology has existed for at least 10 years to create an open banking environment. In fact, banks including mine, are already creating open banking-like ecosystems, in partnership with FinTechs, a thing called digital international money transfer services, online mortgage marketplaces, free credit scores, and robo advisors. As popular as these offerings are, this is not the same as when customers are free to data share, to enable them to shop across the financial system in a safe manner.
Let me reinforce the point. The biggest benefit to Canadians is choice. It's about banking on your terms. Imagine a future where one click opens your own personal budget management tool, that helps you manage expenditures and investments across all your bank accounts, to ensure that you reach your homeownership or retirement goals. With another click, you can access credit card or savings products, that are curated across multiple institutions, specifically for you. For those with elderly parents, a future with open banking means receiving instant notifications, alerting you to unusual activity on your parents’ monitored bank accounts, using safety apps. When you arrive at your future workspace, your auditing, accounting, and payroll capabilities are also different, faster and more efficient because of open banking. If you're a small business owner, the ability to access credit is enhanced, because lenders have more and better data at their disposal to gain comfort with your file. Indeed, small business seems to be one of the best early use cases for open banking. These aren't “blue eyes blue sky ideas,” they are the realities today, in countries with open banking concepts, where new concepts are reshaping financial services, much as internet banking did two decades ago. As a judge of the UK’s open banking awards, I had the opportunity to see innovation up close and personal. The new ideas made me green with envy—not so green to get me to move back to a country of perpetual rain and warm beer, but certainly even more convinced that we need to bring open banking to Canada. Award-winners like the aptly named Snoop, created an app that connects consumers to over 36 banks and 18 credit card companies, then keeps what they call their beady eye on your bills, so that you're notified of expense changes, and proactively advised of how to save money. Starling Bank, a bank I really have an admiration for, won for best customer experience, with apps now used by over 400,000 businesses to streamline administrations, seamlessly integrate bank accounts with QuickBooks, capture digital receipts, and eliminate fees. Moneyhub’s apps provide powerful insights into your spending habits, and the tools to help you change your behaviour. Yapily taps into bank accounts to add real-time intelligence to accounting, and its wealth management app uncovers income and spending patterns to offer bespoke solutions.
Personal finance tools that assist with daily budgeting, and more generally boost financial awareness and enhance financial literacy, are important. And this, like open banking, is an equalizer, a helping hand for the less fortunate. I see the lack of open banking is an acute problem for lower-income Canadians, who find themselves underbanked, in part because the personalized services that they need are expensive for banks to provide, and result in relatively low account balances, and limited transaction fee opportunities. Open banking could lead to specialized FinTechs, armed with data from across the universe of low-income customers, to create simple and effective apps, where the economics make sense for both the customer and the financial institutions services providers.
In countries of modernized payment systems, open banking is also integrated with real-time payment rails, transactions are verified, and can be triggered from with inside the open banking platform, you know, success rates are really high as soon as you start triggering that. The good news is that Canada is modernizing its payments regime, so we will be ready for open banking, for that evolution of open banking when it comes. To the economy, new competition would stimulate job and wealth creation, both key societal benefits. FinTechs would be winners for sure; much more would be invested in Canada's FinTech sector if open banking was mandated. It's anyone's guess how big that number can be, but I would expect to see a lot more risk capital flowing to a sector where the structure encourages innovation. A 2018 survey by FinTech Canada showed that Canada had a thousand fewer FinTechs than the UK. Open banking isn't about banks or FinTech, and this presentation isn't meant to dwell on it from that angle. But financial modernization of this nature may very likely help banks generate new revenues, reduce costs, and more effectively discharge their regulatory, and I think increasingly importantly, social responsibilities. To get to this promised land, we need all banks to be constructive participants. That said, we also need a regulatory framework designed to produce the economic and social benefits I mentioned. Unconstrained by regulations, banks, the economically rational actors, may choose to limit data sharing. For that reason, government needs to force both access to data, and the rules by which the data is shared.
