Supporting a competitive and innovative open banking system in Canada
January 18, 2021
On this page:
- Competition principles for open banking
- Pro-competitive open banking regulatory design
- The Competition Bureau (Bureau), as Canada's competition expert, assists government decision makers in promoting competition across the Canadian economy.Footnote 1,Footnote 2 As the Advisory Committee on Open Banking (Advisory Committee) undertakes its second phase of work to consider the implementation of open banking in Canada,Footnote 3 the Bureau is pleased to offer its perspective and analysis of several topics relevant to supporting competitive and innovative open banking regulatory design.
- Open banking enables greater competition in the Canadian financial services industry. Allowing customers to safely and securely share their data between financial institutions makes it easier for customers to switch to the provider or product that best suits their needs. Encouraging this switching behaviour places greater competitive pressure on incumbents, and supports the business models of new and innovative service providers. Additional competition in the Canadian financial services industry will significantly enhance choice and bring about lower prices, increased convenience, and higher levels of innovation in an industry that is of central importance to the Canadian economy.Footnote 4
- In this submission, the Bureau outlines the competitive benefits of open banking, and provides advice on regulatory control and oversight measures designed to ensure the success of Canada's open banking regime. Through this submission, the Bureau advances considerations for pro-competitive regulatory design that will ensure that open banking will effectively promote competition and innovation to the benefit of both businesses and consumers across Canada.
II. Competition principles for open banking
- Effective regulation is crafted with a clear understanding of the policy goals it seeks to achieve. However, beyond such explicit goals, decision makers should also seek to understand the effects that proposed regulation may have more broadly. A key area of importance for all regulators lies in ensuring that regulations support a competitive and innovative Canadian economy.Footnote 5
Open banking supports competition and innovation
- The Canadian financial services industry is characterized by significant barriers to entry.Footnote 6 Barriers to entry act counter to market forces, making it more challenging for businesses to introduce new products, expand their current product offerings, or grow into new territories. Accordingly, barriers to entry lead to marketplaces that are more stagnant: customers have fewer choices, services are more expensive, and businesses have less reason to innovate.Footnote 7
- Open banking will help financial service providers to overcome at least some of these barriers. For example, in its 2017 FinTech Market Study Report, the Bureau recognizes that financial markets are characterized by a general lack of customer switching between providers.Footnote 8 Open banking seeks to promote customer switching by making it easier for customers to compare offers between different services providers and, in the case where a customer decides to switch, to bring their transaction history, and other relevant information, along with them.
- By reducing barriers to entry, open banking can enable greater competitive vibrancy in the Canadian financial services sector.Footnote 9 When switching is easier, customers are more able to take advantage of competitive alternatives, which in turn incentivizes businesses to bring valuable new offers to market.Footnote 10 A greater openness to switching increases competitive vigour between incumbent service providers, and promotes the entry and expansion of new and innovative service providers, allowing customers to benefit from additional options, lower prices, and greater levels of innovation.
- An effective open banking system will deliver important economic benefits to Canada. However, should the system fail to provide workable opportunities for greater competition and innovation, Canadians risk losing the benefits promised by open banking, as well as the progress that technology-enabled new entrants have made in recent years in Canada.Footnote 11
III. Pro-competitive open banking regulatory design
- A successful open banking regime requires careful design and ongoing regulatory support. Accordingly, decision makers must actively ensure that regulatory rules are successful in achieving their intended policy goals. This part of the Bureau's submission identifies areas that should be of particular focus in designing the Canadian open banking system, and provides practical advice on how the rules of that system can best support competition and innovation.
Universal principles of pro-competitive regulatory design
- The Bureau's 2017 FinTech Market Study Report elaborates a number of broad recommendations for decision makers to consider when crafting pro-competitive financial industry regulation.Footnote 12 Six of these recommendations apply directly to the design of a Canadian open banking regime.
- In particular, regulations should be:
- Technology-neutral and device-agnostic: regulation should be sufficiently flexible to accommodate and encourage new and yet-to-be developed technologies.
- Principles-based, rather than prescriptive: regulation should be aimed at achieving a policy goal and, wherever possible, should not specify or endorse any one particular way of meeting that goal.
- Based on the function an entity carries out: service providers should compete on a level playing field. Wherever possible, consumers of any given product should have the same protections regardless of a provider's business model.
- Proportional to risk: regulatory oversight and control should be based on the risk that an activity may bring to the financial system.
- Harmonized across geographical boundaries: harmonization of regulation between jurisdictions makes it easier for firms to enter and operate across borders.
- Reviewed frequently: regulations should be reviewed regularly to ensure that they are achieving their policy goals and responding appropriately to marketplace developments.
- These principles apply in respect of each design element of an open banking system. Decision makers should assess how each regulatory element meets and supports these principles, and adapt such elements if they fail to do so.
