The gradual growth of fintech product and service adoption in Canada over the last decade is poised to take off. Accelerated by the pandemic’s overhaul to the ways business is conducted, these technologies are creating a decentralized financial world that gives consumers more control over their finances. It’s become apparent that embracing opportunity over resisting change is critical and industry leaders are collaborating with the Canadian government to keep Canadians competitive and protected.
“The pandemic has highlighted to most businesses how important scalability and adaptability are,” says Adam O’Brien, founder and CEO of Bitcoin Well, the longest-running, founder-led Bitcoin ATM business in Canada. “From the perception of the consumer, it identified the gap that exists in how reliant we are on legacy styles of banking and the traditional custodial model. The consumer’s eyes have certainly opened up to what our money can do.”
That realization has people seeking more control over their financial data, such as with open banking. “The essential premise is to give consumers and small businesses alike control over their financial data by consenting and directing their banks to release their data to a specified third party,” says Alice Davidson, Chief Legal Officer at Mogo, one of Canada’s first established fintech businesses providing a full suite of digital financial product and services accessible within the free Mogo app.
Canada’s Department of Finance is also taking steps to ensure proper regulations are in place to protect individuals and businesses. Recently released, their Final Report, Advisory Committee on Open Banking suggests Canadians can expect more security and portability in third-party financial data sharing as soon as 2023. “I welcome this report with open arms. It’s been slow moving in Canada, but it’s on the horizon,” says Davidson. “I commend the Department of Finance for working closely with our industry in the consultation process to generate that final report.”
Amongst other industry leaders, Mogo assisted the advisory committee and pushed for the government-industry stakeholder hybrid model outlined. “The government requires industry expertise around all the moving parts of an open banking framework – the technology, the data standards, the security requirements, the design, the consent and liability pieces,” says Davidson.
Developing the framework is a response to increased consumer desire for innovative products, more choice, and the ability to share their financial data on their own terms. “Open banking is a more secure and standardized way to do this,” says Davidson. “There’s going to be a regulatory regime around it and anyone participating will need to be registered. There will be security safeguards in place, including a liability regime and recourse for any breaches.”
It’s an option that’s been a long time coming for Canadians. The U.K., the E.U. and Australia have been up and running with open banking for years. “We need to move fast and ensure we don’t continue to lag behind and instead make Canada a competitive, leading nation in the field of financial services,” says Davidson.
That open and direct flow of financial information helps business-to-consumer (B2C) and business-to-business (B2B) companies by removing barriers such as intermediary parties or competing businesses for information. “Without open banking, the only way people can currently share their financial data is by sharing their banking credentials with data aggregators, which is often unreliable given banks’ efforts to thwart this,” says Davidson. “It also raises security concerns and privacy issues.”
It also reduces reliance on credit bureau scoring by allowing lenders to make underwriting decisions based on the borrower’s cash flow, savings, and outside contributions. “It gives a more holistic view of the individual’s financial situation,” says Davidson. “Having direct access to the business’ financial data and transactions enables the lender to make more informed decisions with better efficiency. The opportunities in open banking are endless in terms of innovation and the ability to create innovative products and services.”
The open banking framework isn’t the first collaboration between the Canadian government and the fintech industry. In 2018, industry associates in the crypto currency space initiated conversations with the Canadian Securities Administrators (CSA). “We wanted to be proactive in forming a regulatory framework while having input on the regulatory process,” says Mark Binns, CEO of Netcoins, Canada’s first publicly owned, fully regulated crypto trading platform. “We must now adhere to requirements set out by our provincial and federal governments. Everything from our procedures to how we onboard customers and hold assets will be overseen by these regulatory bodies.”
Binns agrees that Canada’s fintech progression became especially interesting when the pandemic hit. “We saw a decline of the global economy. At the same time, Canadians started to look outside of traditional investments like stocks, currencies and commodities in search of alternative store holds of value, like bitcoin,” he says. “As the crypto industry continues to mature, we’ll see more crypto-related products like lending and borrowing of crypto assets, crypto loans and interest rates, and more. In the end, everyone – from retail investors to businesses – will have a relation to, or dependence on, crypto.”
With regulation comes compliance, which helps instill consumer confidence. For bitcoin and other crypto currencies, pricing action and legitimacy in the U.S. are also expanding north of the border. “That legitimacy is going to open it up and continue to unveil the benefits of a society that uses bitcoin,” says O’Brien.
Canada has introduced a dual-model bitcoin system where bitcoin can be purchased in either the custodial or non-custodial model. O’Brien describes the custodial model as similar to traditional legacy banking. “You give someone else your money, you tell them which kind of trades to make, that person makes the trades on your behalf and then hopefully gives the money back later,” he says. “I say, ‘hopefully’ gives the money back later because that’s a real thing that’s happened in the past. Custodians in this business can make a ton of mistakes.”
Operating in the non-custodial business model allows consumers to control their own finances and realize the benefits of decentralized currency and financial services. “The differences between custodial and non-custodial models can seem small, but they are really important,” says O’Brien. “Society right now only knows a custodial financial system. You cannot buy a house, a car, or make a payment, without a custodian unless you’re using cash in your day-to-day dealings, which can tend to be frowned upon. Those who use bitcoin enjoy the capability and security of holding their value – their money – themselves.”
While this system provides options, it’s confusing for many. The main distinction to keep in mind is this: custodial service providers must register with the CSA and non-custodial businesses cannot. “We need clearer guidance and better communication from the government and regulators to the public as far as who they’re regulating and why regulation is needed in those cases,” says O’Brien.
For instance, the technology is available for realtors or car dealerships to use bitcoin for home or vehicle purchases, but the first question people have when O’Brien discusses the possibility is, “is this legal?” “The fact that that’s the first question demonstrates that the regulators have work to do and they’ve scared people into thinking bitcoin is illegal and using it is scary. That needs to change,” he says.
More optimistically, the Retail Payment Activities Act (RPAA) recently passed including a federal regulatory framework to oversee payment service providers (PSPs). Its penultimate goal provides PSPs with direct access to the real-time rail (RTR), Canada’s real-time payments system. “The innovation and growth coming out of this development for the consumer and B2B spaces is huge,” says Davidson. “It’s going to take time but it’s happening, with the requisite technology and oversight being put into place.”
Meanwhile, the fintech products and services set to open up over the next three-to-five years are positioned to put consumers into the driver’s seat in terms of what they want, where their money goes, and why it’s important. “We are creating products and services focused on the fact that the consumers who are using them today and those who will use them in five years are going to be different,” says O’Brien. “Everything is only going to become more user-friendly, safer, and more affordable for everyone.”