At some point between early April and late September last year, Bay Street realized that the future comes for all of us, even oligopolies.
On the big issues, the mood was roughly the same in the autumn as it had been in the spring. A cyber attack was seen as the biggest threat to stability, but most felt the system could withstand a major shock.
But the central bank observed something in the fall survey that appeared to come out of nowhere. Thirteen per cent of the respondents said open banking — an approach to financial regulation that requires banks to share their clients’ banking information with other service providers if asked to do so — would transform the industry over the next three years.
That might seem like a small number. However, the only innovation that inspired more interest — or dread — was the automation of trading. “Open banking appears to be an important emerging development, since in the spring survey, only one participant mentioned it,” the Bank of Canada said.
Emerging in Canada, maybe. The innovation has already emerged in most other developed economies; a year ago in Europe, later this year in Australia, and in 2020 in Japan.
We’re still thinking about it. Finance Minister Bill Morneauannouncedin the 2018 budget that he would study the merits of open banking. Seven months later, at the end of September, heappointeda four-person advisory committee that will make recommendations at an unspecified date. Earlier this month, Financepublishedan overview of open banking and asked the public for input. The consultation period closes Feb. 11, but there is little reason to expect anything definitive from the government this year, given the October election. The EU gave its financial industry a couple of years to get ready for open banking. If Canada were to do the same, assuming the government even embraces the idea, it could be 2022 before Canadian banking upstarts have regulatory clarity. By then, their international rivals in Europe will have had a five-year head start.
It’s better to get ahead and export our prowess (in financial technology) to the rest of the world, rather than have others come, partner with our banks, and eat our lunch
Matt Flynn, partner, Bennett Jones
“Canada needs to speed things up, frankly,” Matt Flynn, a Toronto-based partner at Bennett Jones, a law firm, told me in an interview on Jan. 23, adding that “90 per cent” of the legal structure that would be needed to support open banking already exists. “It’s better to get ahead and export our prowess (in financial technology) to the rest of the world, rather than have others come, partner with our banks, and eat our lunch,” he said.
Some fintech companies think the legacy banks might be the problem, usingconcerns about privacy and securityas excuses to stifle a competitive threat. Or it simply could be the banking oligopoly’s historic aversion to risk. “Change is not a big word in their vernacular,” said Flynn. And Stephen Redican, a partner at Borden Ladner Gervais, said in a separate interview on Jan. 23 that “Any industry, if you see a threat to your business model, you are going to work in a way to preserve your business model.”
The tech scenes in Montreal, Toronto and Vancouver are incubating some potential world beaters in digital finance. Redican’s firmincludesfintech among eight emerging industries in which it reckons Canada could excel, but only if the regulators keep up. “We have less certain structures for our companies to grow in,” Redican said.
Open banking will be an important piece. Take Mobeewave, a Montreal-based startup thataddedSamsung Group as an investor on Jan. 28. Mobeewave owns patented technology that facilitates contactless payments, so it is well placed to profit off the growth of cashless transactions. An open banking regime would accelerate that shift, as it would create an incentive for entrepreneurs to get into financial services. The bigger the financial services industry, the bigger the market for Mobeewave’s payment system. “It’s going to be really, really interesting for us,” Benjamin du Haÿs, the co-chief executive, said in an interview.
We have less certain structures for our companies to grow in
Stephen Redican, partner, Borden Ladner Gervais
Most experts think the shift is coming, eventually. Teresa Scassa, the Canada research chair in information and law policy at the University of Ottawa,wrotethat even though there are “a lot of risks,” Finance is “clearly enthusiastic” about the economic potential of open banking, so “resistance probably is futile.”
National Bank of Canada, the junior member of the Big Six, has gone ahead and started sharing its customers’ data, if asked. But Lionel Pimpin, senior vice-president of digital channels, makes the point that open banking is a two-way street. National created a digital hub where its clients can display both in-house and external accounts: super convenient for the user, and an opportunity for National to steal some business, as long as its clients grant permission to view the data that they have imported from rival institutions. “We see (open banking) as a major opportunity,” Pimpin said in an interview on Jan. 28.
Still, National doesn’t sound like it’s in a rush for new rules. The U.K. forced open banking on the industry before anyone, including consumers, were ready for it, Pimpin said. National prefers a “market-led” approach that keeps government mandates and timeliness to a minimum, Pimpin said.
Maybe that’s the way to go? It would be easier to answer that question if Canada’s sheltered banking industry was fully exposed to market forces. Can an oligopoly lead a “market-led” approach? It will be interesting to see what the federal government decides.