THE STANDING SENATE COMMITTEE ON BANKING, TRADE AND COMMERCE
OTTAWA, Wednesday, February 27, 2019
The Standing Senate Committee on Banking, Trade and Commerce met this day at 4:15 p.m. to examine and report on the potential benefits and challenges of open banking for Canadian financial services consumers, with specific focus on the federal government’s regulatory role.
Senator Douglas Black (Chair) in the chair.
The Chair: Good afternoon, and welcome colleagues and members of the general public who are following today’s proceedings of the Standing Senate Committee on Banking, Trade and Commerce either here in the room or listening via the web.
My name is Doug Black, I am a senator from Alberta and I chair this committee. I would ask please that my committee members introduce themselves to our panellists.
Senator C. Deacon: Colin Deacon, Nova Scotia.
Senator Verner: Josée Verner, Quebec.
Senator Stewart Olsen: Carolyn Stewart Olsen, New Brunswick.
Senator Duncan: Pat Duncan, Yukon.
Senator Dagenais: Jean-Guy Dagenais, Quebec.
Senator Marshall: Elizabeth Marshall, Newfoundland and Labrador.
Senator Wetston: Howard Wetston, Toronto.
Senator Wallin: Pamela Wallin, Saskatchewan.
Senator Klyne: Marty Klyne, a senator from Saskatchewan.
The Chair: Thank you very much and as always, we are ably assisted and supported by the clerk of this committee and the analysts.
Today marks our third meeting on the study of the potential benefits and challenges of open banking for Canadian financial service consumers, with specific focus on the federal government’s regulatory role. I am pleased to welcome or witnesses in the first panel, both appearing by video conference, from the Ontario Securities Commission, Pat Chaukos, Deputy Director, OSC LaunchPad; and from Accenture Inc., Robert Vokes, Senior Managing Director and Financial Services Lead.
Thank you both for being here this afternoon. I understand Ms. Chaukos you will proceed with an opening statement and then we will hear from Mr. Vokes.
Pat Chaukos, Deputy Director, OSC LaunchPad, Ontario Securities Commission: Good afternoon and thank you for the opportunity to present today. I’d like to start by providing context as to why the Ontario Securities Commission has been involved in the issue of open banking or more broadly, open data. In recent years, technology innovation has been the most disruptive force to the capital markets and the financial industry. It has transformed consumer and investor behaviours and expectations, it operates irrespective of borders and industry lines and has changed the way we think of fast and accessible.
As a securities regulator, the OSC recognized that we needed to understand the innovations that were happening in the marketplace to keep our capital markets globally competitive. We created OSC LaunchPad in late 2016 to keep securities regulation in step with the fintech innovation we were seeing.
The goal of OSC LaunchPad is to take a modern approach to securities regulation and help innovators navigate the rules, while at the same time fulfilling our mandate to protect investors and promote confidence in our capital markets.
Open data complements this mission by providing greater transparency and access to information that will help fintech innovation in Canada. We know this because a major part of what we do at OSC LaunchPad is outreach. We have listened to and engaged with hundreds of people involved in fintech. We have provided support to more than 220 businesses, met with over 320 stakeholders and have attended roughly 125 industry events.
Through our fintech advisory committees, we have solicited the advice of close to 35 experts in the field, many of whom are venture capitalists and entrepreneurs behind the companies that are forming the Silicon Valley of the north.
On the flip side, we’ve received the input, concerns and analysis from those who participated in our hackathon event RegHack in late 2016, which attracted many coders, developers and young entrepreneurs who are just beginning promising careers in fintech. Throughout it all, we have heard one consistent message: Open data is a critical issue for fintech innovation and companies seeking to create novel fintech applications.
Businesses developing fintech solutions and mobile apps are increasingly looking for access to consumer data to identify trends, patterns and associations that can assist with better decision-making for Canadians. By allowing open data, this information may be used to develop applications and programs that are helpful to both consumers and businesses. For good reason, many countries, such as the U.K. and Australia, have mandated open data in order to support innovation.
Open data could have many beneficial applications. For example, when paired with artificial intelligence, the automation of data analytics could potentially produce savings that can be passed on to consumers and offer a more tailored product, service or application. This could also be applied by regtech businesses that are looking to help market participants to streamline regulatory compliance requirements. This can save time and money by gathering information from things such as corporate registry databases, firms and individuals that we regulate and other publicly available references. Businesses could also integrate their own computer systems with national systems through what is called application programming interfaces, or APIs.
However, what we’ve heard across the board is that information pertaining to companies, individuals and our capital markets, including data on the businesses and the people that we regulate, are either not available or problematic to obtain.
Currently, there is limited open data in Canada, and it is difficult for fintech businesses to enter into bilateral agreements with multiple parties, not to mention develop fintech solutions that are sustainable and that can benefit both firms and consumers.
All of this gives Canada a competitive disadvantage if we want to support and attract homegrown innovation. That’s a real risk if we don’t listen to these concerns. Our brightest and most ambitious innovators and companies in this arena won’t sit by while we play catch-up on this issue. Instead, these Canadian companies will go, create jobs and generate revenue elsewhere. I don’t believe that’s what we want for Canada.
We can and should turn this around, but not without some work and a thoughtful approach. First, we have to acknowledge that transparency of data is beneficial, so long as it is done with appropriate client consent, permission and privacy standards. Processes must be in place where individual information and trust can be consistently and clearly obtained. Data standards are of great importance here. For example, government organizations and businesses already collect a variety of information. However, this is often done differently, with varying parameters and labels, making it difficult to analyze the data in a structured way. In order for applications to be useful to data aggregators and businesses, the inputs need to be captured and labelled or categorized in a consistent way.
If we don’t have data standards, then issues may arise with the reliability of the source of the data, the interoperability of the APIs and the categorization of the data that is used to generate the outputs. These are businesses that are analyzing data from multiple sources in order to provide insight to businesses and consumers, so one of the key criteria we hear is that data standards need to be applied consistently and hopefully globally as these businesses operate in multiple countries.
Finally, and most importantly, the concern we’ve heard is that if open data is not mandated by the government, this will likely not happen because of conflicts of interest and competition over consumer data. This is ultimately why we’re here today. We believe that permitting data in an open format that is machine-readable, vendor-neutral and standardized will be of great benefit to Ontario and to Canadian businesses and consumers. It’s a move that will help to encourage businesses to establish themselves, grow and prosper here. We need to make that happen.
I’m grateful for your time today, and I’m happy to take your questions.
The Chair: Thank you very much. That was a very strong presentation.
May we ask you, Mr. Vokes, if you would share your comments with us?
Robert Vokes, Senior Managing Director and Financial Services Lead, Canada, Accenture Inc.: Thank you for the opportunity to address you today.
For a bit of context, Accenture is a global professional services firm that solves our clients’ toughest challenges by providing unmatched, end-to-end services that include strategy, consulting, digital, technology and operations. We partner with more than three quarters of the global Fortune 500 driving innovation to improve the way the world works and lives. With expertise embodied in more than a half million people across 40 industries and 120 countries, we deliver transformational outcomes for a demanding new digital world.
Here in Canada, in the area that I work, we are working with all of the major banks to help them address the challenges presented by these new digital technologies. We take an innovational approach to help imagine and reinvent their futures. With that context, as we think about open banking, we see clear evidence that will provide value to Canadians and to Canadian businesses based on a range of use cases and products available in other jurisdictions.
Open banking fosters ecosystem connectivity, innovation and collaboration, and as a result, drives more product personalization, improved customer journeys and transparency for businesses and Canadian consumers.
Our strong working hypothesis is that the primary market segment that will benefit from open banking, particularly in the area around funds management and financial management product offerings, will be the small- and medium-sized enterprises and small corporates that do not have their own corporate treasury departments. These companies can gain significant benefits from having access to a real-time view of their aggregated cash flows and liabilities across all of their accounts, enabling better decisions around payables and receivables.
