Lynn Johannson, Advisor, Sustainability and ESG
January 4th, 2024
Lynn Johannson, President of E2 Management Corporation and Catalyst for THE Collaboration
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Open Banking Delayed to 2026, Favours Banks Over Innovation
Consumer-Driven Finance | Dec 18, 2024
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Open Banking Delayed to 2026, Leaving Canada Behind While Favouring Banks
If you haven't realized it, Canada likes to delay the rollout of national projects (i.e, Trans mountain pipeline, national housing strategy, Phoenix pay system, high speed rail projects etc), and while it was painfully anticipated, the Canadian government announced its complete framework for the implementation of Consumer-driven Finance (Open Banking) in the 2024 Fall Economic Statement (FES), which will now be delayed to 2026. It's one of those 'we told you so moments' and this comes after years of promises and stalled progress. These delays and execution challenges put fintechs and consumers at a disadvantage, and undermines Canada's capacity for financial innovation and to remain globally competitive (among peer countries).
The announcement at least included more funding to the tune of $44.3 million over three years for the Financial Consumer Agency of Canada (FCAC) to enhance its capacity to supervise and regulate the consumer-driven finance framework. But it's the extended timeline that has left many industry stakeholders and investors questioning Canada's ability to keep pace with modern times. Countries like the UK and Australia have shown how robust open banking systems can unlock competition and innovation in financial services. Yet, Canada’s fragmented and overly cautious approach risks falling further behind these global leaders.
What’s the Problem?
The government is opting for a phased rollout, starting with mandatory participation of large, federally regulated banks. Then smaller financial institutions, such as credit unions, and fintech companies must opt in, assuming they can meet the same strict accreditation standards as large banks. This uniform approach to accreditation doesn't differentiate between the size or risk level between participants, imposing an undue burden on smaller players. A one size fits all requirement will make it harder for smaller players to participate, stifling the very innovation the framework is hoping to stimulate in the first place (sigh).
The plan is to start with limited functionality such as read-only data sharing, delaying more advanced functionality like payment initiation to the future (without a clear timeline leaving fintechs in the dark). It's likely the combination of prioritizing large incumbent banks while delaying access for smaller more innovative fintechs will hurt competition and innovation in the fintech sector.
See: Why Canadian Banks Are Fighting Open Banking
Originally the Financial Consumer Agency of Canada (FCAC) was adorned to supervisor and regulate open banking but adding to the complexity it was announced in FES 2024 that provincial regulators will now also be involved, risking fragmentation and unnecessary layers of bureaucracy. It echoes past mistakes made during the rollout of equity crowdfunding (also see NCFA's submission to Finance Canada re: urgent need for regulatory change and support) where fragmented provincial rules created confusion and inefficiencies, discouraging adoption while adding costs to compliant operators - only to realize this mistake several years later and work to harmonize regulations which was far too late, hurting the investment crowdfunding sector before it got off the ground.
Meanwhile, consumers are still dependent on screen scraping practices which is an outdated and risky practice with cyber security issues rampant.
Why It Matters
Globally, countries that have adopted open banking are seeing boosts to financial inclusion, productivity, and market driven innovation. In the UK for example, open banking has driven competition and productivity by making financial services more accessible and transparent. They are now advancing further ahead and expanding towards open finance.
In Australia, its Consumer Data Right policy is ushering in a new wave of fintech solutions that are giving consumers more choice and improving business efficiency.
Without any sense of urgency, Canada (again) risks falling further behind and sends the wrong message to investors and leading innovators that is 'Canada is hesitant to innovate' and struggles with implementing national frameworks that drive economic growth.
Lessons from the UK and Australia
Both the UK and Australia have implemented TIERED accreditation systems (not a one size fits all like Canada), which allows a diverse range of participants in open banking while maintaining high standards for security and consumer protection.
In the UK, the Financial Conduct Authority (FCA) employs a flexible, risk-based approach, allowing small fintechs to enter the market without being overwhelmed by compliance requirements. Early functionalities like payment initiation and account aggregation have become widely available, demonstrating how a structured yet inclusive system can deliver great value to consumers.
See: U.S. Open Banking Rule Lawsuit and Canada’s Implications
Australia's Consumer Data Right (CDR) framework also uses a tiered accreditation system to ensure participation by innovative fintechs. Smaller fintechs can partner with Accredited Data Recipients (ADRs) to access data under reduced compliance obligations using a “Trusted Adviser” model, allowing lower risk entities like financial advisors to provide services without heavy regulatory burdens. It's this tiered approach together with a clear timeline for expanded functionality that has accelerated adoption and innovation.
Finding Solutions for Canada
Canada’s framework should be more inclusive with less friction and more in line with global peers. It's uniform accreditation process is too ridged and should be a risk-based system. Smaller players offering low-risk services like a budgeting app should not face the same compliance burdens as payment processors or lending platforms. Adopting a tiered accreditation model like in the UK and Australia would stimulate a more innovative and competitive fintech environment.
Streamlining governance and oversight is also paramount. The FCAC should take a leading role with minimal provincial overlap to avoid jurisdictional conflicts and inefficiencies. The whole framework should encourage participation from coast to coast and reduce compliance burdens for fintechs.
See: Canada’s Open Banking Framework 2024 Preview
The FCAC should take their increased funding and fast track the open banking timeline and add clear deadlines for introducing core functionalities like payment initiation. Fintechs, investors, consumer alike all need more certainty and collaboration if open banking is to be more practical, widely adopted and successful.
Outlook
Canada should learn from global leaders in open banking who have amassed a ton of implementation experience if they want to avoid missteps. Canada needs to use this opportunity to boost its position as a global innovator in financial services. Delays hurt everyone from consumers to fintechs and the economy at large. It's time for Canada to step up and get open banking right.
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, artificial intelligence, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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