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On who decides what for whom
The time for unhappy compromise is over. What if the federal government showed some courage and decisively picked a side?
“That government is best which governs least.” This saying, often cited in one form or another with attribution to Thoreau or Jefferson or Locke, goes back a long way. No matter its origins, it comes up when people are debating one of the most animating questions around: who decides what for whom? There’s a type of person that employs the saying recklessly, waving it around like a drunk with a loaded pistol. I don’t think more sober-minded people have a non-circular equivalent—that government is best which governs best?
As Canada tiptoes to open banking, the question that belies the saying—who decides what for whom?—is looming over the federal government. Canada’s open banking lead, Abraham Tachjian, is mostly working with banks and fintech companies to develop a rulebook that would dictate how Canadians can port their financial information from their banks to other organizations of their choosing. Industry stakeholders are fighting over the pen to write Canada’s rulebook. But who takes over the rulebook, and decides what for whom, when the rulebook is finally written?
At a recent event hosted by the Globe and Mail, Tachjian suggested that the federal government would turn its attention to the question of governance soon. After much pressure, this attention is long overdue. No one is going to stop asking who decides what for whom until the question is answered once and for all.
It’s a more complex question than you think
When the federal government started consulting on open banking a few years ago, it stood up an advisory committee that produced a final report last year. The final report has dozens of recommendations, a few of which are about governance. Ultimately, the advisory committee sees a role for a “fit-for-purpose” entity, established by the federal government, that would “manage the on-going administration of the [open banking] system” once Tachjian’s work is done.
That’s where the advisory committee landed, but it’s not because everyone with a vested interest in open banking agreed on a governance solution.
Quite the contrary, big banks want the government to do less. That government is best which governs least. And how can you blame them for believing it?
As they should, Canada’s big banks like to remind us how great they are. The Canadian Bankers Association wrote to the government that “Canada has a long history as a global leader in developing industry solutions to help meet broad public policy objectives, through highly consultative and collaborative relationships between financial institutions and regulators.” I don’t know if they’ve been a global leader, but the banks do have a long history of delivering some things in the absence of a heavy government hand. They were addressing a market need when they launched “chip and pin” credit and debit cards, as well as Interac e-Transfer, which is why Canada never had the need for a Venmo or a Cash App in the same way as the United States did. In other words, give the big banks a set of roomy objectives and let them deliver.
I suspect the big banks also like to remind us of how poorly things go when you don’t leave them be.
Consider payments modernization, a multi-year initiative that started in 2015 to overhaul the payment systems that power the Canadian economy. Control of Canada’s payment systems had to be stripped away from Canada’s big banks for the initiative to even start, and so it’s fair to assume the federal government has been more involved than the big banks want the federal government to be. And yet the whole thing has been mired in existential questions. For example, why are we asking banks to pay what probably amounts to hundreds of millions of dollars to build a duplicate of Interac e-Transfer, which is already in market? According to a 2019 document from the federal government, Payments Canada told the Department of Finance that payments modernization would cost the financial sector $3 billion.
That’s one answer to the question about governance: does the federal government want to risk turning open banking into another payments modernization? That’s what a heavier hand may do, if history is any guide. Perhaps it makes sense to give the banks a set of roomy objectives and let them deliver.
On the other hand…
Many of Canada’s fintech companies think the government needs to be more involved. That government is best which governs best.
Millions of Canadians choose to share their financial information with fintech companies in exchange for financial services they’re not able to get elsewhere. Wealthsimple makes investing more accessible for Canadians. Borrowell has a partnership with Equifax that gives Canadians a way to use their rent payments to build their credit score. Koho has a product that lets Canadians get early access to a share of their forthcoming paycheque for free. I can go on, but you get the gist.
The status quo—the government which has governed least—has neither supported fintech companies nor the Canadians who want their services. Sometimes, big banks prevent fintech companies from accessing the financial information of their customers, even though their customers want the fintech companies to have it. This keeps Canadians away from the financial services they chose. It also doesn’t give Canadians a secure and efficient way to share financial information. The only way is for Canadians to give fintech companies permission to do what’s called screen scraping.