These organizations can also benefit from better access to credit enabled by underwriting that could leverage data from an open banking environment, whether provided from banks or other third parties. These companies may even pay for unique insight generated from aggregated data, building on Pat’s comments around the open data world, particularly if that information provides added value to their business. With nearly 90 per cent of Canadians working for small- and medium-sized businesses, improving this segment’s financial experience can enable more economic growth. Open banking is one way to help that become true.
We also see the Canadian government is in a prime position to play a vital role in the safe adoption of open banking across our ecosystem by developing an all-encompassing set of technical standards that cover the topics of APIs, data access and transmission, security, consent and ownership. Stewardship of open banking, with the creation of a governance model to drive, monitor and enforce those standards, can be achieved with government involvement. One area worth exploring is how a central repository for third party accreditation and regulation can help make this world a safer one.
We also see an interesting paradox — and I believe this has been reflected in some of your discussions in the last two days — around a key question: Do consumers and small businesses want open banking? On the one hand, a recent survey we just completed commissioned by Accenture identified several concerns. We’re releasing those results to the public later in March.
These key concerns are, first, security and privacy of financial data; second, trusting large tech companies with their financial information; and three, not seeing how open banking will help drive value for that. However, the survey also revealed that Canadians would warm to the idea of open banking if measures are taken to address these concerns, including better access to measures such as authentication password and security controls; biometric technology such as fingerprint and facial recognition; and real-time analysis of payment transactions to check that they are actually valid. One in five of our respondents also said they would be willing to share banking account data with non-banking third parties if it meant a better deal or other benefits.
Two other points are worth bearing in mind here. First, about 4 million Canadians use various aggregation services already for which they provide access to their credentials. They are already using a form of open banking but without the protection present in other jurisdictions. Second, to quote Henry Ford, “If I had asked people what they wanted, they would have said ’faster horses.’” That’s the promise of open banking: letting all of our Canadian innovators, not just incumbents, create capabilities to help our financial system be the fuel to grow our economy.
Open banking is not only about enabling innovation and increasing competition in the financial industry, it’s also about the sharing of sensitive private information to enable the display of aggregated financial standing of consumers and businesses. While many consumers share information such as age, address, religion and pictures on social media, financial information is much more important to be protected from being shared publicly. That is why confidence in the system and security in granting access to bank account information is highly important to the success of an open banking system being developed in Canada.
Our challenge here is not whether open banking has value but rather to ensure that the conditions are in place for a safe, secure environment that enables our financial system, both for incumbents and new entrants, to innovative for better outcomes for consumers and small businesses.
Open banking is moving at speed around the world, and in some ways, it’s already present in Canada. You could say the horse has already left the barn on open banking.
Our government plays a key role in ensuring Canadians are ready for this exciting new chapter by introducing regulations that are detailed, specific and timely. This change brings the opportunity to transform the Canadian financial services ecosystem and, along with the payments Canada modernization initiative, ensure Canada has a world-class banking and financial services sector.
Thank you for your time. I’m happy to take questions.
The Chair: Thank you very much. That was also very helpful to us. We have a long list of questions, starting with Senator Stewart Olsen, our deputy chair. Senators, when you addressing your question, you can indicate whom you would like to answer. I’m told that makes it easier for folks who aren’t in the room.
Senator Stewart Olsen: Thank you for your presentations. If you could both answer my question, it’s a fairly simple one. I will preface it with the following: In the great global recession or emergency we just came through, the Canadian banking system was one of the reasons Canada weathered it so well. It was security, well managed, et cetera. How confident are you that we can do the regulations to provide the privacy and security so that we can move into open banking, protecting the consumer?
The Chair: Would you like both to answer?
Senator Stewart Olsen: Yes.
Ms. Chaukos: In terms of the global crisis, I’m not sure that one feeds into the other. I say that because there are countries that have obviously done this with existing banking institutions, and from what we’ve heard from multiple people, it is not a costly endeavour. I agree we need to have a governance model, and we need to think — to Bob’s point — around accredited third-party providers.
Those are things that, as a country, we need to be thinking about. At the same time, I don’t think it jeopardizes our financial institutions and stability in any way.
Senator Stewart Olsen: Just to clarify, I referred to the banks because of their obvious stability. I think that’s what I’m asking: Can we maintain stability in our financial markets and our banking system?
If you wouldn’t mind, Mr. Vokes, please provide me with an answer to that.
Mr. Vokes: From my perspective, I’m less worried about a repeat of the GFC with respect to open banking. In many cases, I’m much more worried about the proverbial 10 guys in the basement of a fintech getting access to someone’s credentials without a regulated environment, a governance structure in place and without those standards. I think inaction is a much bigger risk than putting in place the right governance structure and standards right now.
Senator Stewart Olsen: Thank you. That’s a good comment.
Senator Wetston: Thank you, both, for your testimony today. I’m going to ask a general question. Ms. Chaukos, you talked about open data, whereas I think the other conversation was more around open banking. Obviously, they have a direct relationship. The question I have is: Since we’re studying open banking, what would open banking, in your opinion, look like in Canada, if we were able to implement it? I know there was a comment that suggests it’s already here, but I don’t consider scraping or whatever that comment might be — screen scraping — as the kind of environment for open banking that we would encourage.
Any comments from either of you?
Mr. Vokes: First, regarding what open banking would look like in Canada, part of the premise is on a technical basis of having the right set of tokenization in place to protect people’s identity and characteristics. As we move forward in that approach, that will provide some of that safety and soundness we were looking for.
I am petrified on the screen scraping approach. I think that’s a form of open banking; people think about financial data aggregation. We have to pay attention to that. It’s happening around us. Let’s make sure we put the right safeguards and controls in place.
We need to think about putting in place a registry system for third-party providers, with some accreditation and diligence to ensure our consumers and small businesses have confidence in who they are dealing with and that it’s not a “10 guys in a garage” situation. It ought to be a bona fide organization that’s applying the right set of standards and security to that data. That’s an important step. That governance framework is something we can put in place.
Ms. Chaukos: I’m going to respond a little more specifically to the open data versus open banking. I agree with the comments of Mr. Vokes. On that front, from a government perspective, I would suggest that open data is what we’re hearing from fintech companies. In order for innovation to happen, banking is one source of information, but there are many different sources of information. One example is that if you wanted to have digital identity in Canada, you would need multiple sources of information, both from government, as well as, potentially, banking services and other services that we Canadians use.
From the countries that have already melted open data, one of the challenges is the scope of the data. We’ve heard that it needs to be broader than banking. From what I have heard as part of LaunchPad is that it is not just about banking data but about open data. It could be your government data, your driver’s licence or whether you are registered with the OSC. It needs to be broader than just banking.
Senator Wetston: This question is more to Ms. Chaukos, because you spoke about data standards, and you would want to envision data standards in an open data environment. But do you also see some connection and challenges, particularly from the financial markets on the security side, between what these standards might be and the advice standards that exist with respect to those individuals with whom I know you have a lot of experience regarding their responsibilities to investors in an open data environment?
Ms. Chaukos: Interesting. When I’m thinking about open data, I’m thinking about the standards around open data. It’s developing the standards so that aggregators are complying with similar standards.
When it comes to the advice, I think, as in everything that we deal with at the OSC — and, Senator Wetston, I know you are familiar with this — there will be differences of opinion.
Just to give you a small example of what we have seen. When we did our hackathon, we had a high school team of students that took the open APIs of Linkedin, were able to figure out who are promoting themselves as financial advisers and are not registered.
That is just with the open APIs of Linkedin. Imagine what they are able to do if they were able to connect with that with our registry database and other information that’s out there. So I agree that there may be challenges in terms of opinions about what these data standards look like, but I think we all have a role to play. If we are going to promote fintech innovation and innovation generally in Canada, I think it’s an important initiative for the government.
Senator Wetston: Thank you.
Senator Klyne: Thank you to our panel members for joining us this afternoon.
My first question is to Ms. Chaukos, the Ontario Securities Commission. My understanding is this open banking is to encourage a level playing field among the financial institutions. Let’s assume for the moment that the open banking standards and the governance model are solid and the interests of key stakeholders are fully and effectively covered. In that realm of the securities pillar, has there been any survey or understanding identified about how securities clients will be receptive to this, sharing data with other third party providers?