Bill Morneau’s speech did point out the real politic of the open banking debate. Politicians, by nature and incentive, like to find a middle ground to push through policy objectives, whereas the nature of this debate creates and services differences in perspectives from various player in the financial services sector. Clearly, we will achieve a better outcome if banks co-operate in seeking to deliver the advantages of open banking, this will probably only happen if the government gives clarity to his expectations, and forces industry experts to come to the table. Government unfortunately needs to define the big picture policy objectives, and the timeline expectations clearly. With this architecture of the system established, the industry can deliver the solutions. Though, you know, we hope people listen more broadly to this, Canada can't afford to be a laggard. Hopefully, this message is now being heard by current political leaders, who in their position have a role, have a clear obligation, to create a better society, which will be engendered by open banking.
This brings me to a worldview. The UK pioneered the adoption of open banking when its competition authority introduced a package of remedies to increase competitive intensity, in the provision of retail banking services. Authorities ordered the 9 biggest current account providers in Great Britain and Northern Ireland, referred to as the CMA-9, similar to Canada's Big 6, to create and pay for an implementation entity called the OBIE. Since 2018, and to quote the UK’s Economic Secretary to the Treasury, John Glen, “open banking has taken the world by storm, with around 30 other jurisdictions now following the UK’s lead.” Domestically, OBIE estimates that 4 million open banking transactions were made last year. It’s survey of UK small- and mid-sized businesses noted that 50% took up open banking services since the start of COVID-19. Growing consumer interest has made the UK banks take notice. The ecosystem now extends far beyond the CMA-9, to encompass more than 330 regulated firms, together holding about 95% of current accounts. The UK is now a hotbed of innovation; FinTechs are pushing beyond open banking into the broader world of open finance, with single point access to every bank, insurance company, streaming service, and utility account, using a subscription management API. Financial inclusion has improved for those with little or no credit history, as UK financial institutions gain access to better data by which they can make risk-managed decisions. Open banking is also entering the world of personal and business tax; as any small business owner will tell you, satisfying tax obligations is complex and burdensome. As API's are written for bookkeeping and accountancy, the ability to calculate tax liabilities, and to manage the flow of tax return information into accounts at Her Majesty's Revenue and Customs Agency, become far easier for individuals. Open banking could allow a real-time view of personal tax positions and obligations; the UK’s Making Tax Digital Initiative is moving that ball down the field.
Turning to the other side of the world in Australia, is by far the most ambitious agenda. Australia's regime is based on their consumer data right legislation, passed in July 2019. Just one year later, open banking implementation was mandated. One year. The Australian Government moved with speed to promote the competition in the sectors affected by the legislation, which includes banking, but also energy and telecommunications to start, and raining out to other industries when designated by Australia's treasurer. Among other advantages, this legislation gives Australian consumers the ability to easily change their incumbent suppliers, because they now have the access to information to comparison shop. Early this year, many products were introduced in Australia encompassing business lending, asset finance, trust accounts overdrafts, lines of credit, and foreign currency accounts. With booming financial products and services facilitated, the Australian FinTech ecosystem attracted $1.4 billion of investment in 2020 alone, a great tailwind for the knowledge economy, and jobs. Singapore and Brazil adopted open banking in 2018, and 2020, are both did so by enshrining data rights, which are fundamental to a free and open society. A worldview must also take into account our southern neighbour. Although to be clear, the US banking system is quite unlike Canada's, because it's highly fragmented with close to 5000 banks and credit unions, it's inherently more competitive and does not serve as a useful model for us. But even they're open banking is part of the conversation. President Biden's Executive Order on promoting competition in the American economy, has moved open finance into the mainstream, positioning it as one of the administration's top priorities. That said, American attitudes toward open banking appear to be mixed, as some groups expressed concerns about privacy, and the use of personal data. The same concerns exist in Canada. This values the fact that we do have to do a better PA job to resolve—as there is a certain amount of geekery to the subject that requires translation for people outside financial services, and the need to inform consumers about the benefits. Certainly, people aren't marching in the streets to demand open banking, but they are clearly demonstrating that they want it, by their behaviour in signing up for service in the millions, that use screen scraping to access certain components of their financial data.
