A Review into the Merits of Open Banking

Consultation Document

January 2019

News Release: Department of Finance Canada Launches Consultations on Open Banking

Closing date: February 11, 2019

Who may respond:

Stakeholders are invited to provide written comments on the consultation paper through the Department of Finance at:

The Advisory Committee to the Open Banking Review/Financial Institutions Division
The Financial Sector Policy Branch
Department of Finance Canada,
90 Elgin Street, Ottawa, ON K1A 0G5
Email: fin.OBBO.fin@canada.ca

Submissions will be shared in their entirety with both the Advisory Committee and the Department.

Subject to the considerations below, the Department intends to make public some or all of the responses received and/or may provide summaries in its public documents. Stakeholders providing comments are asked to clearly indicate the name of the individual or organization that should be identified as having made the submission. Submissions should preferably be provided electronically in PDF format or in plain text to facilitate posting.

In order to respect privacy and confidentiality, please advise when providing your comments whether you:

Information received throughout this submission process is subject to the Access to Information Act and the Privacy Act. Should you express an intention that your submission, or any portions thereof, be considered confidential, the Department will make all reasonable efforts to protect this information.

The Department will be responsible for managing submissions and any requests made under the Access to Information Act and the Privacy Act.

A Review into the merits of open banking
Potential benefits of open banking
Managing potential risks from open banking

Building on input received from Canadians in the latest review of the financial sector framework, Budget 2018 announced the Government's intent to undertake a review into the merits of open banking. To guide the review, the Minister of Finance has appointed an Advisory Committee on Open Banking, which will be supported by a secretariat within the Department of Finance. Advisory Committee members will represent the broad interests of all Canadians.

The Advisory Committee will engage with Canadians in two phases. As a first phase, the Committee will assess the merits of open banking. Subject to these findings, the Committee will assess implementation considerations as a second phase in 2019. The purpose of this paper is to engage Canadians on the merits of open banking.

Following the completion of the Advisory Committee's work, the Committee will deliver a report to the Minister of Finance.

The following three core financial sector policy objectives will guide the review:

This paper seeks stakeholder views on the following questions:

When making purchases or carrying out daily banking tasks, consumers and small business generate a stream of information based on their individual transactions. This financial transaction data is currently held and controlled by individual financial institutions.

As depicted in the Chart below, open banking is a framework where consumers and businesses can authorize third party financial service providers to access their financial transaction data, using secure online channels. The benefit to consumers and businesses is that it allows them to access new products and services that enable them to better manage their financial affairs. In jurisdictions that have adopted open banking systems, participating service providers must meet standards with respect to privacy, security and operational stability. Additionally, consumers and small business can opt-in and opt out at any time and a clear system exists to manage inquiries and address complaints. In many respects, a benefit of an open banking framework is its potential to increase individual control over personal financial information.

Open banking holds the potential to reduce costs, improve Canadians' ability to manage financial services, and gain access to the wider range of services that the digital economy has to offer. In order to deliver on these potential benefits, any system must have appropriate consumer protection, while also supporting the continued resilience and stability of the financial sector.

How an open banking system works - For details, refer to the preceding paragraphs.

Box A: Illustrates one of the many potential applications of open banking.

Box A:

Dominique and Addison are parents of one child with another on the way. Dominique and Addison are contemplating purchasing a larger home in the next couple of years to accommodate their growing family. To inform their decision about whether to purchase a new home, the couple first want to gain a better understanding of their current spending patterns to determine whether they need to cut spending in order to save for the necessary down payment and larger mortgage.

They choose to look at the past two years worth of transactions. In the absence of open banking, the process to gain these insights can be time consuming. Dominique and Addison have a number of financial accounts across different providers and need to review their monthly financial transaction statements (e.g., their respective bank statements, credit card statements and investment statements), categorize their transactions, calculate their spending on these various categories of goods and services, determine how much they need to save to attain their financial goals and then determine which expenses to cut, if any, to reach those goals.

With open banking, Addison and Dominique could authorize the sharing of their financial transaction data held by their financial institutions with a FinTech that offers money management services. The FinTech would review and consolidate their transaction history, categorize and provide insights into their spending, including the ability to set savings goals. Addison and Dominique could opt-in to the service when they choose and opt-out at any point, knowing that access to the accounts and their information are governed by clear rules and protections.

Many Canadians are already using in-market money management applications (apps). Some of the functionalities described above can be accessed by Canadians through their banks, or through a partnership a bank has with a FinTech. However, these existing apps do not offer the potential for consumers to choose the services and providers they find most useful, and do not capture the financial accounts a consumer may have across a number of providers.