Ms. Chaukos: Certainly, we have not done that at the OSC. I can certainly take that back. How we have been involved in this is it became a critical issue from when we did our kickoff event. We were hearing it from the companies themselves. At the same time, we have been dealing with companies coming in, because they are looking for: Do we have open data? Does the government have open data? What sources are available? Those are the stumbling blocks, and that’s how we are hearing about this issue.
It’s something we can turn our mind to. We are responsible for securities regulation, but I think it’s an important issue and was one of the major findings we had in our white paper coming out of the hackathon and maybe a worthwhile survey to do.
Senator Klyne: Speaking from my perspective and shopping my data, perhaps, I certainly might be interested in the transactional side and whether it’s a percentage or flat fee and could I do better elsewhere. How would you shop the relational side? I have taken time to educate my wealth adviser, and he has invested a lot of patience with me. To start that process over again, how would you compare that on open banking?
Ms. Chaukos: If you had open banking available, you mean?
I’m going to take an example in terms of some of the companies we have dealt with. One of the types of businesses we have dealt with is alternative lending. What we are seeing is alternative lenders — and this has typically been Canadians go to the bank but there are alternative lending platforms coming into Canada, and even ones outside of Canada coming as a marketplace. One of the interesting things to see is how they are able to take data from multiple sources to be able to inform a loan credit decision. That’s just a small example of the types of things we see.
Let’s say you were using QuickBooks. You might be able to take the tax return data of the owners of a small business. It may be what you are able to find in terms of social media on the social media sites that have open APIs, and you are able to determine behaviours and whether you think this person or proprietor is a good credit risk. Those are ways in which it will change how we offer services. It will introduce competition to our traditional banking networks, but I think one of the gaps we are hearing about is the ability to get small business loans. And I think small business is a critical part of growth in Canada.
Senator Klyne: You have answered that from the perspective of banking. I’m just wondering about the securities side of things, but that’s fine.
The third question I had was on the OSC Launchpad program. What type of data has been shared through that, and with which type of third-party providers or fintechs?
Ms. Chaukos: We have not provided any data with third-party providers. The perspective I’m presenting today is what we have heard from businesses that are coming in and that are trying to understand the regulatory framework and how we might be flexible in terms of how to comply with the regulatory frameworks.
Senator Klyne: Thank you. I thought you had already launched something there as a trial.
Senator C. Deacon: Thank you to our witnesses for very insightful and informed presentations.
I’m focused on the risks of not acting decisively and swiftly in Canada. If Canadians lag behind in our adoption of improved regulation, it risks encouraging bad actors to operate in the market and they won’t be found necessarily. I also think it affects our competitiveness. The VC investment in fintechs and related open banking is exploding and we are kind of getting left behind. I want to have you focus in on where we can start to change our competitive position globally.
I look at the emerging area of regulatory technology, regtech, and the opportunities for us potentially to get in on something where Canadians are respected, and that’s in managing a sound financial system that is seen and known to have limited risks. I’m looking at how quickly GDPR became the privacy standard for most companies operating in the world. It blew my mind how quickly, even with the little company I’ve been associated with in Nova Scotia, it has adopted GDPR standards because we did business in Europe. So the opportunity for Canada to potentially shift into a leadership position as it relates to regulation in the fintech or open banking area and perhaps take advantage of our good brand reputation around a safely regulated industry in the regtech area. If you could dive into that.
Mr. Vokes: We did a study for Toronto financial and “The National” looking at the fintech community in the greater Toronto region two years ago. We are in the process of updating that report and expecting to release that shortly. There are 194 fintechs in the greater Toronto area up to Waterloo. As we surveyed and talked to them over the last two years, we were hearing the same sets of themes. Their ability to grow and access and create capabilities is often constrained by not knowing how to navigate a regulatory environment, not knowing which sets of data they can actually get access to in a legal manner, and navigating the process inside our financial institutions in order to either partner with them or collaborate with them moving forward.
This represents a pretty big challenge for them. The other challenge they are often faced with is access to capital, particularly from the initial seed ground into a mezzanine or growth capital stage. Our U.S. venture capital firms look at it and don’t see the same regulatory framework in Canada, so the immediate reaction is: Yes, I’ll invest in you, Mr. Fintech or Ms. Fintech, but you have to move your company to New York or San Francisco. That’s a challenge. We have an obligation to help them be more successful by getting in front of this problem and helping them be prepared to succeed.
Senator C. Deacon: Thank you. That’s what I was expecting. Have you looked at any regulatory sandboxes as an interim step that can maybe allow greater oversight as we are updating our regulatory regime subsidized sometimes from government groups to allow emerging techs to continue to grow and compete but not get squashed or have to move?
Mr. Vokes: That’s one of the recommendations we made in the initial report in 2017. A regulatory sandbox would help many of the organizations.
The Chair: Ms. Chaukos, do you want to comment on Senator Deacon’s questions?
Ms. Chaukos: Yes, on the regulatory sandbox. That’s one thing we have done across Canada with the Canadian Securities Administrators — which is all the provincial securities regulators — create a regulatory sandbox so that we are able to enable and provide some flexibility to these businesses, because we recognize they are in a start-up phase, and sometimes the regulatory environment in terms of how to comply may look different in a fintech model.
In terms of your question on the competitiveness, we have heard directly from regtech companies. That’s why I raised regtech as an example.
One of our Fintech Advisory Committee members was a Canadian-founded business and is now part of a U.K. larger business. One of the challenges, when they came in to talk to us, was trying to get the information in Canada. It was fragmented and difficult to get to. From my perspective, I’m concerned when I hear that, because that means these companies are going to leave Canada or exclude Canada if they are outside of Canada.
We are hearing this live and pretty much weekly. This is something that, from a competitive point of view, we need to focus on, and, certainly, we have been hearing it loud and clear at the OSC LaunchPad.
Senator C. Deacon: Thank you to both of you.
Senator Wallin: I want to have a general discussion or hear from both of you about your views on the role of government, which everyone thinks is key.
We live in a pretty risk-averse society. That’s why we like our banking system. There is not much competition, but it’s safe.
When we are talking about the financial crisis, it may be we were prudent. It might also have been that we are risk averse and didn’t take a flyer on some of those other issues.
I can see the role in coordination, accreditation, regulation, all of that, but I also have this other question, which is: When we talk about government playing a central role, what does that mean?
We have heard in other contexts in this committee that government does not tend to be very tech savvy, that its technology is not the leading edge. If you want to go to people who are really innovative, the military is there, and the private sector does things much more creatively.
We can start with Mr. Vokes. How do you see the role of government in this? Are they the holders of the key?
Mr. Vokes: I think as a general statement, we are talking about what the rules of the playing field need to be. I think there’s a tremendous role for our government to help set that stage and what those rules actually are.
If you look at what the U.K. has done with the CMA, they set up an Open Banking Implementation Entity, OBIE, which was chartered with the nine major banks to start driving the overall governance framework and delivery of those sets of standards. That was initiated through government action in order for that to happen. That’s one way to think about taking a much more proactive role and making sure those governance models and standards are being driven.
The same thing could apply to thinking about a third-party registry service for that safety and soundness concern.
Senator Wallin: Ms. Chaukos?
Ms. Chaukos: I agree with Mr. Vokes in terms of operationalizing or implementing an initiative like this. It may be outside of government in terms of the implementation.
I see that the key role for government is in mandating this. I personally sit on multiple committees where we are Canadian regulators outside of securities, insurance, banking and anti-money laundering. I also sit on committees that are international in scope. Again, we come at it with different perspectives in terms of education and experience levels, and it takes a long time to coordinate when you are trying to do it piecemeal.
If the government were to mandate open data, I think it starts the ball rolling in terms of it is important for innovation in Canada. Then in terms of implementation and the governance model, obviously, the government has a role to play. What we have heard from other countries is they engage with an external party who takes on the tech savvy and has the technology background to enable and to be able to implement this.
