NCFA Canada | Mahi Sall | Aug 9, 2022

Thought Leadership Series of Expert interviews and insights related to a made-in-Canada open banking regime

The National Crowdfunding & Fintech Association of Canada (NCFA), true to its mission of providing education, industry stewardship, networking, growth, and funding opportunities for innovative financial technologies and related sectors, is pleased to launch a brand new thought leadership series on Open Banking led by Berlin-based NCFA ambassador and independent expert in Fintech-Bank Partnerships Mahi Sall.

NCFA is proudly contributing this thought leadership series to help shape a system that will bring profound changes in how financial services will be created, distributed, and consumed in Canada over decades to come.  Our hope is that Canada’s Open Banking system will improve economic outcomes, improve market efficiencies and competitiveness, and enable consumers to access new and innovative financial services in a way that is secure, efficient, and consumer-centric.

The series is called ‘Canada’s Open Banking Journey’ and aims to aggregate international and domestic perspectives of Open Banking/Finance expert practitioners from around the globe to advance dialogues, key considerations, and explore potential solutions for the development of a made in Canada open banking regime with the following timeline:

• Sep 2018:  Canada’s Open Banking journey officially began when the government established a multi-stakeholder Advisory Committee tasked to conduct a review into the merits of Open Banking
• Apr 2021:  Advisory committee publishes final recommendations
• Mar 2022:  Government appoints Abraham Tachjian – PwC Canada as Canada’s Open Banking lead responsible for convening industry, government and consumers in designing the foundation of the system of Open Banking for a launch in 2023.
• Oct 2023:  Phase 1 implementation expected

NCFA Canada's Open Banking Journey Series:

Interview Begins

The UK created the blueprint for Open Banking and Open Finance, the pace of market adoption is accelerating, an incredibly exciting time for this sector.

-- Helen Child, Founder, Open Banking Excellence (OBE)

 

Mahi Sall: Please tell us about yourself and OBE, and how you relate to Open Banking.

Helen Child: Helen Child is the Founder of Open Banking Excellence (OBE). We’re a global community of Fintechs, Big techs Banks, Regulators and Service providers. Pioneers in Open Banking and Finance that are dedicated to driving a global conversation and enabling collaboration to support the growth trajectory of the industry. OBE gathers key industry leaders from across the world at our monthly Campfires to discuss and debate the latest red-hot relevant topics in Open Banking and Finance. Always authoritative, always engaging and a little provocative!

Mahi Sall: Common Rules represent a key component of Open Banking System Design, with the premise that they create a level playing field which eliminates the need for bilateral arrangements between Open Banking participants. 

Can you speak about situations that would call for bilateral arrangements in an Open Banking environment that thrives on common rules.

Helen Child: Variable Recurring Payments (VRP) will launch in the UK at the end of July 2022 and are likely to require bilateral or multilateral arrangements.

In a summary of feedback from a Variable Recurring Payments (VRP) consultation, the UK’s Open Banking Implementation Entity (OBIE) reported that a number of TPPs “stated concerns that having to agree multiple bilateral contracts could stop the market from developing or result in fragmentation, with adverse consequences to consumer adoption and outcomes”.

However, in its own response OBIE acknowledged that “a wide range of different VRP-based propositions would naturally create a degree of fragmentation” but predicted that the market will “evolve” to create a “relatively small number” of multilateral frameworks.

A survey from Token found that 65% of the Open Banking and payment professionals (including ASPSPs, payment providers, TPPs, regulators and merchants) believe a bilateral or multilateral agreement is required between PISPs and ASPSPs to address liability.

VRP implementation requires common rules that define consumer protection mechanisms and set out commercial models with banks. It may also lead to bilateral arrangements that must also prioritise protection and focus on encouraging adoption.

Mahi Sall: Another key component of Open Banking System Design is the Accreditation Process. Canada’s Advisory Committee on Open Banking recommended to exempt federally regulated banks from the accreditation process, and similar consideration for provincially regulated financial institutions to be discussed. 

Based upon what you have seen unfold in the UK and in other jurisdictions, what major frustration points relative to the accreditation process can be anticipated and how to address them? 

Helen Child: In the EU, PSD2 rules that every organisation operating in the Open Banking ecosystem must have certificates issued under electronic identification and trust services (eIDAS) regulation.

There are a number of issues around these certificates, which are only issued for a short time and must be updated regularly. Authorisation status can change overnight and Open Banking players in the ecosystem must work with external providers to monitor the identity and authorisation status of TPPs in real time. Brendan Jones, CCO of Konstentus, has warned that this creates “genuinely frightening possibilities” because regulations and the law state that ASPSPs have liability for fraudulent transactions.