So, what about Canada? The short answer is, we've been investigating, with good foundational insights captured in formal reports to Parliament, and no legislation to speak of. It's been a slow burn, and that's a shame for consumers, because open banking is in our grasp technologically, but out of our reach legislatively. Looking at the public policy debate chronologically, in 2018, the government announced the creation of an advisory committee led by the Department of Finance. The committee was asked to engage with Canadians in two phases, one to assess the merits, and the other to assess the implementation. From this engagement, the government received over 100 written submissions from stakeholders, including my bank. In January 2019, the advisory committee launched a public consultation. In June 2019, the Senate Banking Committee released actually a really well written report, recommending the government facilitate an industry-led, principles-based framework. This report made comments helpful to those like me, who advocate for open banking now. Momentum seemed to be growing in 2019, as 2019 marked the release of Canada's Digital Charter, the 10 principles which guide the government's work. Principle four arguably commits the government to an open banking agenda; this was a step in the right direction, as the principles include transparency, portability, and interoperability. But the Charter is not law. 2020 started in promising fashion, as the advisory committee’s reports recommended the development of framework within the next two years. That report referred to open banking as consumer-directed finance, a change in naming meant to assure Canadians that they control their own data. I like the term open banking, which could be misconstrued to mean a loss of control and privacy. Consumer-directed finance leaves no such ambiguity. The pandemic, and other political priorities had conversations of this data on the back burner, however, in the fall of 2020, five private virtual stakeholder consultations provided feedback on the proposed model. In August of this year, the advisory committee dropped its final report, recommending a limited initial phase open banking, with an operational date of January 2023, just 13 months from now. That report outlined an implementation roadmap that includes appointing an open banking lead, with a mandate to convene industry working groups, to develop proposals for common roles, establish an accreditation framework, and technical standards. That work obviously has to happen over the next 13 months.
And that's where we stand today. A proposed timetable, a proposed roadmap, and a job posting for an open banking Czar. As Australia and the UK have proven, Canada can and must do better. Every serious study has shown open banking is the future of personal finance, and the way forward for a modern society. Regardless of political affiliation, it is something every party can support. Of course, there's a silver lining to following rather than leading. Canada can learn best practices from those who have blazed the trail. Case in point, the UK Competition Authority recently reviewed the governance of the open banking of limitation entity, and warned that, while the largest UK banks have shown some signs of embracing open banking, they may also have an incentive to slow the further development of the ecosystem, where this kind of conflicts with their own commercial open banking objectives. We can also learn from the UK about how important it is to give customers a great experience for open banking use cases, and how the basis of giving and maintaining permissions for data access, needs to be easy and trustworthy. These are things that Canada must adhere to, to ensure that our system, when it finally arrives, is not constrained. Our banking system has already embarked on a payments modernization journey, with the two primary systems, Lynx just got stood up in August, and the Real-Time Rails to come in 2023. As evidenced by the UK’s leadership, combining open banking and payments, this results in faster growth, and much better services for consumers. Building a digital ID system also needs to be a part of the roadmap; a unique digital ID that stores your personal information online, automatically verifies your identity, and protects the data you generate from this use, is a must. As the Digital Identification and Authentication Council of Canada, or DIACC notes, investing in digital ID offers economic benefits of citizens, businesses and governments, and also establishes digital tools to support societal trust, security, privacy and fraud mitigation. This is a win for all. I agree with that statement. The Council calls for the government to make digital identity-enabled services available to all Canadians. So, a lot for lawmakers to draw on, as we move from the drawing board to the order paper.
Thinking about implementation, Canada's dated financial infrastructure, and multi-layered, multi-jurisdictional regulatory systems, pose challenges. Adam Felesky of Portage Ventures and I commented on these challenges, in a Globe & Mail article we co-authored last year, where we noted that for an advanced economy, Canadians encounter the surprising level of friction across the system. Fixing this will require legislation standardization, to ensure ease of access to data, enhanced cybersecurity protection, and supervision. Open banking is the way to set Canada's financial services infrastructure on the right course. Creating a modern digital financial infrastructure is far less costly, time-consuming, and complex, than building a high-speed rail service from Windsor to Québec City and will deliver benefits to far more Canadians. Much as our ancestors surely thought that driving the last spike of the CPR was important to the future of Canada, so too can we leave a legacy of a modern financial system, that will promote prosperity for the country as a whole. Canadian banks, including mine, have been preparing for the arrival of open banking for some time. Technologically, it’s not a particularly hard row to hoe for individual institutions, if they invest in the necessary people and technical architecture. Equitable’s collaborations with companies like Wise and Nesto are examples of our efforts to pursue open banking relationships that are good for Canadians, and show that we've already built the necessary IT capability. We're also working on a proof of concept that will give EQ Bank customers a taste of open banking. As community leaders, your support is vital if we're going to make open banking happen in Canada. You are the people who can influence public opinion in favour consumers, data rights, and competition. So, please add your voice to the debate. Knowing that open banking isn't just a nice to have, it's a societal imperative, that will secure a better, safer, and more enriching future, for Canadians in all walks of life. Thank you.