Senator Wallin: What we tend to do in this country is to rely on the government to protect us from bad things. If anything goes wrong, it’s why didn’t the government fix it, or let’s sue the government, or whatever that may be, but they wouldn’t really be in that role?
Ms. Chaukos: From my perspective, even from where we sit, from OSC LaunchPad and the CSA Regulatory Sandbox, we have a role to play in that we are approving anything that is happening in terms of some of these fintech models and how they might deal or comply with requirements in a different way.
I would think that government still has an important role to play, but that doesn’t negate the fact you may have the experts in terms of implementation and what makes sense, and to provide recommendations to government.
Mr. Vokes: I would agree with that statement. Setting up those conditions for safety and soundness is an imperative. That does speak to ultimately what those rules of the playing field are and what the standards need to be.
Government is in a prime position to be able to pull in those experts around the industry to help support that and be the driving force to ensure it happens in a timely manner.
Senator Wallin: What is the government entity or body, as you see it, that does that?
Mr. Vokes: From my perspective, this is one of the areas where I’m way out over my skis in terms of what the structures need to look like, so I’m going to defer on that one.
Senator Wallin: Ms. Chaukos?
Ms. Chaukos: Again, this is based on the experience and what I have been hearing from multiple regulators. First and foremost, we need to mandate it. The government will need to set standards around it, but it will need a group of experts to be able to rely on. I still think that the government will need to play a key role in any body that is responsible for implementation and operationalizing this.
Senator Wallin: I don’t disagree. I’m just trying to figure out where that would be. Is it a separate body? Is it through the Bank of Canada? Is it through the securities structure? All of the above?
Howard is saying all of the above.
Ms. Chaukos: I have heard the challenge in Canada is the federal-provincial jurisdiction. I did hear a good idea yesterday in that one country has done it through digital data and telecommunications. In Canada, that would be federal.
Senator Dagenais: My first question is for Ms. Chaukos. The Ontario Securities Commission has taken steps to oversee firms involved in securities transactions. I think that’s a strict measure that provides security for consumers. Now, fintech companies want to get involved in the transaction process. Who should be in charge of overseeing these companies and keeping the sector from turning into the wild west?
Ms. Chaukos: When it comes to securities firms, the way we traditionally oversee that is through the securities firm itself. They are able to engage with technology providers and the onus the firm itself to ensure that they’ve done their due diligence and they are overseeing the technology providers that they use.
We have seen that throughout the securities industry and that has been our perspective and how we oversee these technology providers.
However, one of the things that we are hearing is firms that are the technology providers coming in and wanting us to provide some advice in terms of the internal controls they should have in place, the steps we would expect them to have on their technology platforms. We have played a role in that as part of OSC LaunchPad. We’re providing some guidance and input to the technology providers themselves in terms of the things they need to build in. If we’re talking to the platforms at the tail end, it’s too expensive to go back and change it. We’re talking to the firm early on so they understand the expectations of the securities regulation and they are building that into their platforms before they provide it to the registered firms we would deal with.
Senator Dagenais: Thank you very much. Mr. Vokes, usually, when a bank offers a service, it’s to make money. Nothing comes for free. What are the banks hoping to get out of their discussions with you? Please give us some examples of mechanisms that could be put in place, especially in terms of oversight, to determine where the banks are going with this, because someone must see a chance to make money.
Mr. Vokes: I think the question has multiple facets to it. On one side, we have a system here in Canada where our financial system overall makes money from the storage of value — the disintermediation of credit and liquidity over time and the ability to grow consumer or businesses’ overall value through asset management services. As I think about an open banking world, some of the studies we’ve done suggest that as open banking moves in it could potentially impact bank revenue by an order of magnitude of 20 to 40 per cent on their retail banks. Particularly, if you think about the payments world, if alternate payments come in place through a payment initiation service the interchange for Visa, MasterCard, et cetera goes down, gets bypassed. That takes revenue out of the banks and shifts it to a different pocket.
At the same time our banks have an opportunity to look at the data flows going through them to figure out how to provide better sets of services to our consumers and our small businesses. An example, and similar to what Pat talked about earlier, National Australia Bank, NAB, teamed up with competitor Xero which is a competitor to Intuit’s Quickbooks. Where the NAB can enable small business to get instant credit up to $100,000 because they have complete access to all the financial transactions within that small business via the Xero accounting software. Now with better artificial intelligence and looking at underwriting, they can make instantaneous decisions to give small businesses the credit they need to grow their business.
That’s a great set of services a bank can offer through the use of open banking to constituents. For example, it’s the same thing on the consumer side through data aggregation services: personalization, convenience, better tailoring of the experience. This is where the opportunity lies for our banking system to make themselves more relevant and important part of our society, particularly as it fragments across the commercial system.
Senator Marshall: We’ve had previous witnesses and my question is formulated both from what you have said here today and from the witnesses we’ve had previously. When you’re talking it seems like you’re representing the people or those who want the data, and I don’t get the feeling that there’s equal representation for those who are going to be providing the data. Could you comment on that? It seems like there is a group out there who just want the data, they’d love to have it, but the data has to come from somebody or something. In the discussion, it seems like no one is talking about that group over there. Am I misreading what I’m hearing?
Mr. Vokes: Think about the example I gave around the National Australia Bank and Xero. That data actually resides in the accounting systems of the small business, it’s being pulled into the bank through an interface. It’s not going out of the bank, it’s going in. What happens then is that the bank can make a better set of decisions because they have a much broader view of what’s happening for that small business than they would have an annual review that they’re probably not looking at. This is a way to enable our banking system to be better at how to use third-party data themselves. It’s not always about data going out of the bank to a fintech it’s also data coming into a bank.
Senator Marshall: Again, you’re concentrating on the organization or the people or the group that want to use the data. What about the individual to whom that data pertains? Privacy is a really big issue for me. In your discussions the entrepreneurs, venture capitalists, the banks, et cetera would like to have the data. If we’re going into open banking, it will be a large system. There are privacy issues and you will be depending on overseers and regulators. We’re talking about different platforms and it all has to work together in order for people’s data to be protected. Then government will have a role. I just don’t have the confidence that all those parts are going to work in sync to keep organizations’ data confidential. It seems like that issue is not at the forefront. It seems like the concentration is on getting the data, not protecting the data.
Mr. Vokes: From my perspective — Pat jump in on this as well — the data is already out there. In my opening comments I talked about the horse have already left the barn. People are screen scraping.
Senator Marshall: Not all the data. Some of the data is out there but you want all the data.
Mr. Vokes: Not necessarily, that’s the point about setting up the appropriate standards and appropriate governance structures to ask what elements of data are appropriate to share. Australia has taken a paced approach as they look at what data to enable and in what sequence. It is an interesting way to think about getting more controls, the right standards, the right governance structures and the right operational capabilities put in place to provide that privacy protection, which is paramount.
Senator Marshall: You mentioned four things and they all have to work together and they all have to work perfectly. I just don’t have the confidence that all of that is going to work. Now, from what you and Ms. Chaukos are saying, they want the government involved. I just don’t have the confidence in government that other people do that all this is going to come together and work great.
Ms. Chaukos: I’m going to take it from a consumer perspective. If we had asked consumers probably 10 years ago if they wanted mobile banking, they probably would have said I don’t know or probably not. If we enable the data in an open format where it is a trusted third party and it is not controlled by one entity. I’m a proponent of digital identity so take that as the context. If I’m able to renew my licence, or provide information that I provided to my bank already to my mortgage company, or to my online adviser in order to expedite my client on the boarding process, make sure that when my bank account hits a certain amount it gets invested my online adviser, those are all benefits. Unfortunately, consumers don’t know what can be enabled through the use of fintech innovation and open data. I agree there are pieces that need to come together and that’s why the data standards are critical to any type of implementation. I do believe the government has a role in that. Without it being mandated it’s happening, the screen scraping is being done.
