Open banking would help recovery.
Times of crisis confront societies with challenges — in the current crisis, increased unemployment, strained public finances and severe social hardship. But they can also generate opportunities for improvement through policy innovation.
Many of us who are engaged in the discussions around the future of Canadian banking believe such an opportunity is being missed. The planned second phase of consultations by the federal government’s Advisory Committee on Open Banking, which was to look into the merits of open banking and the related data security risks, has now been postponed.
Before COVID-19, these reforms had yet to catch the imagination of Canadian political leaders in the same way they had in the U.K. and Australia, where regulatory regimes now give consumers much more control over their personal financial data. Canada was already late to the open banking party. Now we are even further behind — though the reasons to act quickly have only become more compelling since the onset of the pandemic.
In case anyone had still been in doubt, we are now clearly living in a fully digital economy. In just two months, we have seen almost every sector of our economy become more digitized. Canadians were active users of digital banking channels before the pandemic struck but now lockdown and self- isolation are forcing anyone and everyone online. Payments Canada recently reported that 62 per cent of Canadians are using less cash now than they did pre- COVID, while Paypal says its fastest- growing user base is the 50+ demographic.
At the same time, the challenge facing small businesses looking for financing is only worsening. Before the pandemic, banks were only doing a so- so job lending to small businesses. According to the C. D. Howe Institute, Canada lags far behind its OECD peers when it comes to small business loans. We are at or near the back of the pack in both share of total business lending going to small business and small business lending as a percentage of GDP.
Although the federal government and our banks deserve praise for getting critical funding to companies during the pandemic, many small businesses have been left out of relief programs — either because they don’t meet the requirements or because banks are refusing them based on standard pre- pandemic criteria. Part of the reason companies like Amazon and Shopify have gone into small business lending is that they have key data from businesses ( such as cash flow and accounts receivables) that allow them to do it really well. Open banking would unlock this data for small business and let them show it to other potential lenders. We can’t wait for the next pandemic to help out the largest group of employers in Canada.
Another reason to act now is the pandemic itself. Open banking infrastructure and data are helping governments around the world better respond to the crisis. Apart from the many ways fintechs are helping consumers, small business and charities battle the effects of the pandemic, we are seeing promising signs of governments starting to use open banking data to help inform their pandemic responses. The Global Open Finance Centre of Excellence ( GOFCOE) recently launched a program that uses open banking data from fintechs and other organizations to provide the U.K. government with accurate, regularized, near- real- time insights into how the pandemic is affecting the economy. This data will help the government adjust its policies within days instead of weeks.
Our own government should be acting, too. Once Parliament reconvenes it should reform the Personal Information Protection and Electronic Documents Act ( PIPEDA) to include strong data mobility rights for consumers and small businesses. The government should also adopt the recommendations of the Canadian Lenders Association and engage fintechs in the small business lending program. We owe it to the small business owners of the country to use every regulatory tool at our disposal to help them through this difficult time. For its part, the Department of Finance should report, before the next consultation begins, on ways open banking could help manage the next pandemic and how other counties are doing just that.
Canada has long had a reputation for policy innovation. We lost our chance to lead the world into open banking, but we still have time to get caught up and be a leader in the next phase.