Manjula Selvarajah, National Columnist, CBC
Thank you, Andrew. My name is Manjula, and I'm here to thank you for the invitation from the Empire Club to moderate this discussion. Kirsten, and welcome to you as well.
Kirsten Thompson, Partner & National Lead, Transformative Technologies and Data Strategy Group, Dentons
Hello. Thank you, delighted to be here.
So, you know, I think that we should start with getting an understanding of what's going on with the report. The report from the advisory committee came out in August, you are one of the authors of that report. What has happened since then?
That's right. I'm a member of the Advisory Committee on Open Banking. As Andrew mentioned, that report, final report was released in August. We then went into an election period, so not much has happened because of that, either prior to, or immediately after. Also, as Andrew mentioned, we recommended a framework be instituted, and fairly ambitious timelines, in fact, now very ambitious timelines. We do have the benefit of learning from other jurisdictions, so the timelines are not unrealistic. But they do require movement, and fairly quickly.
And my understanding is that's a recommendation for starting in January 2023, or system in place by 2023. Is that right?
To have that architecture, and the framework, and the system, essentially. The open banking is broken into two, conceived of as two different types, there's what's called read-only access, and so that you typically see an aggregator sites, so as a consumer, I can get access to information across multiple accounts, and then there's the read-write access, which is the payments. And you heard Andrew talking about many of the different types of ways you can move, or obtain money, credit, that kind of thing; that would be sort of a phase two of it. So, we'd be looking at the implementation of phase one by that time.
Thank you. Andrew, I was hoping, I know that you had touched on this during your presentation, but I was hoping to get you to sort of paint a picture for me. So, let me imagine a person here, Sharmila, let's say, a 40-year-old, single urban planner, lives in the annex, let's say has two dogs—I don't know why she needs to have two dogs, but she has two dogs. Give me a sense of what a change like this would mean for her. What would it actually mean, when it comes to the day-to-day financial interactions that she does?
Well, I've actually caught up with Sharmila’s story. She's actually been a permanent relationship for 10 years now with Doug, who's a jazz musician, who also has a side hustle in a music critic’s website. And Doug is unlike Sharmila, he's not as focused on financial matters; he doesn't get his taxes deducted at source from his gig work as a musician. There was a bit of stress in the relationship about five years ago, when it turned out that he had spent the taxes he should have been withholding on a on a new saxophone. And so, open bank has now allowed them to evolve forward, where every first Sunday of every month, they look in their open banking apps, Sharmila helps Doug make sure he's got enough money being held aside for his future tax payments. And using a clever app that searches around the financial services landscape, they park it in the bank that's offering a good rate of interest, or a good rate of interest to them, until tax time. They also have some other interests. As Sharmila is obviously interested in planning and developing in the City, she’s really interested in an investment property in the East Side of the city, where she sees particular growth. Now, with Doug, her partner, having this kind of somewhat erratic income, it's hard for banks to really get their head around what the joint income of this couple is. But using open banking frameworks, they are able to share all the financial data they have, using the magic of AI, Sharmila and Doug are able to get two really great mortgage offers, and banks that can peel through that transaction flow, and give them something that is good for them. So, you can see how it's working on two levels for them, it's helping them save time in their banking, but it's helping their relationship have more confidence, not just the sort of the personal side of relationship, but the financial side of their relationship. And it's helping them realize their dreams, and build wealth.
What's interesting, because you've touched on efficiency for sure, that it, you know, brings to their life, more visibility into how their finances are doing. I don't have this statistic before me, but I once heard that only a minority of consumers in Canada actually get a competitive lending rate. So, I wanted you to shed light on this. I have a sense that open banking may make things cheaper for consumers, or perhaps even help, I think you've touched on that, extend services to underserved communities, or communities on the fringe. Can you speak about the value of that disruption in making things cheaper, or targeting, or bringing services to fringe communities?