It’s being done by multiple parties, not consistently. It’s violating the terms and conditions of some of the banks themselves. So what I am advocating for is standards around this in a way that’s safe and keeps our financial institutions and the stability in Canada as it is today.
Senator Verner: Mr. Vokes, out of curiosity, I see in the document you prepared, The Brave New World of Open Banking, that 65 per cent of industry respondents said —
They see open banking as more of an opportunity than a threat.
In a document submitted by Finance Canada, we learned that Germany was initially somewhat resistant to the idea of an open banking system. Do you happen to know why it was reluctant at first, or what made it change its mind?
Mr. Vokes: Unfortunately, I don’t know.
The Chair: That’s a good question. I wish you did know.
Senator Verner: Okay, thank you.
The Chair: Ms. Chaukos, would you know?
Ms. Chaukos: No, unfortunately not.
Senator Klyne: Thank you. This question would be for Mr. Vokes. I was going to ask a question about how the third parties are going to monetize this but I think Senator Dagenais looked after that. We heard before, and you mentioned it again today, that there are already 4 million people using this open data process. I’m wondering what type of data they are sharing and with which types of fintechs or third party providers, and do they actually realize what they’re exposing themselves to or do they know they’re even doing this?
Mr. Vokes: Our surveys would suggest they probably don’t know the risks. But this is going to be primarily around aggregation services more than anything. It’s not about initiation services. It is effectively pulling state information or transaction information presented in a consolidated format. An easy example from the U.S. is Mint in terms how it aggregates a consumer’s credit card spending, it’s bank account spending. It presents opportunities back to the consumer and their mobile device about how to save some money, get a lower interest rate. It all comes through an aggregation service primarily driven off the screen scraping.
Senator Klyne: The activity around this open data and fintechs and third party providers in the U.K., is that on an upward trajectory of growth or has it plateaued or flamed out? What cycle are we in here?
Mr. Vokes: The short answer is early days. It’s a relatively new set of initiatives that all went live in January with their framework being fully institutionalized. So it is a bit early to tell on that front.
Senator Klyne: If you were to look out into the future, what would you think?
Mr. Vokes: We do believe there will be a bigger uptake among both banks today and additional third parties to change the way that consumer and small business experience works in terms of how they access their financial information. The convenience is one that I think will grab consumers once they are able to see it. Until they can see it, it’s hard to actually envision it.
Senator Wetston: It’s a bit of a cart before the horse once again. What do you see first? Do you see a framework for open data being developed, including the appropriate standards and commercial models, or do you see open banking developing first with the proper scope, standards and commercial models?
The reason I ask this is because I’m absolutely persuaded that we need to have the appropriate regulatory model in place to address the risk and other issues associated with an open data/open banking environment. Do you have any comments on that, Mr. Vokes or Ms. Chaukos?
Ms. Chaukos: Drawing on my last two and a half years of experience in OSC LaunchPad, when something is novel and new, it’s difficult to get it perfect the first time out. I do think that the government has to mandate and we will have to iterate as we go and learn.
We can obviously take the learning of other countries and regulators that have done this ahead of us. But at the same time this needs to be mandated by the government. I don’t believe that it will happen on its own based on what we’re hearing from businesses and the challenges that they have even trying to establish partnerships with some of the financial institutions, the fact that there are so many they would need to deal with and the types of information they would need to be able to negotiate.
Mr. Vokes: To your point about the cart versus the horse, this is it. Feeding on that analogy, the horse is gone, so let’s put the right sets of frameworks in place. And I would love to see more, from a standards perspective, how we ensure what financial information is available to whom, in what format and what protections are around that.
I do think there is a role here to set that up as a standards capability and a governance model. Focusing on that will alleviate constraints down the line for the fintechs or banks as they try to leverage this information.
Senator C. Deacon: I want to finish with the issue of global competitiveness of our financial system going forward in a world that is moving rapidly towards financial technology companies. In the 20 to 40 per cent potential risk and the revenues of our current very stable reliable chartered banks, do you see an opportunity for us to not only keep — Canada has a company that’s in payment processing that has been the fastest company to do a billion dollars in revenue ever, and that’s Shopify. We have great success stories. We can do it.
Do you believe there is the opportunity for Canada to put in place a regime that can protect consumers and attract global fintech companies and investors to us in order to maintain our global leading position in terms of our financial institutions? If so, how quickly do you see government having to move in the manners that you have recommended?
Ms. Chaukos: You’ve given a good example of fintech companies and certainly Wealthsimple and other online advisers were one of the first innovative companies that we saw. I see open data as enabling more fintech innovation. I think it’s the first step that needs to happen if we are to have a robust innovative ecosystem in Canada.
We have the universities and infrastructure, but think these companies, if we don’t have open data, will be persuaded to go elsewhere. Companies that have come to talk to us at OSC LaunchPad that want to operate in Canada, open data and what is accessible and what they are able to use in their fintech solutions is an important element. From what I am hearing, it’s the competitiveness and whether Canada will be part of a global roll out of these businesses.
Senator C. Deacon: How quickly do we need to move, in your estimation? I’d like you to give us a sense of that urgency; the mandates and iterating with urgency.
Ms. Chaukos: This is my personal view: yesterday would have been great.
Senator C. Deacon: Thank you.
Ms. Chaukos: We really need to move.
Mr. Vokes: Yes, and now.
The Chair: Thank you very much, that is exactly what we wanted. I’m not saying we were prejudging, but to the point is always good. Thank you very much.
To the witnesses, thank you very much. This has been extremely helpful to our deliberations and we’re very appreciative that you both took time to share your views with us. I hope we can rely on you again at some other time for some other projects we are looking at.
We’re continuing our study of the potential benefits and challenges of open banking for Canadian financial services consumers, with a specific focus on the federal government’s regulatory role. I am pleased to welcome the witnesses in our second panel from the Canadian Bankers Association, witnesses I know we have seen before and benefited from their testimony. We welcome Marina Mandal, Vice President, Banking Transformation and Strategy; and Angelina Mason, General Counsel and Vice President.
Thank you, again, for being with us today. We look forward to your comments and we’d ask for your opening remarks, please.
Marina Mandal, Vice President, Banking Transformation and Strategy; and Angelina Mason, General Counsel and Vice President, Canadian Bankers Association: Thank you and good evening. It’s always a pleasure to appear before the committee. I’m joined today by Ms. Mason.
As senators are aware, in January, Finance Canada released its first consultation document reviewing the merits of open banking. The banking industry welcomes the opportunity to work with the federal government on fully understanding the policy objectives and the potential benefits and risks of open banking.
The CBA submitted a response to the consultation document and I am happy to speak today to the key points made in our submission.
The banking industry is a strong proponent of a competitive and innovative financial services sector that uses rapidly developing technological solutions to better serve customers and meet their evolving expectations. Canadian banks are leaders in the adoption of new technologies that make banking simple and convenient for customers, while also fostering customer trust and confidence.
Constantly looking to the future, banks have established internal innovation hubs and partnered with outside organizations, including universities, incubators and technology companies, in an effort to pursue, design and deliver digital innovations and solutions for bank customers.
We believe that open banking offers benefits to individual consumers, as well as small businesses, financial institutions such as banks and other third-party financial service providers. Provided the inherent risks associated with open banking are effectively managed, open banking provides an opportunity for consumers to more easily share their financial transaction data and benefit from new and innovative products and services customized to their needs.
Varying approaches to open banking are being considered or adopted in different jurisdictions based on the level and scope of market activity and the range of catalysts that triggered market and policy responses in those jurisdictions. Several jurisdictions started exploring open banking in the aftermath of the 2008-2009 global financial crisis. Systemic failure of banking systems and the subsequent loss of trust required the marketplace and policy makers to search out alternatives to the banking system.
In contrast, Canadian financial institutions performed well through the financial crisis, maintaining a high degree of public trust. As the government continues its examination of open banking models being explored, introduced or implemented in other jurisdictions, we strongly encourage government to assess these models through the uniquely Canadian lens.
