Consumer-directed finance is already here, committee finds

Although open banking isn't official in Canada, the reality is that data sharing by customers is already happening in the financial sector in a significant way

Consumer-directed finance is already here, committee finds

One year ago, the Advisory Committee on Open Banking was given a mandate to assess the merits of open banking and determine whether it could deliver benefits to Canadians. The committee has released its report, which revealed that not only were there benefits for Canadians, but that Canadians were already participating in open banking, albeit informally.

The Committee received more than a hundred written submissions responding to the consultation paper, “A Review into the Merits of Open Banking,” which was released in January 2019 and which posed three questions regarding open banking: are there meaningful benefits for Canadians, how should risks be mitigated, and what is an appropriate role/course of action for government?

Based on those submissions and conversations with stakeholders, the Committee recommends that the Government move forward to enable what they now refer to as ‘consumer-directed finance’, using these principles:

  • Focus on enabling consumer choice and meaningful control
  • Give consumers confidence and engender trust with a system that is secure; that respects and enhances privacy; and be an improvement over the status quo, with a clear accountability mechanism
  • Innovation should guide the development of consumer-directed finance

Consumer-driven finance allows a consumer to give instructions to a financial institution to share their transaction information with a third party of their choosing, sometimes even authorizing third parties to initiate payments on their behalf. In short, it places consumers in control of their information.

While assessments of risks and responsibilities are a good place to start in theory, consumers are already miles ahead.

“The market is currently delivering services that leverage and utilize the data that Canadians themselves produce. During consultations, the Committee received information from stakeholders indicating that some 3.5 to 4 million Canadians use data-driven services that offer them convenient ways to manage their finances and their businesses, most often through a process called screen-scraping,” the report reads.

Consumer expectations have expanded, and they now want to be able to control their own data as well as leverage that data to their advantage—all at their convenience. Canada may not be leading the way in the consumer-driven space now, but given the strength and stability of Canada’s financial sector and the ability to attract top innovators and talent, the country has the opportunity to set the pace going forward.

“[Consumer-driven finance] is not merely a natural progression in the provision of financial services, it is a fundamental part of a much broader transformation,” the report reads. “Through this lens, it has an integral role to play not only in ensuring the sector's continued global competitiveness but also in strengthening Canada's innovation agenda and supporting Canada's successful transition to a data-driven economy.”

Financial health is a constant concern for Canadians, and the report determined that Canadians could benefit from having tools that would enable them to “better and more efficiently manage their finances.” Consumers are frustrated regarding clarity around the use and protection of their information, and their growing discontent has led to the development of applications that consumers are using to take their financial transaction data into their own hands. These applications, however, could be inefficient and present a real security challenge.

Some Canadians are already accessing these tools, but one problem with letting consumers lead the way is that data security risks are elevated because there currently isn’t a structured framework for consumer-directed finance. The Committee makes it clear that privacy and security should not stifle innovation but should both be viewed as top priorities moving forward. A framework could require participants follow certain technology system requirements, thereby ensuring safer data sharing.

“While consumer demand for data-driven financial services is increasing, liability and uncertainty are preventing these applications from growing in a way that could deliver greater benefits to Canadian consumers, innovators, the financial services sector and the economy more broadly,” the report reads.

The report finds that the interest of the consumer must be the “primary guide” directing the development of any framework, with industry and government moving forward together in order to establish consumer confidence and educate the consumer on their benefits, risks, rights and responsibilities.

Canada could benefit from the fits and starts of other jurisdictions, but it also needs to move quickly lest it be left behind. So how to move forward?

The committee recommends the Government establish a process that includes: setting a clear timeline for moving forward, prioritizing consumer interests and development of an ecosystem that’s accessible to a wide variety of stakeholders; enabling enhanced data choice and control for Canadians in consultation with regulators across sectors and in alignment with other related initiatives; learning from the experience of existing consumer-directed finance models globally; and developing a policy framework in collaboration with stakeholders.

“There is no going back. A significant amount of data sharing is already undertaken in the market through inefficient technological workarounds that present liability and security risks for all,” the report reads.

The second phase of consultations is set to begin this spring and will report findings on data security to Finance Minister Bill Morneau later this year.