Yeah, I think this was many, many use cases. And you think about open banking as an architecture on which other the value can be built. You know, I think there's actually lots of interesting use cases around our First Nations, for example, that certainly seems to me, we've been doing a bit of work in this recently, you know, around the bank community, and obviously, a priority for us all to help, you know, give a leg up into the financial system. But more generally, people that are moving in kind of patterns of employment, where your income isn't quite so regular, they're tougher to assess from a credit perspective. And you know, I speak as somebody who has people trying to work their way through, and figure out whether or not, you know, how strong people are going to be from credit perspective. Certainly, by having data easily available, we're able to have more confidence in making the right decision for us. And if we're confident of that decision, then also we can reduce rates to the people borrowing money for us, or helping them fund a small business, particularly small business is just really complicated to understand. So, the more confidence we have that the loan will be good, obviously, the lower rates we need to charge, and that then drives back kind of prosperity, the economy can allow small businesses to set up more easily, and also to reduce their cost of borrowing, which helps them then invest more in physical plant or employees or whatever else they're trying to do as they build up their business.
What's interesting is that the picture you're painting is also one of multiple companies that will be offering services. Kirsten, this means that we're going to see a wide field of FinTech companies, some of them very small. Canadians are used to having a very stable financial sector. I mean, that's what's helped us weather some financial disasters around the globe, even south of the border. So, I wonder, you know, one of the concerns I think that people will have, is around cybersecurity. Can you speak about that issue? What are some of the concerns when it comes to cybersecurity in open banking?
Sure, I think we need to start by dispensing with the idea that limited choice provides security. It may make us feel better, because we're not overwhelmed, and Canadians do believe that the sort of incumbent banks are safe and secure, but the alternative of having many choices does not necessarily mean we're no longer safe and secure. There are ways to do this. The three main ways to bring that level of security—and we should be concerned about this—is to have robust technical standards. Again, this is something we can build on from other jurisdictions, and either adopt wholesale or adapt to the Canadian environment. We are not going to be opening the gates to the barbarians, and anybody and anybody’s friend will have access to information. This is consent-based, so you do not share it as a consumer unless you want to share it, and you're only sharing it with accredited organizations and FinTechs that are inside the regulatory perimeter in some manner. So, that would necessarily require them to comply with certain technical standards cybersecurity requirements, perhaps have insurance, and those sorts of things. And then finally, sort of the third part of that is to have robust and purpose-specific privacy laws. We're fundamentally talking about personal information here, so we need to regulate transfers and uses of personal information, in a way that allows open banking and data portability to occur in a safe way.
How then do we ensure compliance, and how do we ensure that these companies will comply?
Some of that is regulator-driven, and some of it is market-driven. There's no way of escaping the concept that you need to have meaningful enforcement, which then gets into an interesting discussion about who should those enforcers be, should it be one, or should it be many? Currently, there are multiple organizations that can play an enforcement role, from the Privacy Commissioner to, for instance, OSFI, the financial institution regulator. On the markets side, there's also contractual arrangements, so banks and FinTechs would be required to have some kind of contractual obligation to manage those. So, you sign up for certain commitments, and you risk vetting the company if you fail to fulfil those. And then finally, you can do some kind of audit system, either private sector audit by a third party, or a regulator-type audit, to keep everyone honest.
I wonder if there was to be a breach or a scam or anything of that kind, is it hard to figure out who's responsible, who's accountable, who's liable?
We already have a model for that. In many different areas that are complicated, we have many types of these sorts of flows, where there's multiple players, and we're seeing it more in business models. But I can give you an example of the Payment Card Industry Data Security Standards. What the consumer sees is something bad happens, and they are made whole. What happens on the back end, is there's a complex contractual arrangement amongst all the participants, that allocate liability and apportion it, in conjunction with whatever the failure was, to comply with certain cybersecurity standards, comply with certain rules, and so on, and so forth. So, you can shift the liability that way, and still keep the consumer whole. That's just one example. Insurance is also another example, whether that self-insurance or some sort of regulated insurance product.
Andrew, I think you had a point, there?