Part of the unique Canadian context that was identified in the government’s consultation document is the broader environment of ongoing policy initiatives affecting the financial services industry in Canada. We agree with the government that the merits of open banking should be reviewed in the context of these initiatives, which include payments modernization, the national digital and data strategy consultations and the development of the federal government’s national cybersecurity strategy.
In examining the interplay between open banking and these other initiatives, it is imperative that Finance Canada continue discussions in collaboration with all relevant policy makers and regulators.
The potential benefits of open banking require the associated risks to be addressed and mitigated through appropriate allocation of responsibilities between all participants whether consumers, financial institutions or other third-party financial service providers. We believe those associated risks revolve around four key areas: consumer protection, privacy and confidentiality, financial crime and financial stability.
Customer information should only be shared with informed customer consent obtained in a transparent manner that allows the customer to understand how their financial transaction data will be used and secured. It is also crucial for customers to understand the mechanisms of recourse and redress available to them in the event of a data breach or misuse of financial transaction data by a third-party financial service providers.
Once third-party financial service providers receive financial transaction data, they become accountable for the information and, therefore, liable for mishandling it. It is important for customers to be protected regardless of the nature of the third-party financial service providers involved.
The appropriate handling of highly sensitive personal and confidential information is key to any open banking model and necessitates consistent standards for the responsible use and management of customer financial transaction data, and the safeguarding of that data. Open banking must include appropriate security and other safeguards for financial transaction data across the ecosystem in order to achieve the benefits highlighted in the government’s consultation document.
Specific characteristics of open banking could increase the risk of financial crime, including data proliferation, increased connectivity and the use of login credentials by third-party financial service providers to access data on behalf of customers. It is crucial to understand these risks and how they can be managed by open banking participants.
Stability is central to Canadians’ trust in our financial system, as evidenced by the banking industry’s performance during the 2008-2009 global financial crisis. As the federal government explores the merits of open banking, it is important to ensure that Canadians’ trust in their financial system is not put at risk. Potential risk to financial stability in the context of open banking should be closely monitored.
To conclude, the formal consultations are only just beginning in what is sure to be a thorough and rigorous review process. As the government proceeds with its review in the months ahead, we welcome opportunities to continue to engage on these issues, assessing the merits of open banking in Canada.
Thank you. I look forward to your questions.
The Chair: Thank you very much, Ms. Mandal. Ms. Mason, do you have anything to add at this time?
Angelina Mason, General Counsel and Vice President, Canadian Bankers Association: I’m here to answer questions.
The Chair: A very thorough presentation. Thank you.
Senator Wetston: Thank you for coming. The consultation report to Finance, they asked three questions in the report that they would like answers to. I think you know what I’m referring to generally. On balance, in looking at the report, what is the general position that CBA is taking with the goals and objectives that the Finance Department is attempting to address? Do you have general comments?
Ms. Mandal: We agree with Finance’s commentary on the potential benefits to consumers, including small businesses, of open banking. We thought the consultation document did a good job of mapping that out.
The second question revolved around the risks. I have covered most of that off, our general comment on the risks, in my opening remarks.
We do spend a lot of time, in our submission, on risk and risk mitigation strategies because that is so central to our concerns as an industry. That was the second question, generally speaking, and we can have deeper discussion today.
The third was the role of government. On the role of government, our general thinking now is it’s early days, not just for Finance’s consultation papers, the formal paper came out last month, but it’s also early days in other jurisdictions.
While other countries have been talking about open banking for some time, it has only gone live in one country, in the U.K. It has only been live for just about a year now. As one of the witnesses before me said, it’s early days for the U.K. in assessing both unintended consequences as well as consumer interest.
In other jurisdictions, not everything is nailed down. There may be regulations, but they haven’t been put into effect. I’d like to take a moment to say that in terms of the role of government — we need to talk about that at greater length — but of the jurisdictions looking at this, we don’t see purely government driven or purely market driven. It’s a hybrid. It has to be. A lot of these issues leverage off existing regulatory structures — privacy commissioners, easy example in Canada.
Regarding the role of government, it’s really important to think about all the models out there, taking into account that certain things won’t be apparent right now, because it’s early days, and then apply the Canadian lens. Every jurisdiction’s lens is unique. And when you look at policy drivers in other jurisdictions, again quite different from what’s happening in Canada.
How we approached that question in Finance’s document was to go through the risks, talk about mitigation strategies from an industry perspective, as well as a government perspective, to frame out what we think Finance Canada and other officials — policymakers, regulators — need to be thinking about over the next few months.
Senator Wetston: We are well informed about the strengths and weaknesses of our banking system. We rarely ever acknowledge the weaknesses of our banking system because we like to think the financial crisis was not as extreme in Canada. We just had the 10-year anniversary of the financial crisis. I understand what you are saying about how you view the positive aspects of this and the innovation which would flow from it, and I know you have mentioned the risks. What do you think the risks are to the banking system, as we know it today from open banking? I wish there was another term for open banking. In this committee we talked about shadow banking, and that involves market-based financing. What’s open banking going to evolve to?
How do you see the structure of the banking system being affected by a progressive system of open banking in Canada with the right scope and standards and commercial entities under a regulatory framework that is well understood and working to protect investors or consumers in Canada?
Ms. Mandal: It’s a great question. The challenge I have — and this goes to some of the points raised by prior witnesses today and during the other two meetings, raised — is that it is hard to predict what the system will look like without knowing the regulatory framework.
We have commonality across all the stakeholders I have heard from, that mitigating, addressing, as much as we can, the risks around privacy, financial crime and, fundamentally, the consumer, the risks around that are preconditions for success.
Once you have said that these are the preconditions for success, and then you start looking — and that’s a lot of people’s tasks, including those in this room — over the next few months to start thinking about what changes are needed to our regulatory framework.
In some instances, we think it could help. We’re expecting national cybersecurity legislation this year, and we’d like to see how that intersects. We are expecting ISED to come out with its report on the digital data-driven economy consultations. It would be helpful to know what their thinking is more broadly, from a digital economy perspective, so we can try to link that up to influence our thinking on open banking.
What I’m trying to say is if you get a chance to look at our submission, there are a lot of open questions. They are deeply interesting questions around federal-province-territorial dynamics. There are big questions on how to regulate entities that are not located in the country. There are questions about how far the data flow goes. It’s tough for me to predict what the world looks like five years from now until we, as a country, get some threshold questions nailed down.
Senator Wetston: Thank you.
Senator Klyne: Thank you to our witnesses on the panel. You probably heard my preamble that my understanding is that this is to encourage a level playing field among the financial institutions, and it just confuses me a bit that the banks are saying, “Yes, let’s go; let’s compete for this, and so here is data for our customers, and through fintechs, we’ll get other opportunities.”
So obviously fintechs and third party providers have figured out how to monetize transactions here. I can’t see any banks wanting to give up market share, and I can see every bank wanting to grow market share through this. There will probably be some incentivizing to keep customers because you don’t want to lose the ones you already have. There will be some incentive of breaks on pricing to grow market share and wanting to take that away from other banks.
At the end of the day, I would assume the fintechs and the third party providers have made out okay on this, but there has to be a reckoning on the incentives you paid to keep and grow market share, and some day that all has to be accounted for and settled in, and maybe the markets will settle back.
At the end of the day, is this all about, from a bank’s perspective, that this is good for our customers? Is there something that keeps you up at night as representing the bankers?
Ms. Mandal: First, to your question about the customer, Ms. Mason and I have been at this table as recently as last year talking about the changes to the Bank Act in Bill C-74. We talked about how we really feel innovation is not just what customers want anymore, but it’s almost what they expect because they are experiencing it in other areas of their life. So to your question, is it for our customers, yes. To the points made by earlier witnesses about these 4 million accounts that are relying on screen scraping, well, if that is the signal of customer needs then that’s something we as the banking industry have to take seriously.
