The Public Should Be Informed Of Open Banking’s Risks Before It Arrives

A fintech startup seeking the financial history of a new customer will likely get the same blithe trust consumers tend to give their banks, and that might be a mistake, writes Philippe Desmarais.

By Philippe Desmarais for The Toronto Star

Innovation is a double-edged sword. History is full of examples where new technology is enthusiastically welcomed by society while not paying enough attention to the risks that come with it. And if the Cambridge Analytica saga clearly demonstrates that the Pandora’s box of privacy was opened a while ago, there is at least one area where protection is still strong: financial information.

Over the past decade, a booming industry of financial technology startups has emerged, trying to disrupt a sector that has struggled to innovate. These fintech companies are now promising greater interoperability and a more modern user experience to their consumers. That’s why — as an attempt to make the industry more innovative — the Canadian government recently announced its plans to implement an open banking system.

The main element introduced with open banking is the ability for consumers to share their financial information with whomever they choose. But who would benefit the most from such an instrument? Most likely, it will not be the consumers nor the banks. Instead, it will be mostly fintech companies that will benefit from this financial infrastructure. A number of concerns emerge when looking at how open banking could manifest in Canada.

First of all, these companies (often relatively small in size) might not be prepared to protect the customers’ data as effectively as banks. So it will be necessary to ensure that this new financial ecosystem is well-prepared to take custody of financial data, which has a much greater potential of being exploited than other information that is shared online today.

Another concern is related to the level of awareness of users when sharing information. This is what researchers have been calling the privacy paradox, where “users claim to be very concerned about their privacy, but they, nevertheless, undertake very little to protect their personal data.” Just as the vast majority of consumers passively accept cookies on websites today, it is not hard to imagine the same happening when a startup requests the financial track record of a new customer.

Historically, consumers have trusted their banks to not share sensitive information with third parties, but this level of trust will be worthless if open banking is implemented.

One needs to keep in mind what is the nature of these fintech companies, which is often closer to that of a software company than a bank. If a fintech company obtains the financial information of several of your neighbours, it will be able to make accurate estimates for you, too. Just like Amazon and TikTok use algorithms to predict users’ choices, they could exploit the data that banks have been protecting for decades. This would not only give them a competitive advantage that would be detrimental to consumers, but it would also put them in a good position to have an accurate picture of the whole Canadian economy.

It’s easy to see how this can become a matter of national security — especially when there are foreign entities involved such as Apple and Google, who are aggressively expanding their footprint in the payments space. One of the reasons why banks are so heavily regulated today (e.g. ownership restrictions) is because they process and store information revealing every small detail about the country’s economy. Exempting fintech companies and foreign entities from such regulatory burdens would not only be unfair to the banks, but it would also be an irresponsible choice.