Just in general, if you have an open banking standard, where, you know, where we're sharing data with authorized third parties, you know, through API's, we know what data has gone to who, and I think that allows us to at least track down when the leakages in the system might happen. Today, frankly, leakage can happen, because the data was extracted through screen scraping, you know, we thought it was a good personal finance app, or something, and, you know, it's not entirely clear what was going on, and you don't know where the data went. So, I think it's a much stronger environment, to have this open banking environment. And of course, we do have data breaches today. and we'll have data breaches in an open banking environment, to be clear, but we'll probably have fewer of them, because it will be a more constrained and controlled system. And there'll be some learning, and we shouldn't be shocked to see one or two data breaches, you know, as I say, we see them already. So, I'd much rather have a more secure system where—and the consumer demands that we need to share data, to allow consumers to do what they want to do. Much better to have it in an organized fashion than it is to have the sort of ad hoc approach that we’ve got today through screen scraping.
I should add here, that if people have questions, please do send them on to us. We'd love to hear from you. I think we're about five minutes away from taking questions anyway, and I'd be happy to put them to Kirsten and Andrew. Andrew, I'm thinking about how Canadian consumers are going to embrace this. I mean, to a certain degree, they are used to the stability of the Big 6 banks, they're used to finances working a certain way, and some people may say that Canadians can be hard, it can be difficult to get Canadians to embrace change. So, what is your sense for if this will be embraced by consumers, or it'll just be those early adopters that will jump on?
I do think you're right on point, there's not going to be a sort of fast, rapid, you know, the world changed, open banking came, and now, you know, we're all changing the world, but I think it's in a similar way with two when, say, the first people got cell phones; people looked around, said, “well, why do I need a cell phone? I just have my phone beside me at my desk, I can call people.” And then of course, we saw different use cases come. So perhaps over a decade, it'll just become so ubiquitous, or so, you know, it's hard to imagine a world in which we didn't use these things, and the services that sit on top of it. You know, what I'm really interested in, is in creating the architecture, and letting the imagination of independent FinTechs, people that understand certain communities—I mentioned earlier First Nations communities, I think would be a great use case—where you could where you can, you know, build products that are specific to them. You know, and the one that always appeals to me is students. So, students have a particular need, they've got $1,000, and they’ve got to get to the end of the end of the term, you know, how do they plan their spending? And so, these kinds of apps could sit on top of, you know, on top of a bank, or bank data, and really provide them insight as to, you know, how fast money is disappearing, you know, where’s their OSAP, coming from?
QUESTION & ANSWER
Interesting. Oh, my goodness, I have several questions, but I also have a ton that are coming in, so I'm going to shoot directly into them here. And please jump in, whoever wants to answer this. So, I've got, in Canada, who are the top three financial institutions advancing open banking, and what is their status? Andrew, you want to take that?
Yeah, I mean, I don't know that any, we've gotten any great leaders. So, you know, one of the things that’s very interesting is National Bank’s purchase of Flinks. And we're working with Flinks, who is a FinTech, we have a lot of admiration for out of Montreal, and a close partner of Equitable’s, to build open banking use cases, sort of simple use open banking use cases for implementation, so certainly, National Bank’s somebody to keep an eye on. You certainly hear significant voices from both TD and Royal, that clearly understand the environment, and, you know, preparing those banks. You know, and I think some of the others sort of fall in the middle, somewhere around that. All of us, you know, and I think it's hard to actually get the banks to speak as one voice, and that's why I would urge the government to kind of give us some central direction. And even when you speak to different executives within the bank, they have different perspectives on open banking. And so, it's a very interesting world, and it's very hard to kind of point to those that are really leaders and pushing this thing forward. But there's certainly a lot of knowledge within the big institutions about the inevitable direction. And I think most people understand that open banking is coming. What we're trying to anticipate is how is it coming, and what sort of regulatory frameworks are going to come, and how much pressure will be on us to move fast?
Fair enough. There's this question that I find actually quite fascinating, will open banking force smaller financial institutions to abandon product manufacturing, or is it realistic to think that they can develop products, market them effectively enough, to join in an open market that is sure to be crowded?