My second point relates to the fintech TPP question. To be absolutely clear, under open banking model banks would be TPPs themselves. As third-party providers, the data is not just flowing from banks to fintechs. It’s going across FIs. That’s really the thinking here. As a word, “bank” is important here because the picture becomes more complicated if you’re looking at your holistic financial picture across your bank, your credit union and your securities dealer. That was the earlier reference to federal-provincial dynamics in Canada. Putting that aside, the banks themselves would be sharing data with each other. So it is not quite that one-way flow.
The related point to what I just said is we talk a little bit just because it’s such early days. We weren’t really in a position to deep dive on this, but we do talk a bit about how only the customer consents, obviously. There should be thought given to seeing if the data can flow both ways.
In other words, if I consent to bank A sharing my data with fintech A, we’d like to see a mechanism or at least a consideration of a mechanism through which the fintech — again, if I consent — could send that information back. That notion of data reciprocity would be really interesting. The challenge, of course, is who regulates fintech? Does federal finance have the authority? It does not under our current model.
Ms. Mason: When we look at it from a point of view of risks need to be addressed for success to happen, we’re talking about highly sensitive personal and confidential information that our system has treated well. If you’re looking to expand parties who would have access to that data, you must respect the foundations of where that trust was built, which is on ensuring the confidentiality of that data, ensuring that customers provide informed consent and know how their data is being used, and ensuring adequate protection of that data. And that for us, for example, PIPEDA, from a privacy perspective, has all the right provisions to address that. It’s principle based, comprehensive and technology neutral. But it’s a question of a number of the other parties haven’t dealt with sensitive information the way banks have, which have a long history of securely handling sensitive information. It’s a case of, if other parties are going to now have access to this data, ensuring they treat it in an appropriate fashion. So it’s looking at standards in cybersecurity, making sure they have comprehensive controls in the same way that financial institutions currently have in place.
Senator Klyne: When I think about banks and the banking side of things, it used to be transactional but they have decided if all things are priced equally the single grain of rice that could tip the scales would be relationships. The banks focus on relationships and wanting to keep the clients they have. This is going to become pretty much transactional quickly. That’s a bit of a disruptor for the model that banks have currently been investing a lot of time with their client service representatives and dealing with clients. Do you see that being an issue in terms of relationships that have been built with customers going by the wayside?
Ms. Mandal: That’s a really interesting question. I had the privilege of being here when you were speaking with the prior witnesses. I heard that and I hadn’t thought about it quite from that angle. It’s absolutely correct with the automation of what traditionally would have been a banker’s role. The move has been to focus on the relationship. The classic example a lot of people use is who holds your hand when you’re having a panic about your financial status. It would be nice if it was a human being.
I would think, given that the overall atmosphere of digital, automation, applications of artificial intelligence, all of that in some ways still underscores the need for humans. What shifts then is what those humans are doing. We’ve already seen it and would open banking be like the model of everyone moving to their apps and looking at their phones. I hope not. We are doing that all the time now with everything else. So I would hope that the relationship factor stays and it’s a really interesting area to explore. It would be kind of looking at the skill sets and the value proposition that human bankers bring versus really nifty apps.
The Chair: Thank you very much.
Senator M. Deacon: Thank you very much for being here. I have three questions but I want to get your response on the estimate you heard that 20 per cent to 40 per cent of the revenue currently of our chartered banks is at risk of being poached by fintechs based on trends and what’s happening globally. What do you think of that estimate as a starting point?
Ms. Mandal: In a word, I was shocked to hear that. I don’t know where the statistic comes from. I didn’t catch the full context of what Mr. Vokes said. Open banking is live in only one jurisdiction. It has been for just over a year. I don’t know if those numbers are extrapolating out. I found that rather confusing. As I said, we are here on behalf of the Canadian Bankers Association and we have put in a submission that supports, provided all the risks are sufficiently addressed, that believes that open banking has merit. I’m a bit perplexed why our member banks would believe there are benefits if it could pose such a revenue threat.
Senator C. Deacon: The general shift globally away from traditional banks in a lot of economies is maybe where that was coming from.
You’re not seeing that as a big threat right now, even with the fact that your members operate in a lot of jurisdictions. That’s interesting from my standpoint.
What about the risk of government not mandating the implementation of strong open banking standards or standards related to these new emerging fintech institutions when we’ve got so many Canadians already playing in that space and much of it is unregulated? If government isn’t moving quickly to that, what do you see as being those risks?
Ms. Mandal: By playing in the unregulated space, do you mean the screen scraping? In our submission we wanted to frame out these threshold questions or key considerations. You answer one and that leads you down the path to another one. It is a kind of fun little game.
Absolutely there is concern. The screen scraping issue is not unknown to the Canadian banks and it is a concern, particularly from the cybersecurity perspective. When we looked at these risks we mapped out you go one way or another. I suppose this idea has been put on the table that the only way to effectively combat screen scraping is through the government immediately mandating open banking. I don’t think we would fully agree with that. There are other models, perhaps a more industry-driven model that also exists to combat the exact same issue of screen scraping.
The example I’ll give is the financial data exchange out of the U.S. It’s very new. I believe it was officially launched in October of last year. It’s a group of banks, data aggregators and fintechs with a common API standard that have started to work together, using the API and relying on the API so it mitigates or eliminates the need or desire for screen scraping, ultimately to meet customer needs.
Senator C. Deacon: Thank you.
Senator Dagenais: Banks tend to do everything they can to write conditions into their contracts to prevent customers from shopping around and switching banking institutions whenever another bank offers something more appealing. In the open banking system, what will the banks agree to share amongst themselves, and what will they get in return? Obviously, nothing comes for free. They’ll agree to share certain things, but only at a price.
Ms. Mandal: Thank you for the question.
In the context of the data going from the primary bank to a third-party service provide. First of all, the way it’s being envisioned, the linchpin is the consumer’s choice and consent. This goes back to a comment I made earlier: it’s extremely important to maintain the relationship with the customer to respond to their needs.
In terms of the cost of the service, the third-party service provider would be providing some interesting, innovative product or service. For example, something that analyzes your spending patterns for three years, tells you where and how much you need to cut back to buy a house and tells you what your debt minimum or maximum down payment should be. And it does all that on an app on your phone within minutes once you have consented to sharing the data.
That product or service, in any other corporation or context, when a corporation sells a product or service, there is a cost involved. That would be where the customer is just paying for that.
Senator Dagenais: One last question. Several witnesses mentioned countries like Australia and the United Kingdom. What I’m wondering is, why don’t our neighbours to the south seem to be interested in these systems? I’m not saying they don’t have any, but they don’t seem to be interested. God knows there are plenty of banks in the United States, although they don’t have the same banking system as us, but why are the Americans not as interested in this?
Ms. Mandal: We spent a little bit of time and touched on this earlier. Policy drivers in other jurisdictions have been different. When you look at the U.K. and the EU, the financial crisis resulted in quite the impact on their banking system. There were bank failures. The investigation of open banking was spurred there by that.
In Japan and in the EU it was felt there wasn’t enough movement to digital channels. Customers were not relying on that enough and there were concerns about debit transactions, and how that works in the modernization of their payment system.
In Australia, as I’m sure you know, there has been a lot of public and regulatory political scrutiny of Australian banks for some time now. There is some of that sentiment, and a little bit of Australia following in the U.K.’s footprints.
The U.S. is its own jurisdiction, and they have their own context. As I mentioned in the financial data exchange, that became an industry effort to combat screen scraping. There was screen scraping in the U.K., the EU, Canada and the U.S. You see the regulators and policy makers not being as interested.
So it’s interesting that the U.S. Treasury released a report on open banking in summer/fall of last year. The report says we are going to watch closely what happens in the U.K., but we are not the U.K. and we have a very different system. They have a large number of fintechs and a large number of banks. We’re not going to go and hammer down regulation, but here are some things to consider. They had some things they wanted the consumer protection authorities in the U.S. to consider.
I think every jurisdiction looks at it from its own perspective and what makes sense given its financial services landscape and also its regulatory framework. I’m not deeply familiar with the U.S. regulatory framework for banking, but I understand it would make it quite challenging to mandate access and standards across the board.