Alternately, consumers may currently choose to use "account aggregation" apps provided by non-banks, which may require consumers to share their financial institution usernames and passwords in order for the application to access their transaction histories (a practice called screen-scraping). Doing so may violate the terms of the consumer's service agreements with their financial institutions and result in consumers unwittingly bearing the risk of loss. In addition, screen-scraping and other similar mechanisms raise privacy and security concerns, both for financial institutions and for consumers.

These innovations challenge existing regulatory frameworks to consider new ways to give Canadians more control over their personal financial information while at the same time protecting them from the consequences of privacy breaches and fraud.

Open banking gives consumers the ability to provide their consent to allow for financial transaction data to be accessed without requiring consumers to give their personal login credentials to third party financial service providers. This can be accomplished through the use of secure data sharing mechanisms called application programming interface (API).

Through the assessment of potential market frameworks, like open banking, consideration can be given to how to manage these new risks and ensure that the market evolves in a way that delivers benefits for consumers, small business and a full range of Canadian firms.

Canada has a strong, well-respected financial sector that has proven to be stable, resilient and trusted by Canadians. In addition to the services it provides to Canadians – both consumers and small business – the financial sector is a source of economic strength and employment. Canadian financial institutions are also looking to the future and delivering new services for consumers, both through partnerships with new financial technology firms and via in-house innovation.

However, just as innovation and technological disruption continues to change all sectors of the economy, digital innovation is already transforming the financial sector. Both domestically and abroad, economic activity is increasingly moving online, with consumers and businesses generating exponential amounts of data. In a data-driven economy, companies rely on data to develop new business models, target consumer needs and grow their markets. The amount of data, coupled with the reduced costs of technology, mean new, non-traditional entrants into the financial sector can provide innovative ways for Canadians to access financial services.

The digital transformation of the financial sector, and supporting policy frameworks, have the potential to both better serve consumers and grow businesses and markets, contributing to the growth of the Canadian economy and Canada's global advantage.

Giving consumers the ability to provide third parties access to their financial transaction data can help unlock the application of data-driven digital technologies in the financial sector and can empower consumers to leverage their own data to receive more tailored services. It can improve financial literacy and access, and it can also help drive innovation among a vibrant ecosystem of firms to help support the growth of globally innovative and competitive companies.

Open banking can increase consumer choice and improve financial outcomes for Canadians. Open banking is a framework that can promote a vibrant and more diverse ecosystem of financial services providers, including enhanced roles for FinTechs and small and mid-sized financial service providers. Establishing a competitive and dynamic framework for digital and data-driven financial services at home could help a range of businesses, from small start-ups to large incumbents, participate and thrive in the global economy.

For consumers and small business, the promise of open banking is the potential to use their own information to gain new insights into how to manage their money and access new products and services. Allowing consumer choice to flourish requires confidence that any potential open banking system has in place the safeguards to ensure that Canadians' rights as consumers are respected, their privacy is protected, their information is secure and that the financial sector continues to be stable and resilient.

In order to assess whether open banking would deliver positive results for Canadians, the review will initially consider its possible benefits and risks. While the primary objective of this paper is to facilitate a dialogue to assess the potential merits of open banking in Canada, stakeholder input on implementation considerations that would maximize the potential benefits of open banking and ensure consumer confidence is also welcomed at this time.

International experience has shown that market participants and consumers often look to governments to play a role in developing open banking systems that deliver benefits while mitigating risks. The Annex to this paper provides an overview of the implementation approaches used by the main international jurisdictions with open banking regimes.

The focus of the open banking review will be in respect of financial transaction data (e.g., withdrawals or account balances) from federally regulated banks, as the Minister of Finance has responsibility for federal financial sector policy and legislative frameworks covering federally regulated financial institutions, such as the Bank Act. The findings from the open banking review may also provide useful observations for a system that would include a wider range of consumer data.

Enabling consumer control over the sharing of financial transaction data is core to most open banking frameworks. In addition, some jurisdictions are including payments initiation, whereby third party financial service providers can make payments on behalf of consumers and small business directly from their bank account, within their frameworks. In Canada, Payments Canada is currently working towards the modernization of the infrastructure for retail and large value payments systems. Should the Government proceed with open banking, appropriate staging and alignment with payments modernization would be undertaken. Stakeholder views are welcomed on whether payments initiation should ultimately form part of an open banking framework.

