Open banking could mean cheaper services and a better credit score. What is it?

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The Liberal government failed to meet its own deadline earlier this year to overhaul how banks handle Canadians’ data — a missed promise that industry players say has a major impact on how Canadians manage their own money.

The concern from some in the financial services industry revolves around open banking — an approach to banking that gives Canadians more choice about how and with whom they share their financial information.

Such a system could make it easier to move money and even accounts across institutions, improve access to credit for new Canadians or allow a small business owner to receive payments from customers in a way that avoids costly fees, says Alex Vronces, executive director of advocacy group Fintechs Canada.

“This system will ensure that you, not your bank, control your data,” reads the federal Liberals’ 2021 election platform, which promised to introduce a “made-in-Canada model of open banking that will launch no later than the beginning of 2023.”

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Now four months into the year, the rollout for open banking remains an open question for industry stakeholders like Vronces.

“There’s a worry that we’re going around in circles in the open banking conversation right now,” he tells Global News.

“We’re not yet close to a decision on how this thing is going to be stood up and what exactly it’s going to look like. This, I think, is a pretty, pretty big risk.”

The federal government confirmed to Global News in a statement Wednesday that despite missing the early 2023 deadline, open banking is still on its radar and it hopes to have something more tangible by the end of the year.

Experts say Canada risks falling behind if it doesn’t implement the model soon, with Canadians themselves missing out on the benefits of an open banking system.

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Open banking could help renters qualify for mortgages

Vronces says an open banking system would allow Canadians to more efficiently connect their financial information to third parties or app developers who offer services outside what major banks typically provide.

“If there’s a company that offers a service that you want to access, but in order to access it, you need to share some of your financial information, open banking is a regulatory framework that lets you do that safely, securely and efficiently,” he says.

This can range from more innocuous apps like simple budgeting tools to more consequential services that could even help renters to qualify for a mortgage in Canada’s difficult-to-access housing market.

Borrowell, a Toronto-based firm that helps Canadians better understand their credit scores, is one such company pushing for movement in this space.

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Last year, the company launched a program that lets Canadians use their rental payments to build their credit scores — a feature existing homeowners receive automatically when they pay down their mortgage each month.

Andrew Graham, co-founder and CEO of Borrowell, says this is a “really unfair” aspect of Canada’s existing financial system, where renters making similar payments to homeowners don’t get boosts to their credit scores — something that all lenders are going to look at to judge whether they’re going to give you a mortgage or not.

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Through Borrowell’s rent advantage program, this financial data is shared with a credit bureau to count these regular payments towards your credit score.

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But without open banking, Graham says the system isn’t nearly as efficient as it could be.

There’s no way to ensure a consistent “link” between your bank accounts and Borrowell or the credit bureau, which means most customers are stuck having to enter their banking information every single month in a method called “screen scraping” just to keep the process going.

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“Imagine if with your Netflix subscription, you had to go back in and input your credit card details every month or the service would shut down. I mean, that’s just obviously a terrible way to do business,” Graham says.

“That’s very much like the system we have … where there is no certain way to keep that data link established if you want to.”

In addition to being more burdensome, the status quo of screen scraping also comes with some fundamental insecurities, Graham says. By giving a third-party permission to your account in this way, you’re essentially handing them the keys with no limits on what data they can look at — even beyond what they’re using for their service.

“Today with screen scraping, which again, millions and millions of Canadians use because there is no alternative, there’s really no rules around that,” he says.

Despite the name, Vronces says open banking is not about “opening up the vault of data and flooding it into the market.” Conversely, he argues that open banking frameworks are more secure than today’s screen scraping standard, as it tightens regulations on how data sharing happens.

“Open banking isn’t about deregulating. It’s actually about more regulation, more standards that everyone has to meet,” he says.

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Open banking could challenge industry heavyweights

Vronces says consumers should treat big Canadian banks with the same level of skepticism as big tech companies when it comes to how they handle your data.

“The big banks benefit from erecting a wall around your data just like a big technology company might,” he says.

“Banks call all the shots right now with whom you can share your data, how you can share your data, what data you’re allowed to share, and what data you’re not.”

The current setup boxes out smaller competitors and stifles innovation in the financial system, argues the Council of Canadian Innovators (CCI), a group representing high-growth tech companies in Canada.

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By making the data more mobile, customers can easily shop around for services and switch providers, sort of like porting a cellphone number, rather than the clunky systems currently relied on. The system could mean a quick switch of accounts, including automated deposits, all done online.

The delays mean all sorts of innovations are slower to arrive, said Vass Bednar, executive director of the Master of Public Policy in Digital Society at McMaster University, in an interview with the Canadian Press.

“Why can’t you Venmo in Canada?” asked Bednar, referring to the popular money transfer service in the U.S. “They can’t because of how we regulate our payment system.”

While these are complex changes, some of the slow pace can be blamed on reluctance from the biggest banks, said Bednar.

“We see them being hostile to progress that allows others to compete on a more even footing with them,” she said.

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Where do we stand on open banking today?

For its part, the federal government agrees that moving forward on open banking is in the best interest of Canadians.

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“The establishment of an open banking system will help Canadian consumers and small businesses safely and efficiently access tools to help them improve their financial outcomes,” said Farrah-Lilia Kerkadi, press secretary for Associate Finance Minister Randy Boissonnault, in a statement to Global News Wednesday.

The government first started looking into open banking in 2018 and appointed Abraham Tachjian, director of digital services at PwC Canada, to lead a working group on the file a year ago, with his term set to expire in September.

While Kerkadi did not say why the federal government missed its early 2023 deadline to implement open banking in her response to Global News, she said that the federal government “remains committed to presenting a read-only model of open banking in 2023.”

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A “read-only” model would allow services providers to view Canadians’ financial information but not perform “write” functions such as initiating a payment on consumers’ behalf, according to Kerkadi.

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Despite assurances that the government is continuing to work on the file, businesses such as Borrowell and industry stakeholders including Fintechs Canada and CCI are insistent that time is of the essence when it comes to setting up an open banking regime.

“Stifled competition and innovation in Canada’s banking sector is directly hitting the pocketbooks of everyday Canadians and negatively impacting the country’s long-term economic prosperity,” said CCI’s director of federal affairs Nick Schiavo in a statement to Global News.

Schiavo said many Canadians’ finances are in a vulnerable state with rising inflation and economic uncertainty on the horizon, and low-income households in particular would benefit from access to options beyond the traditional financial system.

For Vronces, the urgency comes in recognizing that Canadians are already sharing their financial data with existing screen scraping methods, and the longer Ottawa waits to firm up open banking rules, the longer consumers’ security is at risk.

“If Canada can hurry up and implement this thing, it can put guardrails around something that already happens,” he says.

Graham says countries including the United Kingdom, Australia and more recently the United States have made great strides in open banking, while Canada has “fallen very far behind.”

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Those markets have already seen increases in competition and lower-priced services as a result of open banking policies, he says, which Canada would be wise to emulate.

“This is the next evolution, the next ingredient to having a competitive financial system that offers good choice,” Graham says.

— With files from The Canadian Press

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