By Kevin Morris, Strategy and Programs Director, Large Credit Union Coalition (LCUC)
For financial services in Canada, 2019 was an important year, as it featured several major events by the Canadian government to accelerate digitization of services. The first was the launch of the “Merits of Open Banking” consultation by the Department of Finance, and another was the introduction of the “Canadian Digital Charter.” These two initiatives will introduce new societal norms for Canadians and operating norms for the financial institutions that serve them. As an industry, we are just beginning to decipher how regulations from these new initiatives will affect business models, consumer interactions and IT infrastructure. The absorption and implementation of the Digital Charter and Open Banking will take years, but many of the challenges that have been initially identified could simply be resolved with a ubiquitous digital ID system in place in Canada.
Let’s frame the Digital Charter and Open Banking with their intended consumer goals: The Charter intends to modernize services provision to Canadians across all industries in a way that protects their privacy, their data and the data about them. Open Banking intends to improve financial services competition and decision making, by mandating that financial institutions share their client’s data with other financial service providers if the client consents for that data to be shared. The most commonly identified use case is viewing all of one’s finances from all of their accounts, securely (via API connections), and on one app. This framework creates a need for financial institutions to understand the ownership and obligations that they have with handling their client’s data. Open banking has the potential to rapidly accelerate the digitization of financial services, and, consequently, create innovative solutions to existing banking challenges often faced by consumers.
However, there’s a problem: sharing financial data is hard.
- Credit Unions, Banks, and other financial service providers are strictly regulated (and rightfully so), to protect our consumer data. Money Laundering is not an often discussed dinner table topic in Canada because our industry and the government do quite a good job in ensuring that Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations are enforced. Canadians are not receiving cold-calls from private financiers or advertising firms based on their banking transaction histories because financial institutions are not allowed to share that data.
- Open Banking can be complex with multiple steps. Because of such rules that protect consumer rights, Financial Institutions need to first verify and authenticate who the person is before they will allow data to be shared. There needs to be a handshake between providers that says a person is who they claim to be, even if they have control of both of their accounts.
- All sources must be verified. Aside from making sure the data fields in one financial service provider’s software/database correctly match with the software/database of a different financial service provider, they also need to make sure that the quality and rigour of verification of that person is compatible.
Without a digital ID system in place to verify individuals that would like to connect their various accounts through Open Banking, financial service providers will have to implement additional processes to verify and authenticate clients. In a few ways, this undermines the goals of Open Banking.
“Open Banking regulation will still work in Canada without digital ID, but the extra work required, as well as likely inconveniences, will make it more challenging for the goals of Open Banking to be achieved.”– Kevin Morris
- A decreased pace of innovation for financial services in Canada. The financial service provider’s additional processes, namely ensuring AML and KYC compliance, would increase overhead at innovative fintechs, reducing their ability to innovate.
- Reduced consumer adoption. Financial service providers may put the onus on the consumer to re-do their AML/KYC registration at each financial service provider they work with. This would increase transaction friction and lower consumer convenience.
- Increase the complexity of verification processes for connections between different financial service providers. Without a common understanding of digital ID systems between providers, there could be multiple initiatives to share a digital ID. Consequently, small financial institutions and fintechs may not have the resources to (while large banks may not have the desire to) configure their systems for multiple digital ID standards.
A common digital ID system that allows for verification of an individual across financial service providers is critical to the success of the goals of Open Banking in Canada. Open Banking regulation will still work in Canada without digital ID, but the extra work required, as well as likely inconveniences, will make it more challenging for the goals of Open Banking to be achieved. This is also why DIACC’s public-private partnership efforts with the creation of the Pan-Canadian Trust Framework for digital ID is so important. With the introduction of a common set of standards for how digital ID systems should interface with one another, financial service providers in Canada will have a much easier time connecting client data securely and with regulatory compliance. With the issues of authentication and verification out of the picture, the innovative services that Open Banking can provide will lead to a better quality of life for Canadians.
To learn more about digital ID’s role in the financial services sector, read our mini white paper, DIACC Industry Insights: Digital ID in Financial Services.