Given the context of digital transformation more broadly, other government initiatives are currently underway that will inform the open banking review. An economy and Government-wide lens is needed to understand how existing regulatory and policy frameworks apply and to ensure these frameworks are well adapted for the digital economy.[1]

The Government is consulting with Canadians through the National Digital and Data Consultations, in order to understand how Canada should position itself in the digital economy, including measures to promote greater trust in data sharing and use. Additionally, the Government has called for cybersecurity to be the companion of innovation and has released a new National Cyber Security Strategy. This paper welcomes feedback on these considerations as they relate to the risks and benefits of the application of open banking.

From the view of balancing financial sector policy objectives outlined in the Overview section, open banking could increase the efficiency of the financial sector by promoting a vibrant and more diverse ecosystem of financial services providers and thereby increase the utility of the sector by delivering innovative and useful offerings for consumers and small business at low cost. Canadians who may not have standard financial needs may also have improved opportunities to access financial services. Finally, open banking may increase consumer control over their own information, to be used for their own benefit.

Open banking has the potential to deliver more affordable and innovative financial services to consumers and provide credit to dynamic, cutting-edge areas of the economy.

Open banking holds the promise of providing a wider range of market participants with access to consumer financial transaction data that can, in turn, be leveraged to develop products and services that are more tailored to consumer and small business needs and preferences.

What open banking could mean for... - For details, refer to the following paragraphs.

For large banks that provide a full spectrum of financial services to Canadians, open banking may provide a new means to leverage their brands and extensive customer base to develop partnerships with firms that bring together other services with banking. It may also increase their global competitiveness with other banks and technology companies that are forging ahead with new platforms for customers.

For small and mid-sized financial banks, open banking may also increase their ability to attract new customers, through easier account-switching processes or reduced friction in having accounts across different providers.

For new financial service providers, such as FinTechs, open banking may increase their ability to grow and scale their business more quickly and independently by providing them access to data. With consumer consent, FinTechs could access the financial transaction data needed to bring tailored consumer and business centric products and services to market irrespective of whether they have an existing contractual relationship with a bank or which bank provides services to a given consumer.

Open banking may also improve FinTechs' ability to reliably serve their customers as their access to data is guaranteed and friction points in the interoperability of different systems are reduced.

Increasing the innovative potential in Canada, with a policy and legislative framework that is adapted to the digital and data-driven economy, could increase the opportunities for Canadian businesses, large and small, to thrive in the global economy.

For consumers and small business, the promise of open banking and the innovation that it may generate and accelerate is the potential to gain new insights into how they manage their money and to access new products and services. Open banking could improve consumers' control over their own personal financial information and allow them to leverage their own information for their benefit. A robust open banking framework could also enhance existing privacy and security considerations as it is customer-built to address data-sharing concerns, instead of evolving on an ad hoc basis to catch up to existing data sharing practices.

By sharing financial transaction data with authorized providers, open banking could lead to the development of the following types of useful applications.

For consumers:

For small business:

International experience suggests that open banking also holds the promise of greater financial inclusion and access for consumers. Innovative products and services in jurisdictions where open banking is being implemented include:

This consultation paper seeks views on whether and how open banking would support a competitive and innovative financial sector and benefit Canadian consumers and small business.

In an Open Banking System - For details refer to the preceding paragraphs.

For an open banking framework to deliver on its possible benefits, it must secure customer trust by having appropriate consumer protection and privacy safeguards, and support the safety and soundness of the financial sector.

The review into the merits of open banking is being undertaken in the context of digital and data-driven transformation in all sectors of the economy, where new or non-traditional market players are delivering both increasingly digital services and innovating to create new lines of business. These market dynamics are changing how risks develop and are addressed. Policy and legal frameworks must adjust as appropriate to manage risks. Consumers will also need to be well informed and educated on their rights and responsibilities with respect to data management.

This consultation paper seeks input on how risks related to consumer protection, privacy, cyber security and financial stability should be managed for open banking going forward. Given that the digital transformation presents similar risks across sectors, views are welcome on whether cross-sector or sectoral responses are most appropriate.

Open banking would create a new system of services and relationships between consumers and service providers. Rules governing the system need to assure Canadians that their information will be protected and used according to their direction.

Furthermore, Canadians should be aware of what they are consenting to when using services. Any potential open banking framework needs to be accessible to all and treat Canadians fairly. In the event that something goes wrong, Canadians must be assured that mechanisms for recourse and redress are available. In the context of open banking and the broader digital economy, the rights and responsibilities of consumers in the management of their data needs to be clear and well understood by Canadians.

