Challenges and opportunities presented by Open Banking in Canada - Adam Felesky

Notes for a speech by Adam Felesky, Chief Executive Officer of Portag3 Ventures and Chairman of KOHO, to the Open Banking Expo conference “Open Banking: A Canadian Lens”.

September 18, 2019
Toronto, Ontario

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Good morning.

Today, I am not here to tell you about the merits of Open Banking. I believe this topic has been well covered including over one hundred responses to the recent Department of Finance Consultation Paper this past Spring.

While there are many issues and concerns raised by many different stakeholders relating to Open Baking, the consensus from a myriad of private discussions I have had is now about the “when” and “how” of Open Banking – not about the “if” and “why.”

In that regard, I am optimistic. Looking back to a year ago from where we are today, there is no doubt progress has been made.

Our federal government deserves credit for bringing momentum to this debate. The work of the Competition Bureau, the Bank of Canada, the Department of Finance, the Ministry of Innovation, Science and Economic Development, the Senate and the Privacy Commissioner have been essential players in giving a voice to this important initiative.

And there is certainly a lot more work to be done! In this vane, I am here today to advocate why we need to move now and with a government-led approach.

Let me first position that Open Banking is simply a practical expression of a broader consumer data rights framework. This framework is essential in a digital economy. Without it, the amount of personal data one has can define their competitive moat, or worse – for example, the case of Facebook-Cambridge Analytica – can even shape political outcomes.

To address the negative consequences of data monopolies in a digital economy, we must implement a consumer data right which, at its core, ensures access, portability and interoperability.

As such, we believe that Minister Bains’ proposed Digital Charter from last spring was a positive first step. However, until such initiatives have legislative teeth, we still risk losing the trust of consumers in today’s construct.

And we fundamentally believe that consumer trust is our license to innovate.

We can see that this delicate commodity of trust is already waning.

BMO reported this past spring the while the majority of Canadian consumers trust their banks to protect their savings, there is considerably less trust (less than 50%) in them doing what’s in their best interest.

With more access and transparency comes competition through innovation. We believe this is what preserves trust and allows us to compete globally. And, importantly, it protects us – both incumbents and disrupters – from a regulatory overreaction by government in the event of a major breach. An Open Data Framework is therefore critical for our future economy.

The global movement around a framework for a consumer data right broadly is gaining momentum. The U.K., the pioneer in Open Banking, just established the Open Finance Advisory Committee to see how they expand their efforts into pensions, wealth management, insurance and mortgages. They are also studying the merits of the Open Banking framework now for their telecommunication and energy sectors. The U.K. was also the sponsor of the now-famous Furman Report on creating standards and data protocols around access for Big Tech platforms.

Australia is taking advantage of the learnings from the U.K. and has started with a Consumer Data Right more broadly – but using Open Banking as their first practical application. Again, telecom and energy are on their roadmap for what to tackle next.

In the U.S., we expect a similar report to Furman’s from the Department of Justice Antitrust Division in the coming months.

Why is this important? Because while we continue debate the “how” of Open Banking here in Canada, others are working to establish a broader consumer data framework to preserve consumer trust and promote competition through innovation, with the objective of harvesting the fruits of an open digital economy to all stakeholders.

Case in point: there are now 41 Fintech Unicorns globally (companies valued at over a billion dollars), six of which are in Europe and one in Australia.

None are in Canada.

I would now like to further support my contention that the “when” is now by debunking two common myths.

First, that Open Banking in the U.K. has been a failure because of low adoption rates.

While Open Banking use cases aren’t mainstream yet, the progress and traction are undeniable. API volume usage in the U.K. jumped from three-million calls in July 2018 to 81 million in July 2019.

297 third party providers have applied for Open Banking; 103 have been accredited and 67 are in production.

And in maybe strongest sign of early success, in addition to the nine banks required to implement the framework by the CMA, an additional 75 have voluntarily signed up to Open Banking.

Second, that there aren’t a lot of cases showing a need in Canada for Open Banking.

A leading Canadian aggregator has seen its “data request pulls” increased to over one million a month – a ten-fold increase from a year ago.