Senator C. Deacon: I want to keep digging into one element. I see open banking about my rights as a customer to share my banking data with organizations that I choose according to reasonable, responsible standards. Is that a fair summary from your standpoint?
Ms. Mandal: That the customer has the right to control their data and who it is shared with?
Senator C. Deacon: So that’s really what this is about?
Ms. Mandal: I would go a step further and say it’s the desire to have that done through secure methods.
Senator C. Deacon: Absolutely, through responsible standards. I think I said that.
Ms. Mandal: Yes, you did.
Senator C. Deacon: And if I didn’t, I meant to. It’s been a long couple of days, and I could well have missed it.
That’s the way I look at this. And I look at the fact that I’m doing that different ways, other than through the term of open banking, right now. That is increasing and the options for me to do that are growing within Canada and globally as are the tools I can use. As Canadians aren’t aware of their risks as it relates to social media and the amount of data that’s being gathered every minute from their actions, I don’t think they are aware of these risks, either.
So I go back to the question of urgency because I’m getting a sense from you of a very methodical process that needs to be followed, maybe at Senate pace or slower. I’m feeling differently about this. I’m seeing young people who can create tremendous enterprises and help us to really grow our business and create export opportunities that are significant in digital and financial technology businesses. But perhaps we’re not doing it here or are not attracting others to build their businesses here.
I’m seeing it with a bit more urgency. Do you see that? Between us there is this sort of very different perspective on a sense of timing, so I’d like to see what your response to that is.
Ms. Mandal: I’ll take a couple of those and then Ms. Mason can dig deep on the cyber points.
It’s understood that screen scraping represents cyber risks. That’s primarily it. The 10 people in the basement are the concern in this honey pot of data. There are still concerns around cyber risk in the context of open banking, which Ms. Mason will talk a bit more about.
Regarding the other point you made on this idea, I get very concerned — and maybe I’m too immersed in my world — about this idea that Canada is maybe a bit behind in innovation. I have heard that side of the story but I have also heard some really positive things and I see some positive things happening to promote and foster innovation in Canada. I pulled out three that jumped out to me.
I mentioned earlier that Ms. Mason and I were here on Bill C-74, the fintech powers in the Bank Act and that went through and from our perspective, modernized the regulatory structure such that banks can now partner more with fintechs and lend their capital to firms that traditionally might not have been considered fully financial services firms.
The other aspect of innovation that is live right now and midstream is payments modernization. The goals are the same there, to bring new entrants into the system. There are very similar considerations and concerns with payments modernization, which is to ensure that new entrants might be under-regulated compared to the banks and are less sophisticated in managing risk and need to be overseen. We’re waiting to see Finance Canada’s proposed framework for the oversight of those entities.
I would take it from employment perspective, and looking at innovation from that lens because I can tell you I was very surprised when I had heard the statistics. In 2017, Toronto had more jobs than San Francisco in the tech space. And 11.2 per cent of employees and employers in Ottawa are tech workers. We have Montreal specializing in AI and Vancouver getting the Amazon hub. From different angles, the innovation picture is not that bleak for Canada.
Earlier you talked about Wealthsimple and Shopify and some amazing success stories. It’s always a balance. If we sound cautionary, it is because we are. It is because the risks on the other side, that Ms. Mason will speak to, scare us.
Senator C. Deacon: I’m cautionary, too, in terms of making sure that the businesses are regulated and every financial technology company that I have talked to is cautionary. They want to see regulations that protect everyone and keep the bad actors out as best as possible. So I don’t think it is about that. It’s about the pace at which we move on it; that is my point.
Ms. Mason: My concern is when you hear a previous witness saying, “We don’t always get it right the first time.” This is your highly sensitive financial data, so we hope the threshold is a little better than we might not get it right to first time.
When we talk about privacy, security and cybersecurity, we’re looking for responsible players and for accountability. If data is going to transfer from one organization to another, the organization receiving that data must be accountable and must show they can meet the requirements under PIPEDA on the safety and security and ensure that they’re managing things in an appropriate manner.
Senator C. Deacon: To keep diving in on that, I couldn’t agree with you more. But you can iterate your way into it. You can limit how much data can be shared at a certain period of time and in a certain way. You can put constraints on the organizations. That doesn’t mean you don’t start to move quickly and keep improving your standards before you expand too far.
I’m pushing you on the urgency question. What’s preventing you, if you could manage those risks, and slowly build out?
Ms. Mandal: If you said tomorrow that risks were all managed, then tomorrow would be the fine time to start.
Senator C. Deacon: If you could pull back on which ones you’re trying to manage at first, that’s the way you build a technology company. You start with your first version and keep getting better, as it relates to all elements of the business. You manage the risks you take on. You can’t start at the top level equivalent to Canadian banks so you scale back as to what data you grab and what you allow to be shared under your rules. You build out from there based on experience. Is that type of a model something that might placate concerns to a degree?
Ms. Mandal: I think what you’re talking about is tiered sensitivity data. I’m struggling a bit to think of what would be the least sensitive transactional data for an individual person in a manner that would deliver value. So when we talk about the use cases or open banking, you do need a little bit of meat, at least the client’s transactional history, to provide the full financial picture. So I struggle to think what’s the least sensitive data.
I take the point about reducing scope and maybe a more phased approach seems to be the suggestion. I struggle to think on what that data would look like.
Ms. Mason: I agree that it would be challenging to find a set of data that wouldn’t be sensitive if it’s going to be of value.
The Chair: Interesting.
Senator Wetston: I’m not really expecting much of a comment on this, but I want to raise it so that we can think about it as we move towards a report.
I’ve looked at the Australian situation. I think they’ve just introduced legislation. Their approach is completely different. The reason I’m mentioning it is because we recognize that this is an area that involves innovation, competition and consumer interests. So the chief regulator — I’ll use that language — in Australia is not going to be the prudential regulator or the securities regulator. It’s going to be driven by the competition authority so that ACCC will be responsible for the framework in which open banking develops in Australia, which I find quite interesting because what they believe in is competition, innovation and consumer protection.
And so I am just mentioning that, chair, as we might look at that from the point of view as we move forward, since we have a fragmented regulatory system in Canada, we can all agree the competition authority that has federal authority across the country. Do you have any comments on the Australian model?
Ms. Mandal: Nothing in detail. As you know, it hasn’t been implemented. The timeline is July, although that might get pushed a bit. It is interesting because Australia, I believe, is the only jurisdiction exploring open banking that has talked about it as being broader than open banking data. Their intent is to move that into energy and telecom and in our submission, we asked the government to also think about that. Again, it is early days, but as they are thinking about open banking, to think more broadly about other data sets.
It’s interesting having the OSC present earlier today and I don’t want to reignite the fed-prov conversation, but even before you get to the energy telecom in Canada, it’s getting to wealth management, data held by a wealth management firm, other subsets of the financial services sector. So I think the Australian approach raises eyebrows. They’ve chosen a different type of regulator but if you think about it from the lens of what they consider broader customer data, it would make sense they would have to someone in play that’s not as bank-focused.
Senator Wetston: My only comment is that it would be helpful if we could look at that model since it’s very public — the report is out and I think the legislation is there — because it raises this important question of innovation and consumer protection. That was correct, it involves telecom and energy and they see the picture of being able to advance consumer protection in all aspects but at the same time, have a model in which the competition authority will be responsible for overseeing that framework.
I mentioned it because I think it’s worthwhile to look at although they have done a slightly better job in ensuring they have national systems in spite of the fact they have a number of states as well.
The Chair: We know your point of view. I can share that we are hopeful that the week of March 20, we will hear from the Australians. And tomorrow morning we’re hearing from the U.K., so I think it will help in our deliberations.
Let me say that we always benefit when we hear from the Canadian Bankers Association. You are always extraordinarily well prepared, articulate and have a deep knowledge of the issues. We rely on you, as you know, and we appreciate that you’re here again today to help us with our deliberation. Thanks so much and we look forward to another time when we’ll hear from you on issues.
Senators, that’s it is for today. We’ll see you in the morning.