This consultation paper seeks views on what specific consumer protection elements are needed for the sharing of financial transaction data under open banking.

At present, Canada's privacy framework[2] has legal requirements for all commercial actors when it comes to the treatment of Canadians' personal information, including their financial information. These principles-based legal obligations are the same for all players across the economy.

Participants in an open banking ecosystem must understand their obligations under Canada's privacy laws. The corollary of this is that, in order for an open banking framework to be successful, consumers must also understand their rights and obligations with respect to privacy and security. Consumers and commercial actors must work together to ensure, for instance, that consumers understand the terms they are agreeing to when using a new service as currently, terms and conditions can be lengthy, legalistic and inaccessible to the average person.

Under open banking, consumer control over their own information is the starting point to allowing financial transaction data sharing. This consumer control is embodied in the concept of consent, the right of individual to choose to (or not to) allow a proposed use of their personal information. As a result, it would be critical that consumers are well informed and, that their consent is meaningfully and properly obtained.

In order to address privacy expectations, other jurisdictions have introduced new framework policy legislation, or considered amendments to their existing privacy requirements to ensure consumer consent is meaningful and well informed. This includes approaches such as the European Union's General Data Protection Regulation, which outlines specific privacy standards and sets a framework for the management of personal information in data based applications.

This consultation paper seeks input on managing the risks or enhancing the benefits that open banking may pose from a privacy perspective.

The digital economy is creating new risks to the financial system as interconnection increases and personal financial information is accessed by more parties. In this context, Canada's financial system, both financial institutions and government regulators, continue to prioritize cyber resilience and has invested significant resources in building and maintaining cyber resilient systems.

Cybersecurity risks are not unique to open banking. They exist across sectors and industries. In certain respects, open banking could mitigate cyber risks (e.g., those risks arising from the use of screen scraping, where service providers centrally store the unencrypted login credentials of customers, making them vulnerable to a cyber attack). However, as open banking increases data sharing and contact points, it could also potentially introduce new or increased risks (e.g., new companies connecting to and accessing data from the traditional financial services sector). Potential risks would need to be assessed and appropriate mitigation measures considered.

This consultation paper seeks input on managing the risks or enhancing the benefits that open banking may pose from a cyber security perspective.

Canada has a stable financial sector that has earned the confidence of Canadians. The Department works closely with Canada's financial sector regulators to continuously adapt legislative and regulatory approaches to account for new risks, and ensure compatibility with a changing global business environment. For example, cyber security can pose operational risks to financial institutions and must be managed to promote financial stability.

Open banking represents potential opportunities for consumers and small business to gain more relevant financial information and better optimize their savings and borrowing decisions, leading to a more efficient allocation of consumers' financial resources. At the same time, this may mean new patterns of financial flows through the financial sector as consumers move funds to new providers to gain cost and efficiency benefits.

This consultation seeks stakeholder perspectives on whether open banking presents new prudential risks to financial institutions, and related mitigants to those risks.

The Government has launched a review into the merits of open banking, which can promote a vibrant and more diverse ecosystem of financial services providers in the financial sector, and offer useful and innovative services to consumers and small business. To allow consumer choice to flourish, there will need to be confidence that any potential open banking system has in place the safeguards required to ensure Canadians' rights as consumers are respected, their privacy is protected, their information is secure and that the financial sector continues to be stable and resilient.

This paper seeks stakeholder views on the following questions:

International jurisdictions have taken a variety of different approaches to the implementation of open banking. The observations below are not exhaustive assessments of each jurisdiction, but rather serve to illustrate the variety of approaches that exist.

Consumer choice:
Confidence in the System:
Consumer choice:
Confidence in the System – General Data Protection Regulation (GDPR):
Consumer choice:
Confidence in the System:
Consumer choice:
Confidence in the System:
Competition/Confidence in the System:

1 Considerations pertaining to consumer protection, privacy, cyber security and financial stability are also common across all international jurisdictions that are either contemplating or implementing open banking. As such, the Advisory Committee will look to the international experience to gain a better understanding of how different jurisdictions have considered and managed theses risks.

2 The Personal Information Protection and Electronic Documents Act (PIPEDA) is the federal privacy law for private sector organizations. It sets out ground rules for how businesses must handle personal information in the course of commercial activity. Alberta, British Columbia and Québec have privacy legislation that has been deemed "substantially similar" to PIPEDA, which means that it is applied instead of PIPEDA.

3 https://www.pwc.co.uk/press-room/press-releases/open-banking-market.html

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