Accreditation in a territory like Canada is likely to be more straightforward in the EU. But issues around liability must be worked out and consumers need to know exactly which institutions are accredited. Adoption requires transparency and confidence, so accreditation should be designed in a way that focuses on building trust among consumers.

Mahi Sall: The third key component of Open Banking System Design are Technical Specifications & Standards with two approaches currently dominating the landscape: single standard approach (e.g. UK, Australia) and multiple standards (e.g. US, EU). Canada’s Advisory Committee left both approaches open for exploration. 

Can you speak to the advantages and shortcomings of these approaches?

Helen Child: The PSD2 laid the groundwork for Open Banking. However, implementation has been hampered by diverging Application Programming Interface (API) standards and market fragmentation. This has made it difficult to launch Open Banking in all markets that make up the EU and led to issues with some APIs, which are not always as good as they could be.

In the UK, Open Banking has benefited from a single standard for APIs and the work of OBIE. This single standard has allowed Open Banking players to deliver reliable, high-quality APIs, reduce friction such as excessive authentication and drive adoption.

Mahi Sall: Please share some of the lessons learned in the UK and in other geographies in terms of Open Banking test designs and implementation.

Helen Child: Brazil’s ambitious and fast-paced Open Banking implementation is truly inspiring. At an OBE Campfire in April 2020 which discussed Payments Initiation,  Janaína Pimenta Attie, Head of Division in the Financial System Regulation Department, Central Bank of Brazil (BCB), said the Open Banking implementation process in Brazil has “already presented very concrete and expressive results” in a short space of time.

After setting a regulatory strategy, Brazilian regulators set out to transform the country’s banking landscape, encourage innovation, promote competition, increase the efficiency of the national financial system, and promote financial citizenship.

Brazil was inspired by Open Banking models in the UK, EU and Australia. In the future, other countries will look to Brazil. It has made tremendous progress in a short space of time.  Open Banking in Brazil is already poised to implement Open Finance because it includes the obligation to share investment, insurance and exchange transactions data. That is remarkable progress in a short space of time.

Mahi Sall: As in other jurisdictions, financial inclusion is high on Canada’s Open Banking agenda. 

Please share examples where Open Banking failed to deliver on this metric. What are some of the key lessons learned that Canada could benefit from? 

Helen Child: OBE is passionate about financial inclusion. It is a topic we discuss on a regular basis, with a Campfire last year and another planned for October 2022. In a blog written for OBE, Lord Holmes said that access to financial products and services is a “human right” and set out a five-step plan to build a “new paradigm for financial inclusion”.

The stages of this strategy are:

1. A financial inclusion remit for the Financial Conduct Authority (FCA).
2. A clear, coherent roadmap for the future for cash.
3. Access to digital payments review.
4. Open Banking solutions to public sector challenges.
5. A collective, connected, collaborative, unflinching effort.

Mahi Sall: Chief among the factors affecting the take-off of Open Banking is low adoption by consumers.  What could Canada do differently than other jurisdictions in order to pre-empt this risk?

Helen Child: In the UK, one of the use cases which has done the most to drive adoption is the tax authority HMRC’s decision to allow tax bills to be settled using Open Banking payments. Open Banking was used in more than £1 billion of tax payments within the first six months of rollout, contributing to the UK passing a milestone of five million Open Banking users.

If Canada wants to drive adoption at pace, it should focus on similarly big and bold use cases. If consumers and businesses become used to paying tax with Open Banking payments, they have made an important first step. When millions of people do the same, then you’re getting very close to mainstream adoption.

Mahi Sall: Drawing upon your observations in the UK and in other jurisdictions, what are some of the quick wins in terms of Open Banking use cases that banks and fintechs should prioritize rolling out? 

Helen Child: We expect to see explosive growth in the use of Open Banking payments in the coming years in both the UK and EU. Part of the privilege that comes with building a global community is engaging with key stakeholders at various stages of creation and implementation. Our community has indicated that we will soon see major players in the payments value chain roll out account-to-account payments for tens or even hundreds of thousands of merchants. These merchants will then expose “Pay by Bank” to tens of millions of consumers. Pay By Bank is certainly a quick win. Others include VRP and sweeping, which involves automatically moving money from one account to another.

In the UK, the Competition and Markets Authority (CMA) has set a deadline of July 2022 for the implementation of VRP for sweeping by Britain’s nine largest banks.

Moneyhub, a market-leading Open Data and payments platform, is preparing to roll out VRPs and believes they will “open up a new financial world order where consumers are in control”. NatWest Group has already made the UK’s first-ever Variable Recurring Payments (VRP) for “non-sweeping” use cases. It has also signed agreements with three payment providers - TrueLayer, GoCardless and Crezco - which will enable it to become the first UK bank to offer sweeping, which it described as “the automatic transfer of money between two accounts belonging to the same person”. We expect to see a huge wave of innovation in the UK after the CMA’s VRP implementation deadline.

