On July 5, 2018, Canada 2020, a Canadian think-tank, published its report on open banking following a Policy Lab which brought together various stakeholders to discuss open banking in Canada. While still a relatively new concept in Canada, open banking has the potential to transform the financial services sector. The federal government is currently undergoing a review of open banking to assess whether it could have a positive impact on consumers while considering the risks to consumer privacy, data security, and financial stability.
What is Open Banking?
“Open Banking” refers to an emerging financial services business model that focuses on the portability and open availability of customer data, including transactional information. The core aim of open banking is to enable consumers to share their financial data between their financial institution and third party providers (and between financial institutions), typically through the use of application programming interfaces (APIs).
A number of jurisdictions have either mandated or encouraged open banking. In the European Union, PSD2 (Revised Payment Service Directive) enables bank customers to allow third-party providers access to their account data, which, for example, could enable third-party providers to manage a customer’s finances. Recently, the European Banking Authority (EBA) released an Opinion and draft Guidelines to provide clarity to market participants on the implementation of the technical standards on strong customer authentication and common and secure communication under PSD2.
The United Kingdom has also been actively mandating open banking, pursuant to an order from the Competition and Markets Authority requiring the UK’s largest banks to share customer data with third parties. The Financial Conduct Authority (FCA) has recently stated that they plan to consult on changes to their guidance and rules to reflect the recently issued EBA Opinion and draft Guidelines.
Australia is also implementing open banking, following its review into open banking, but in this case as part of a broader move to implement a Consumer Data Right “to give Australians greater control over their data, empowering customers to choose to share their data with trusted recipients only for the purposes that they have authorised”. The Consumer Data Right will be implemented first in the banking industry followed by the energy and telecommunications industries, and thereafter followed by other industries.
In Hong Kong, the Hong Kong Monetary Authority has issued an Open API framework for public consultation. Japan has also introduced legislation on open banking. In Singapore, instead of mandating open banking, the Monetary Authority of Singapore (MAS) has been encouraging financial institutions to develop APIs openly so they can work with service providers to enhance customer experience. MAS also plans to issue guidelines on the ethical use of data.
The Canada 2020 Policy Lab
The purpose of the Policy Lab was to encourage stakeholders to share information and to discuss the future of open banking in Canada.
The policy lab identified nine broad areas of consensus:
- Consumers must provide informed consent before any data is shared and must have the ability to retract consent at any time.
- An evolving financial services market may create new or enhanced risks; understanding that some of the risks are unknown, governments, the private sector and consumer advocates should collaboratively develop mechanisms to mitigate and reduce risks.
- Rules around the sharing of data should ensure that the data shared is proportionate to the stated use.
- Common standards, including API standards, must be created to ensure interoperability, avoid fragmentation and drive safe adoption. Those standards should be developed by the public and private sector collaboratively.
- Technical standards around authentication and data sharing should comply with ISO and global standards as closely as possible to match rules in other jurisdictions since the issues are universal.
- Before rules and standards are put in place, regulators must consider the impact they will have on inclusive innovation.
- When designing rules and standards, ethical considerations need to be taken into account on how data can be used.
- A well-designed system of open banking puts the consumer at the centre of their information through increased transparency and the introduction of new products that lower costs, give consumers more options, enhance global competitiveness and accelerate innovation.
- The national retail payments oversight framework should reflect the realities of open banking.
A few themes flowed from the nine resolutions that received broad support. First, in the federal budget and the resolutions, it is clear that consumers must be at the center of the open banking discussion. Open banking should enable innovation that provides consumers with new products and services on a more competitive basis.
Second, the expansion of open banking will not come without risks and these risks need to be managed. Consumers must provide informed consent before their data is shared and ethical considerations need to be taken into account on how the data can be used. All interested parties will need to act together to identify and mitigate these risks.
Finally, in regulating open banking, rules and standards will need to be put in place. Canada should consider international standards when implementing open banking rules and regulators must consider the impact that rules may have on inclusive innovation.
While some of the resolutions were agreed upon by all, there remained some points that remain to be resolved, including (i) how to ensure that consumers are providing informed consent, (ii) how standardized the consent process should be among applications, (iii) whether a white list of authorized players should be created, and (iv) whether or not open banking should be the beginning of a broader open data regime in Canada.
The open banking movement is gaining momentum around the world. While open banking has the potential to create many new opportunities for consumers and financial services providers, implementation in this area is complex and requires thoughtful consideration of various risks. Stay tuned for further developments in this complex and developing area in Canada, following the federal government consultation.