And importantly – most of this activity is being done via “screen scraping,” which is far less secure than in an Open Banking framework. Canadian are essentially hacking their way to Open Banking as we speak!

For even further validation that the time is now, several of the Big 5 banks are now allowing a certain segment of their customers to aggregate their accounts on their platforms (but importantly not ours at KOHO), which obviously points to consumer demand and, arguably, anticompetitive behavior.

I would now like to focus my remaining remarks on the “how”.

Essentially, the debate today from our perspective is about whether this is a market-led solution versus a government-led one.

If the latter then who is the “sponsor” and who is the “regulator”?

To characterize this debate as so black and white isn’t completely fair – there are many other issues to consider from FPT (Federal-Provincial Territorial) issues to the crossover and intersection with the Payment Modernization project.

The proponents of a market led solution would argue that market participants have a strong history of acting proactively and collectively to meet an objective of the government without enacting legislation or introducing regulation.

Many would point to Interac as a good example. Indeed, on many measures, Interac has been a tremendous success. But their involvement with the implementation of the Payment Modernization project and continued delays shows how difficult a dual mandate and government partnership can be.

The other strong point on this side of the debate is that it could lead to a prompter solution, but with the caveat above.

Agreeing to a common API protocol should be achievable, especially given that many of the Big 5 already operate in markets that already have standard API requirements.

The last important argument from this side is that a marked-based solution allows the banks to decide who gets to plug into their platforms and access their consumer data, which protects their customers and thereby reduces – or at least minimizes – their liability in the event of a security failure.

Those on the other side of the argument (including us), would argue that in an oligopoly such as this – which, by the way, has been trending to further concentration – the government must play a leading role.

Existing market participants cannot choose through bilaterals who is credible and who is not.

In our opinion, this is anticompetitive and contrary to an open digital framework.

A new regulatory body must set standards, credentials for accredited participants and a liability model that protects the entire framework from a breach (think CDIC for data).

A government body must also set the standards of the framework itself – such as the API protocols, what information must be available and in what format – and let’s not forget deadlines!

There must be uniformity within the infrastructure – otherwise the merits of Open Banking will not be realized. We believe this approach addresses the “market solution” camp’s concerns while at the same time promoting access and creating a level playing field.

Timing could be the one shortcoming of this approach. In that sense, we must advocate for prompt government action.

Assuming a government-led approach to Open Banking is the conclusion arrived at, we would suggest the following next steps:

  1. Publish the Open Banking Advisory Committee Report as soon as possible;
  2. Establish an Open Banking Implementation Committee including both government and market participants;
  3. Government should meet with market participants to find consensus on standards and accreditation ASAP;
  4. Ensure Open Banking is a consideration with the modernization of upcoming PIPEDA;
  5. The Bank of Canada should agree and state that they are prepared to take on the regulatory function of governing Open Banking participants, which has synergies with their new oversight of the PSP designation as it relates to payments.;
  6. Competition Bureau powers must be broadened – this was Principle #10 of Minister Bains’ charter – advocating “Strong Enforcement”;
  7. Engage other government bodies such as the FCAC to see what role they can play to support the Open Banking initiative and data right more broadly;
  8. Consider whether legislation of a stand-alone consumer data right is not more optimal and less complicated than from pure financial regulation and Open Banking specifically.

In conclusion, as I said at the outset, it does feel like progress is being made. However, we are clearly behind many other jurisdictions and need to think more broadly about how we protect consumer trust in a new digital economy, how we promote innovative and competition, and how we can act collectively to implement an open data framework as soon as possible.

The time is now, and we must focus on the “how”.

About Portag3 Ventures

Portag3 Ventures is an early-stage investor supporting the world's most innovative financial technology companies. Its team has deep entrepreneurial and industry experience and provides its founders with full access to the firm’s partners, in-house experts, and broader global ecosystem. Portag3 — alongside Diagram Ventures, a fintech venture builder — is a part of the venture capital strategy of Sagard Holdings, a multi-strategy alternative investment platform. Portag3 has a presence in Toronto, Montreal, New York, Europe and Southeast Asia.

For more information, contact: Adam Daifallah, 514-316-7089, media@p3vc.com.