See:  Open Banking to Bring Multitude of Benefits to Canada in 2023

Mahi Sall: What role does talent play in developing a thriving Open Banking system? 

Helen Child: Talent is crucial in creating a vibrant Open Banking ecosystem, but, let’s not forget that talent can only go so far without partnership. It is through collaboration - and perhaps a little bit of competition - that Open Banking can thrive. Great things happen when you bring the right people together. Collectively, we have a stronger voice. The community that OBE continues to grow on a global scale, helps create connections, sparking innovation in a sector that’s forever evolving. The talent within each team is what drives that progress and we all have an important role to play.

We have an exciting few years ahead for sure.

Mahi Sall: What are some of Open Banking’s major incidents and how to risk manage them? 

Helen Child: Fraud is a day-to-day reality in financial services. We are seeing some inspiring work among Open Banking pioneers focused on tackling fraud and improving the financial safety of consumers and businesses.

GoCardless recently expanded its fraud prevention offering, launching a service called Verified Mandates in the UK. This offering is powered by Open Banking and builds payer verification directly into the payment set-up flow. It enables merchants to verify the bank account of a new customer and prove their information is valid by authenticating details in the bank’s online or mobile banking app. Open Banking and Finance payments that use encryption or tokens and require customers to authorise payments via their bank using 2FA are more secure than cards. We expect to see the ecosystem continue to devise new ways to manage fraud and heard some of the latest ideas on how to reduce crime at our June Campfire.

Mahi Sall: What are Open Banking limitations and the most common misconceptions people have about it? 

Helen Child: We still have some work to do when it comes to building consumer confidence. The name Open Banking can be offputting to people who are unfamiliar with the concept. They may fear that opening up their accounts to third parties is unsafe or will infringe upon their security and privacy. This is a challenge but also an opportunity to educate about Open Banking and Finance.

The financial industry has recently introduced innovations such as Confirmation of Payee (CoP) which offers improved security and reassurance when making payments or transfers. Pioneers in Open Banking and Finance are now working to develop solutions which offer a similar security boost to Open Banking transactions.

The partnership between Ozone API and Okay is one example of how industry leaders are collaborating to solve challenges around security. These two companies argue that Open Banking and Strong Customer Authentication represent a “tremendous opportunity for innovation” that will “protect end-users at an unprecedented level”. We expect to see more innovations in security which will improve confidence and drive adoption. The wider industry must continue to address consumer fears and show that Open Banking can actually offer improved security.

Mahi Sall: What does Open Banking mean to banks and fintechs, and how does it affect the relationship between the two? 

Helen Child: Both banks and fintechs have a role to play in Open Banking. Traditionally, fintechs have been seen as disruptors dedicated to creating new services and banks as incumbents that must be forced to begrudgingly expose their account data to APIs. This distinction is breaking down (if it ever existed in the first place). We expect to see deeper collaboration and integration between fintechs and banks.

Read:  Open Banking Surpasses 5 million User Milestone in the UK

Mahi Sall: How could banks and TPPs best prepare for Open Banking and extract the most value out of it? 

Helen Child: Digital identity is one of the challenges that banks and TPPs must overcome when implementing Open Banking. Brendan Jones, Co-Founder and Chief Commercial Officer at Konsentus, has warned of “genuinely frightening possibilities” around identity.

In the EU, Payment Initiation Service Providers (PISP) and Account Information Service Providers (AISPs) must have certificates issued by a qualified trust service provider in order to operate in the Open Banking ecosystem. These certificates are not as comprehensive as one would hope. They can quickly become out of date and inaccurate,  meaning that financial institutions are at risk of giving unauthorised third parties access to end-user account data or funds. This could result in fines or regulatory action in the short term. A mistake could also damage trust in the Open Banking ecosystem at a time in which we must focus on adoption.

Banks need to find a way of assessing the identity and regulatory status of TPPs in real time to ensure they are not incorrectly granting access to consumer data.

Mahi Sall: What must be thought of and accounted for at this early stage of Open Banking in Canada in order to ensure compatibility and interoperability at regional/international level?

Helen Child: Canada should focus on building robust standards which allow Open Banking players in its ecosystem to prove their identity and regulatory status. That is a basic requirement. This has proved a challenge in Europe. Now that Open Banking is going global, there is a serious need for global standards which allow interoperability across borders on a regional and international level. Canada could lead on this by driving interoperability with the US and South American ecosystems. If this is achieved, it could lay the groundwork for genuinely international standards.

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Links you may be interested in:

• About Open Banking Excellence (OBE)
• About OBE Campfires

Mahi Sall is an Ambassador of the National Crowdfunding & Fintech Association of Canada “NCFA”, and an Expert on Fintech-Bank Partnerships. He is based in Berlin, Germany.

The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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