- In addition to these general principles for pro-competitive regulatory design, there are five areas of open banking regulation that should be of particular focus for ensuring that Canada's open banking regime supports competition and innovation to the highest degree. To best achieve this goal, specific consideration should be given in the areas of:
- API standard setting;
- accreditation requirements for participation in the open banking system;
- treatment of liability in case of security or privacy breaches;
- ensuring that data access is provided on a reciprocal basis; and
- methods of redress when the system requires regulatory intervention.
API standard setting
- As the Advisory Committee recognizes in its January 2020 report, application programming interfaces (APIs) are the "pipes" that are used to exchange information between financial service providers.Footnote 13 Accordingly, API standards should be designed to consciously promote the very competition that open banking is meant to bring about.
- There are two extreme approaches that can be taken to API standard setting. One approach involves a regulator defining a universal standard for information exchange that would apply to participants in an open banking regime (Common Standard). This is the approach that has been taken in the United KingdomFootnote 14 and Australia.Footnote 15 A second approach allows API standards to vary between service providers (Individual Standard). This has been the approach adopted in JapanFootnote 16 and Europe.Footnote 17
- In analogy with verbal communication, a Common Standard approach requires that each service provider's system speak the same language, whereas an Individual Standard allows each system to speak a unique language. In both cases, the same information is being transmitted but, under an Individual Standard, a degree of translation is required.Footnote 18 In this respect, API standards reinforce the important goals of compatibility and interoperability between systems.
- A Common Standard most directly facilitates entry by non-incumbent, competitive financial services providers (Competitive Providers). Under a Common Standard, a Competitive Provider would need only to develop a solution that accommodates information compliant with the Common Standard. Under an Individual Standard, that same Competitive Provider would have to overcome the complexity of translating information between the sender's API format and the data format used by the Competitive Provider's system. Adding even greater complexity is the fact that these systems would then have to be adapted every time that any service provider changes its API standard. In this sense, a Common Standard reduces the time, cost, effort, and complexity for Competitive Providers, easing their business case to compete.Footnote 19 ,Footnote 20
- Having said that, a Common Standard can negatively impact innovation and dynamic competition when new standards arise. Common Standards are by definition rigid, and deviation from these standards, even in circumstances where there may be value in doing so, could require a number of bi-lateral agreements between financial service providers to act outside of the pre-determined Common Standard.Footnote 21,Footnote 22 This creates a lack of flexibility that can reduce the incentives for service providers to bring about innovative ways of exchanging data, to the detriment of dynamic competition.Footnote 23 ,Footnote 24
- A middle-ground approach may be most favourable in respect of both competition today, and the adaptability of competition in the future. Competition in downstream financial services is most ably facilitated today by a Common Standard that specifies mandatory data fields, performance specifications, and technical documentation.Footnote 25 However, any adoption of Common Standards should be done with flexibility as a key objective to enable new and innovative use cases.Footnote 26 Ultimately, a well-designed system will incentivize rapid entry by Competitive Providers today, while providing sufficient scope for a dynamic competitive process to ensure that a Common Standard system can accommodate valuable innovation in the future.Footnote 27
- Open banking requires service providers to exchange customer financial information, and transmitting such information raises obvious data protection and privacy issues. In order to safeguard this information, it may be necessary for service providers in an open banking system be "accredited"—that is, each service provider may be required to demonstrate that its systems are sufficiently robust, and that it has proper compliance measures in place, to minimize risks associated with data transmission.
- Accreditation typically involves a centralized accreditation body. Such an accreditation body reviews the systems and business processes of a service provider, and approves service providers to participate in the open banking system. The UK, EU,Footnote 28 Japan,Footnote 29 and AustraliaFootnote 30 have all adopted some form of centralized accreditation.Footnote 31
- Accreditation requirements must be carefully tailored to support competition and innovation. Overly strict requirements could limit the ability of Competitive Providers to enter and compete by placing significant regulatory burdens on Competitive Providers, or by establishing regulatory requirements that are incompatible with a Competitive Provider's business model.Footnote 32
- Additionally, the composition of any accrediting body is important to competition. Accrediting bodies, in their role of approving participants in the open banking system, can exercise significant control over marketplace outcomes. In the Bureau's Interac abuse of dominance case, for example, a number of Canadian financial service providers, through their joint control of the Interac system, promulgated rules that had the effect of preventing other service providers from accessing the Interac network to the detriment of competition and innovation.Footnote 33 To avoid similar behaviour in the context of open banking, any accrediting body should be independently-led, and no party or group of parties that has a stake in the commercial outcomes of an accreditation decision should be able, on its own, to determine accreditation.
- Finally, in order to encourage competition, an accrediting body may wish to use a form of provisional or tier-based accreditation. Such an approach could provide some degree of conditional or preliminary accreditation to Competitive Providers, permitting them to enter the system sooner in their product development lifecycle. This would allow Competitive Providers the flexibility to meet accreditation goals as their use-case expands.
- Accreditation plays a key gate-keeping role for open banking. While it is important to ensure that participants in an open banking system are credible, reliable, and trustworthy, this gate-keeping role also must be carefully designed to ensure that it supports competition and innovation.