Well, I think it's probably a question for me. You know, certainly, as an institution that, you know, we've positioned ourselves, as you probably see behind me, as Canada's challenger bank. And we don't think we can offer all the services a large bank can offer, and our approach to market is to every service that we offer, to be absolutely best-in-class. So, the way we think about it as a small bank, we think open banking would be a benefit to us, we think we offer great money transfer services, great savings accounts, you know, one of the few banks in Canada that offer reverse mortgages, for example. But we don't offer some other products. So, but clearly, for any individual consumer that, you know, we think they would benefit from dealing with us, with some of those products. And yet, you know, we would acknowledge that if you're looking for an RESP, for example, which we don't offer, there's gonna be other good service providers. And we think there may be a role for us in helping curate that, i.e., saying, you know, we think we're really good for this, but you know, we would advise you to go to another institution for that. And we might even think about helping guide people through, we will be helping guide people through what we think is the best service for their particular needs, using this open banking data set.
Gautam asks—Kristin, I think this would be for you—how big of a driver is artificial intelligence for open banking? Is there a requirement to ramp up AI capabilities in Canada, to benefit from open banking?
That's an interesting question. Is AI essential to open banking? Probably not. Is AI essential to open banking success? I think so. But AI is in its early days, and it's posing significant challenges for regulatory frameworks, not just financial services, but privacy frameworks. So, I think we have a lot of thinking and work to do around that to get it right. I don't expect that AI is going to go away, and it's not going to be part of the open banking environment, I think it's going to be critical to it. It's a significant portion of any digital finance system, which is, frankly, where were the financial systems in Canada.
Just to sort of lay on to it. I mean, I think there's a lot of stupidity in the banking system today, in the way things are configured. So, the way I think about this is, let's reduce the artificial stupidity in the banking system with a siloed approach. And yes, AI is going to help them add insight once we can put that data in one silo, but there's way too much clunky stuff going on right now, that makes no sense for so many people.
That makes me think of something else. When technical standards in this realm—and Kirsten, this is for you as well—you know, for some reason, I don't know why, I think of all the cell phones I've owned, and my huge box of power adapters that are sitting in my closet that I’m, for some reason, afraid to dump, even though I've dumped these phones—nothing's compatible with each other, by the way, just as a side note, just a personal rant, and I know that's hardware—but when it comes to open banking, are there universally agreed on standards globally, that must be observed, or is this going to be some kind of a circus?
So, it has the potential to be a circus—and who doesn't love a circus? If handled appropriately, with a strong regulatory framework, then it doesn't need to be a circus. You accurately point out how the inability to agree on technical standards can become a competitive barrier for us, as consumers, now one road that forecloses other roads, which is anathema to the whole concept of open banking. So, technical standards can solve a lot of that problem, but then the devil is in the details. Everybody will agree that the technical standards should have something about cybersecurity, and that safety of data is important. But when you get to the next layer, what does that mean? What does safety of data mean? What does cybersecurity standards mean? Now, again, we are, the advantage of being lagging in this field, is that we can build on the technical standards of the US, the UK, the EU, there are multiple versions of that. So, we're not starting from scratch, we can take those, and adapt them for Canada, and the Canadian environment, and our payments, frameworks, and all of that. So, this is not as heavy a lift as say, the UK had five years ago, when it was out of the gate starting. The technical requirements of international standards on cybersecurity and privacy are also evolving and are fairly mature at this time as well. So, there's lots to choose from. We just need to choose how to build it.
Interesting. And this is a question about—there's ton here that I have to kind of go through—payday lenders. I'm interested in this. Andrew, this is for you. So, the question is from the audience, would open banking be able to address the issues around payday lenders.
Well I think it certainly may give certain people, and I referred to this in the conversation I had earlier on, you know, some underbanked people may get better access to credit through information, you know, and unfortunately, there is a piece of payday, and, you know, that there's a piece of the economy maybe where, you know people that shouldn't be lent to are lent to by people with the kind of probably not the best interest of their customers at heart. I think it's an area that bothers me, frankly, but I do think that there are ways that open banking can help give better insight to people with less means, and allow them to access the banking system, and hopefully kind of crowd out the payday lenders as a result of that. It's a thorny problem though, I don't think open banking is a panacea for this, but I think it does help move us in the right direction. It certainly seems unfair to me that some of, you know, the Canadians with the least means might be paying 30%, 40% interest rates on borrowing money. And so, I don't see that as a good thing for our society for sure.
