On January 31, 2020, the Advisory Committee on Open Banking1 (the “Committee“) released a report on “Consumer-directed finance: the future of financial services” (the “Report“).
The Report was in connection with the Committee's consultation process and recommends the development of a framework for open banking to allow the implementation open banking legislation in Canada.
What is consumer-directed finance?
The Committee introduced the term “consumer-directed finance” as an encompassing concept that includes open banking. Consumer-directed finance allows consumers to more readily and easily share their financial information held by their financial institution with other third parties, ultimately allowing them to access a broader range of financial services. The third parties could include alternative financing sources such as FinTech companies or credit unions.
There are a number of benefits to implementing a technological solution that efficiently allows organizations and consumers to share specific financial data with third parties. For example, individual or small business consumers could access alternative means of financing more easily in a situation where they do not qualify for traditional financing. Ultimately, implementing a consumer-directed finance framework could reduce the friction that consumers currently face in sharing their financial data in order to meet their financial needs.
The Report was produced after consultation by the Committee with a broad range of stakeholders including individual consumers, small businesses, financial institutions, as well as FinTech organizations. These stakeholders agreed that consumer-directed finance could provide consumers with expanded financial tools to meet their financial needs. Further, a consumer-directed finance framework could be implemented through a collaborative approach where the government would serve as a guide and work with industry stakeholders, including FinTechs, with technological expertise.
The Committee consulted a broad range of stakeholders asking three main questions about consumer-directed finance which are discussed below:
- Are there meaningful benefits for Canadians?
- How should risks be mitigated?
- What is an appropriate role/course of action for government?
1. Are there meaningful benefits to Canadians?
The Report concluded that current financial practices suggest that there is a demand in Canada for consumer-directed finance. At present, millions of Canadians are engaging in data-scrapping, a technique that involves a computer program gleaning and importing readable data from another computer program. This current approach to data sharing does not limit the data collected to only what is required, thus creates potential liability as well as unreliability with respect to the data processed.
In addition, the Committee concluded that consumer-directed finance could also benefit underbanked Canadians. Underbanked Canadians are individuals who do not have access or who only have limited access to traditional banking. This could include recent graduates who have high amounts of debt, and concurrently have further financing need or individuals that may require alternative financial tools such as those working as freelancers in the gig economy.
The Committee advised that there is a need for a customer-centric framework. The principles of such a framework should include:
- Consumers may access and control their transaction data and supporting information in a meaningful and useful way.
- Consumers are well informed and may meaningfully consent to and direct different uses of their transaction data and supporting information. The consent process employs clear, plain language and clearly delineates what and how data is being used, by whom and for how long.
- Consumer transaction data and supporting information should be handled securely and in a manner that protects against unauthorized access or use.
- If something goes wrong for consumers, there should be a clear process by which redress and resolution of issues occurs; and which assigns liability to the appropriate party."
Ultimately, implementing such a framework would boost innovation in an already strong and resilient Canadian financial sector.
2. How should risks be mitigated?
The Committee reported that stakeholders shared a concern that consumer-directed finance would raise privacy issues, as shared financial data could become vulnerable to cyberattacks and data breaches. However, the Committee maintained that safety concerns have to be viewed in light of the increased capability to share data and consumers have already begun to fill the void in the financial sector by employing techniques such as data-scrapping. In this context, it is prudent to develop a framework that promotes safer sharing of consumer financial data.
Stakeholders also provided suggestions on how these risks could be addressed. There were calls for adopting an accreditation system that would provide a clear, fair and transparent way for stakeholders to receive authorization to engage in consumer-directed finance. In such an accreditation system, the participants would have to meet certain standards for risk management and could be overseen by a regulator or independent expert. However, stakeholders were clear that this system should not be used as a competitive barrier to entry. Additionally, there were proposals for a means to identify consumers in the process, such as Digital IDs.
The Committee suggested that there was perhaps a greater risk that a robust Canadian financial sector could fall behind in the global economy if a consumer-directed finance framework is not implemented. This could include Canada experiencing a brain-drain of talent. It could also involve globally competitive technology companies filling the financial void in Canada.
3. What is an appropriate role/course of action for the government?
The Committee reported that stakeholders expressed diverse opinions regarding the role of the government in establishing a consumer-directed finance framework. Stakeholders suggested that the government can stimulate the process by setting boundaries to protect consumers and participants yet allow innovation to take place. Additionally, some expressed that the government should set timelines in order to drive the process. There were mixed opinions on the government's exact role in an accreditation system varying from (i) the government should allow stakeholders to establish a self-governance system, to (ii) the government should completely be in charge. Stakeholders generally agreed that the technical infrastructure should not be set by the government but by those industry stakeholders that have expertise in technical standards of how data is permissioned, moved and protected. Overall, the Committee recommended that the government collaborate with industry stakeholders, and ultimately be responsible for setting objectives of the consumer-directed finance framework.
The Committee discussed the role of the government in establishing and propagating a consumer-directed finance model. This would include educating consumers on the benefits and risks, and rights and responsibilities of using such tools. The government would have to focus on education if consumers are to have confidence in the technology and adopt it. The government would also have to ensure that the tools do not unintentionally exclude individuals, such as though in rural communities. Additionally, the government could initiate policy research efforts to assess how international jurisdictions are implementing consumer-directed finance, and suggest ways of adapting these approaches to the unique Canadian context.
Consumer-directed finance has the potential to offer Canadians expanded access to alternative financing by more easily allowing data to flow from financial institutions to third parties. There is a clear desire for this solution as demonstrated by the fact that Canadians are already engaging in consumer-directed finance through data-scrapping. Currently, there are many individuals and businesses that cannot meet their financial needs through traditional means. Given this context, there is a role for the government to come together with stakeholders to implement a framework for consumer-directed finance. Ultimately, this will benefit consumers by improving their options to improve financial health, as well as stakeholders, the financial sector and the Canadian economy which will experience a boost in innovation and productivity.
1. Appointed by Canada's Minister of Finance in 2018.
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