Treatment of liability
- Since open banking requires the exchange of sensitive customer financial information, a question arises of how customers could be made whole in the case of a security or privacy breach.Footnote 34 Regardless of which party—the initiator or the receiver—is ultimately liable, there are two main approaches to ensuring that customers can be compensated for any resulting losses. First, service providers could be required to hold capital balances that would be used to cover losses from a security breach. Second, service providers could be required to carry insurance against such losses.
- In either case, these requirements must be carefully designed to avoid negative effects to competition and innovation. If potential entrants face high capital requirements to take part in open banking, this will impose entry barriers that may limit innovation and have a negative impact on competition.Footnote 35 If mandatory insurance is required, then regulators must first ensure that an adequate insurance market exists, and carefully consider the role that large financial institutions play in the underwriting market. For example, if incumbents underwrite the insurance policies of Competitive Providers, these incumbents may have the ability and incentive to raise premiums as a means of limiting entry.Footnote 36
- Ultimately, liability protections should be implemented in a manner that minimizes any negative effect on competition and innovation. Decision makers can support this goal by ensuring that liability rules are tailored in such a way that promotes entry and provides the maximum scope for competitive services.
Reciprocity of data access
- Reciprocity is the concept of allowing flow of financial information between all participants in the open banking system. Reciprocity can drive greater competition between service providers, and bring about incentives for a broader range of firms to participate in open banking.Footnote 37,Footnote 38
- Key to an effective reciprocity regime is the appropriate definition of "proprietary" and "non-proprietary" data. In this context, non-proprietary data is required by an open banking system to be made available between service providers, whereas proprietary data is not shared from one service provider to another.
- An appropriate distinction between proprietary and non-proprietary data must balance innovation and competition. The ability to designate certain information as proprietary is central to a service provider's incentive to invest in innovative products; without such protection, competing service providers could "free ride" on that innovation.Footnote 39 However, improperly designating data as proprietary can obscure necessary information from rivals, making them less able to use customer data to deliver competitive financial products.
- Regulators may therefore be charged with making a clear distinction between proprietary and non-proprietary data that is sufficiently flexible across many potential use cases. The Bureau's experience, including in its Toronto Real Estate Board (TREB) abuse of dominance case, is that businesses could illegitimately claim that certain data is proprietary as a means of frustrating the competitive process.Footnote 40 Accordingly, regulators should ensure that there is demonstrated evidence to legitimize claims that certain data should be not be shared.
Methods of redress
- Even the most well-designed regulations are challenged by unanticipated circumstances. For example, a regulatory rule may fail to account for a new technology, or an accreditation criteria may prove to be unsuitable for a certain class of new providers. It is, therefore, paramount that an effective redress system be put in place to settle issues as they arise. Failing to do so may result in the benefits of competition being either delayed or denied.
- There are many models of effective redress. One model would be to have a regulatory body empowered to hear and decide disputes. Another could involve decision-making by an expert committee, recognizing that some matters may require significant technical expertise to resolve. From a competition perspective, similar to the discussion of accreditation bodies above, any redress body should be independently-led, and no party or group of parties that has a stake in the commercial outcomes of a redress decision should be able, on its own, to determine a matter.
- One redress model that may be worth further study is that used by the Canadian Radio-television and Telecommunication Commission (CRTC) to govern its Interconnection Steering Committee (CISC).Footnote 41 This committee empowers working groups of industry participants to discuss and consider complex technical or business issues in the regulated areas of the Canadian telecommunications industry. These working groups follow administrative guidelines set by the CRTC,Footnote 42 and produce reports on active matters to the CRTC for ultimate decision. This model allows those that are most likely to be directly affected by a particular regulatory decision to play a central role in the decision-making process.
- An effective open banking system will increase competition and innovation by placing greater competitive pressure on incumbents, while also supporting the business models of new and innovative service providers. Greater competition in the Canadian financial services industry will result in a wider range of innovative financial products being made available at lower prices to the benefit of both businesses and consumers.
- To support the development of a Canadian open banking system that promotes competition and innovation, the Bureau recommends that:
- Decision makers assess each element of any proposed open banking regime against the principles for pro-competitive regulatory design set out in this submission;
- APIs used to facilitate data exchange be standardized across service providers in order to ease entry, but that a process be enacted to allow new standards to emerge on an as-needed basis;
- Accreditation decisions be made by an independently-led body, such that no party or group of parties that has a stake in the commercial outcomes of an accreditation decision should be able, on its own, to determine accreditation;
- Liability requirements be well-vetted to ensure that they neither create unnecessary barriers nor rely on un- or under-developed insurance markets;
- Data access be governed by the principle of reciprocity, and claims that certain information held by a service provider is proprietary, and therefore exempt from exchange, be substantiated by evidence; and
- An effective redress mechanism be put in place to ensure the adaptability of the open banking regime.
- The Bureau is pleased to have this opportunity to support the Advisory Committee's work to consider the implementation of open banking in Canada. In that regard, the Bureau is available to discuss this submission, or to consider other matters upon which the Advisory Committee may wish to receive further submissions.