Major changes may be coming to Canadian banking as the country gets one step closer to implementing an open system that could help people manage their finances more efficiently and securely.

The federal government announced in November that it would introduce new legislation for open banking in its next budget, and Finance Minister Chrystia Freeland is expected to release a new regulatory framework after months of pressure from the finance industry and opposition parties.

But what is open banking, how does it work and why does it have so many supporters? Here’s what to know about the financial system.

What is open banking and how does it work?

Open banking involves a new set of rules that enable financial institutions to exchange information more efficiently and securely. The system provides consumers with more control over how they share their financial data, making it easier for them to switch banks – which is sometimes a difficult process in Canada’s highly saturated financial industry.

Open banking also allows consumers to authorize their banks to safely share financial data with financial technology (a.k.a. fintech) companies that offer budgeting, e-transfer and trading services.

“When you use a fintech app with open banking, your bank securely shares your financial data with the app on your behalf,” writes the Financial Consumer Agency of Canada (FCAC) on its website, explaining how the system would potentially work. “Your data is shared using a secured online channel. You don’t need to provide your online banking username and password to access the app’s products and services.”

Other emerging uses include simpler payments, automated accounting and business finance management.

Fintech companies have called on the government to implement open banking, saying it would lower barriers to entry for new players in Canada’s banking sector, where the Big Six banks control more than 90 per cent of the market.

What are the pros and cons of open banking?

Many technology experts say they are in favour of an open banking system because the current system of data sharing, in which a consumer essentially has to use screen-scraping, is not reliable.

Screen-scraping technology is used by fintechs to access banking information to process transactions. It requires consumers to provide their online banking username and password so fintech apps can automatically log into their bank account and access their financial data.

Millions of Canadians currently share their bank login information with third-party applications, but that system comes with the risk of privacy breaches. Open banking could help mitigate those privacy concerns and give people more control over the data that companies are gathering about them. It would provide protection against unauthorized transactions, as consumers would not be required to share their online banking usernames and passwords.

Proponents point to other advantages, including an opportunity to access cheaper and better services, a way to dramatically shift how payments are made and the ability to boost competition, as customers, not banks, would get to decide who sees their information.

Critics, including many in the banking world, argue that the industry is already competitive and that privacy and cybersecurity concerns should take precedence over other considerations. Because it is expensive to maintain and protect customer data, banks have also resisted giving away the information for free.

Education and awareness about open banking could also be an obstacle. According to a report published by the Financial Consumer Agency of Canada (FCAC), Canadians’ knowledge and understanding of open banking is low. The report found that only 9 per cent of respondents had heard of open banking; after they were provided with a definition, only 15 per cent said they would participate in such a system.

Which other countries use open banking?

Other countries have already begun implementing open banking systems. Britain started introducing it in 2017, and Australia began the process in 2019. Both countries tasked government-led entities with supervising and enforcing the regime. Countries such as Japan and South Korea haven’t introduced legislation to allow open banking but have introduced measures to promote the sharing of information between financial institutions.

In October, the U.S. Consumer Financial Protection Bureau introduced its own proposed rules, saying they would stop banks from “hoarding” customer data and bolster competition.

What are Canada’s plans to implement open banking?

The federal government has been facing pressure from fintech companies, industry professionals and opposition parties to move ahead with its delayed rollout of an open banking system, which it has referred to as “consumer-driven banking.”

The government first committed to study open banking in the 2018 budget. In subsequent years, Ottawa struck advisory committees and working groups and held consultations with dozens of stakeholders. In the 2021 election, the Liberals promised to have a system in place by January, 2023.

In the 2023 fall economic statement, Ms. Freeland said the government would introduce open banking legislation in the federal budget.

One point of contention in the rollout has centred on who would administer and supervise an open banking system – a group of government-appointed regulators or an organization overseen by the bigger banks. But Ottawa said it is opting for a government-oversight model, which is favoured by smaller industry players and fintechs.

With reports from Stefanie Marotta, Chris Hannay, Reuters and The Canadian Press.