Open banking is privacy regulation. Banks aim to sink it as financial regulation.

2024-10-30- Andrew Escobar

Linking open banking rules to bank failures is quite a stretch, but you cannot fault a bank historian (with bank clients) for trying:

The sudden closure of [a small U.S. bank] and the announcement of the U.S.’s open banking rules last week showcase how history sets countries on different paths, even in banking. For those who wonder “what’s the holdup” for open banking in Canada, in which customers can more easily switch financial institutions, therein is the answer.

Actually, therein lies the problem.

Yes, history set Canada and the U.S. on different paths when it came to banking and financial services. That history has not only shaped how Canadians and Americans view their banks, but also continues to shape how each country approaches financial regulation. But one of the biggest mistakes you can make — one of the strategies a bank can employ — is confounding financial regulation with privacy regulation.

Open banking in Canada is not predicated on account switching (like in the U.K.) or any other specific use-cases for that matter. And it is not contemplated to be a somewhat punitive measure (arguably like in the U.S.) or as a form of “market redress” (Abraham A. Tachjian). It will also not enable real-time money movement or other financial tasks directly within your account — though that is hopefully its future. But attempts to both hold on to the past and jump in to the future are a distraction. Open banking is simply not financial regulation (prudential regulation) — a bigger “zombie-idea” (Andrew Graham) that some banks refuse to let die.

An open banking system will allow Canadians to securely share their financial data and remain in control of that data. The governments policy objectives are clearly consumer focused — and thankfully small businesses focused too. Open banking is therefore privacy regulation (delivered as market conduct regulation).

Who cares about tech regulation? Almost no one: “It’s boring, and years away, but more fundamentally, it really doesn’t affect what people are working on.” Fintechs (and big tech) treat open banking as tech regulation: it does not keep them from building today. Large financial institutions want Ottawa to treat open banking as financial regulation: they care a great deal because it will impact how they operate and how they compete. (While Ottawa may not hold competition as a policy objective, competition is clearly an outcome.) Here’s the thing though. Open banking is not some type of distant tech regulation, it should not be burdensome financial services regulation, and it is certainly not “structural intervention” (Benedict Evans) — so allow me to reiterate.

Open banking is privacy regulation. It is time we start treating it as such and get one with it.

When seen with that lens, you tend to recalibrate your views, and become less pessimistic about timelines, implementation, and associated risks. Launching an open banking system is a lot like the construction of a skyscraper: tons of work below the surface that seems to take years, and then suddenly a tower goes up in no time.

Canadian fintechs should care a bit more about open banking, but not too much: let it inform your product roadmaps, but not what you’re building today. Canadian banks should care a bit less — or at least care about the right thing: open up the API you’ve probably already built, even if confined to a few at first, before you make it available to everyone in a trusted ecosystem.

Open banking alone will not upend financial services. The only way to do that is to reimagine and rebuild financial services — to meet the needs of consumers and small businesses. That should be the aim of both banks and fintechs alike.