A street light on Bay Street in Canada's financial district is shown in Toronto on Wednesday, March 18, 2020.Nathan Denette/The Canadian Press
John Turley-Ewart is a regulatory compliance consultant and Canadian banking historian.
In the series of surprises surrounding the federal government’s fall economic statement last week, one announcement was anything but: Ottawa is not in a hurry to implement open banking.
Only open-banking advocates find this astonishing. They should not. These advocates have failed to appreciate the priorities inherent in the Canadian financial system and its regulation. They want to change a system they don’t understand.
If you are unfamiliar with open banking, you are in good company. When the Financial Consumer Agency of Canada studied it in 2022, it found that 91 per cent of Canadians had not heard of it.
In essence, open banking refers to integrating new financial technology applications (fintech apps) into Canada’s financial ecosystem (e.g. banking, payments and insurance). In open banking’s first phase, consumers and small- to medium-sized businesses will be able to share financial information from their banks with fintech apps that offer users financial management strategies.
However, open banking’s end-goal is more ambitious. Fully realized, it would usher in a future where consumers and businesses can transact using fintech apps in the same way that they currently use payment and financial service providers. This would juice competition and convenience in the process. Lower fees, better investment products and cheaper loans are the payoffs for the public.
It is this end-goal that is the sticking point in Canada. Liberalizing financial data, no matter how safely done, comes with a certain degree of risk. How much risk will Canadian policy-makers and, importantly, regulators, accept to realize open banking’s potential to increase competition?
The federal government’s 2018 budget launched a process of assessing open banking in Canada. Advocates have been eagerly pressing for the introduction ever since, assured by Ottawa it would happen only to see implementation repeatedly delayed, including in the fall economic statement last week, which pushed off the first phase of open banking’s launch till 2026.
Given the threat of U.S. tariffs after incoming president Donald Trump takes office on Jan. 20, and a federal election in Canada some time in 2025, the delay is likely to be even longer.
That 2018 federal budget offered clues of Ottawa’s priorities; clues open-banking supporters missed. The assessment of open banking was relegated to Annex 3 of that document. In the 2018 budget document itself, the federal government boasted that Canada has “one of the world’s soundest banking systems – ranked first in the G7″ by the World Economic Forum.
Six years later, open-banking advocates now feel they have been politically punked by Ottawa. Consider the case of FinTechs Canada, a not-for-profit association that “serves as the collective voice for fintechs in Canada.” Despite its lobbying efforts in Ottawa, it has little to show for it.
Its executive director, Alex Vronces, admitted as much in response to the fall economic statement, declaring, “Most of what this government has done over the years is bargain with a banking oligopoly for negligible gains, rather than exposing the banking oligopoly to the very thing the government concedes can lower prices for Canadians: competition.”
How to introduce more competition into the banking system is a debate as old as Canada itself, going back to Confederation in 1867. Open banking is the latest incarnation of that debate.
The way the debate has been conducted over time is important to how the open-banking debate happens today. Canada was launched dependent on a banking system with no guardrails (the Bank Act was largely a dead letter till 1925). It incentivized competition and innovation at the expense of stability, witnessed in bank failures and the economic fallout that came with them.
To entrench stability into the banking system, Canada turned to government bank inspection in 1925, which was founded within a political context that put the highest priority on stability, even at the expense of competition. It has been the same ever since, slowing innovation in the process.
When assessing open banking, Canadian policy-makers and regulators have one priority – ensuring the stability of the Canadian banking system. That means open banking, to succeed, must show how it will keep the system safe and sound – not that it will add to competition, a secondary consideration in Canada. Exemptions from stringent compliance standards, for instance, as open-banking advocates have called for to help small fintech companies, are non-starters.
What open-banking advocates have not appreciated is how little risk Canadian policy-makers and regulators are willing to assume to increase competition. The answer, as Canadian banking history shows, is far less than other jurisdictions such as the U.S. and the EU. And for reasons that are uniquely Canadian.
If open-banking advocates want to succeed, they need a made-for-Canada solution.