So, maybe what it is, it's not that it takes away that whole space, but what happens is, it offers these communities maybe more options, right?
Yes, and therefore, might kind of shrink the payday market, and take those people that truly credit-worthy out, and then make that a more difficult business model for some. And then, you know, I think again, that's an area where—you know, I'm a capitalist, I believe in competition, but it's a tough one for me to see. You know, some of it does certainly look to me, and not a business I try to go anywhere close to—but it looks sort of predatory for sure. So, got to be careful around those areas. And it becomes a bit tricky, right? You've certainly got people that are more likely to default on a loan. I mean, as bankers, risk, you know, risk and return are trade-offs, so if you're more likely to default, we will likely be charging you more, but having a good understanding of whether your chances of defaulting, and if we really believe it's low, then we're certainly happy to charge much less for a loan.
So, we have about a minute left, and Andrew, I'll start with you; 30 seconds. You know, you've talked about how Canada is a laggard here, right? What do we lose if we continue to be a laggard, in terms of, for the average consumer, for businesses, for the economy, and I'm sorry to say this, in about 30 seconds?
Well, we lose the benefits of creating a more prosperous Canada, and having an economy that we're happy to hand on to our children and say, we did the right thing to create a prosperous society, There’s definitely economic growth that can be quite easily harnessed by moving along this path, and I think, you know, all Canadians deserve it, frankly.
And Kirsten, to you, I think of that deadline of January 2023, I think is what I read in the report, and to me, what do I know, but it sounds aggressive, right? What needs to happen next, for that to be a possibility?
So, we need to have the government appoint the person with the big stick, who is going to drive this forward, and create that framework that everyone agrees on is the direction to go. And frankly, now is the time to do it. In an environment, both political and economic, where we're focused on post-COVID economic recovery, and everything is channelled towards that, movement in open banking can be a real driver for that, both for individuals that are trying to manage their finances, because they've either been on benefits, or laid off, or trying to find a new job, moved out of the city, and are now trying to move back in, or for the institutions that are trying to retool in a post-COVID economy. So, there's a lot of upside here, and yoked to that sort of economic drive, I think there's a good probability of meeting those deadlines.
Thank you to both of you. And I think Kelly is going to come knocking on our virtual door very open. Kelly, I'll hand the mic back to you.
Thank you, Manjula. Andrew and Kirsten, for that fascinating conversation. I'd like to now introduce Abraham Tachjian, Director of Digital Banking, PwC Canada, to deliver today's appreciation remarks. Abraham, welcome.
Note of Appreciation by Abraham Tachjian, Director of Digital Banking, PwC Canada
Thank you, Kelly. First, I'd like to thank the Empire Club of Canada, for giving PwC the opportunity to be part of this great event. The topic of open banking, aka consumer-directed finance, has been really top of mind for many in the Canadian financial industry lately, building on last year's consultation, which PwC was proud to be part of, and leading up to the release of the advisory committee’s report. Of course, developments in other jurisdictions, such as Australia and UK, have surely piqued the interest of stakeholders here, with regards to the realm of possibilities open banking offers. And as the government prepares for the next steps in the journey with the nomination of the open banking lead, to drive the implementation of the regime, we find ourselves at a critical point, where much of the foundational work will shortly begin. Of course, this won't be done in isolation, with the industry contributing to the lead’s efforts, and designing and made for Canada approach. So, what better time than now, to dig deeper into this topic, and discuss the value of open banking to Canadians, whether from the perspective of improving their financial health, to offering them new and innovative products. And we'd also be remiss if we didn't consider the benefits of open banking to the wider economy as a whole, and as Andrew touched on during his opening remarks, competition, greater choice, and financial inclusion. We're really lucky to have a front row seat to the evolution of Canada's financial landscape. And like everyone here today, I look forward to the implementation of our open banking regime. With that, I'll pass it back to you, Kelly.
Concluding Remarks by Kelly Jackson
Thanks, Abraham. And thanks again to our panelists, and everyone joining us today, or participating at a later date. We hope you will join us on December 9th, at noon Eastern Time for our special virtual awards ceremony, recognizing Chief Perry Bellegarde as the 2021 Nation Builder of the Year. For details of the full program, and for complimentary registration, please visit empireclubofcanada.com.This meeting is now adjourned. Stay safe, take care, have a great day.