“Screen-scraping requires consumer to share their financial institution usernames and passwords in order for the application to access their transaction histories). Doing so may violate the terms of consumer's service agreements with their financial institutions and result in consumers unknowingly bearing the risk of loss.” - Consumer-directed finance: the future of financial services (2020)
The “governing least” approach has failed to prove itself for more than two decades. In 2000, the Globe and Mail published an article about the latest innovation in banking at the time: web portals, which showed customers “their chequing account balances, what they owe on their credit cards and how much they are earning on their mutual funds.” To launch them, Canada’s big banks were relying on account aggregators, who were screen scraping and needed access to online-banking usernames and passwords to do it—more than two decades ago. In 2022, we’re in the same spot.
If what happened yesterday is the best predictor of what’s going to happen tomorrow, I’d say that government is not best which governs least. Though banks are starting to sign deals with data aggregators to make the sharing of financial information more secure and efficient, why should we believe that banks know what’s best for whom when they haven’t known until now?
The best government would govern better
Canada’s screen-scraping problem is a governance problem in disguise. Banks believe themselves the “trusted custodians” of their customers’ financial information. If the financial information of Canadians is the responsibility of banks, then banks should get to make the decisions. But banks can’t just assume the full and exclusive responsibility. Who gets to make decisions about the sharing of financial information isn’t a straightforward question. After all, it’s about who decides what for whom.
Our government has already taken a big step towards better government by telling banks they can no longer pick and choose the organizations with which their customers may share financial information. The Liberals recently tabled a bill to reform federal privacy law. If passed, Canadians are going to get a general data-mobility right:
Subject to the regulations, on the request of an individual, an organization must as soon as feasible disclose the personal information that it has collected from the individual to an organization designated by the individual, if both organizations are subject to a data mobility framework.
This data-mobility right is supposed to be the legislative foundation for open banking in Canada. Tachjian is working with banks and fintechs to develop a data-mobility framework in Canada’s financial sector. When all is said and done, if banks decide to override the decisions of their customers, they may have to answer to the privacy commissioner, who’s going to have new powers to levy hefty fines upon those that run afoul of the new law.
But there’s stuff the new federal privacy law won’t do. Who’s going to be the custodian of the data-mobility framework and oversee its evolution, changing its scope as the facts and circumstances of financial-information sharing in Canada’s financial sector changes? Who’s going to decide when Canadians get access to quick and effective recourse when something goes wrong, such as when there’s a data breach, or when a pre-authorized debit has been erroneously initiated on the back of an open banking API and Canadians suffer immediate monetary losses? Who’s going to adjudicate disputes between participants as they arise? Better yet, who’s going to monitor and enforce compliance with the open banking requirements, minimizing the probability that something bad happens in the first place? And what about organizations that aren’t federally regulated, such as many credit unions and fintech companies? To ask these questions another way, who’s going to decide what for whom? I’m as certain as I can be that it’s not going to be the privacy commissioner.
So a big decision must be made about a series of second order questions.
What if you please no one by pleasing everyone?
The federal government can heed the recommendations of the government’s open banking advisory committee and establish a governance entity to answer them all. It would need to determine what type of entity it is—is it a shared governance organization, for example, or a statutory corporation? It would also need to determine its mandate and how it’s funded, among other things. Alternatively, the federal government can hand off its difficult second-order questions to the banks and let the banks answer them.
Let me reframe the decision. How should we approach this problem of who decides what for whom: with a concave disposition or a convex one?
Vitalik Buterin has an old blog post about concave and convex dispositions. Think of a concave disposition as one that’s prone to believing that compromise leaves everyone better off. Let’s call people with such dispositions compromisers. Conversely, think of a convex disposition as one that’s prone to believing that picking one side’s choice or the other’s and implementing it in its purest form maximizes everyone’s well being. Let’s call people with these dispositions purists.
Whether it pays off to have one disposition or the other depends on your facts and circumstances. Compromisers aren’t going to have a good time if their compromise between going to London, England or Miami, USA is to float around on a rickety raft in the middle of the Atlantic Ocean. Similarly, purists aren’t going to have a good time picking between a scalding hot shower or a freezing cold one. Neither disposition is inherently bad. Sometimes we need to be compromisers. Sometimes we need to be purists.
So what do Canada’s facts and circumstances call for?
I can’t help but recall a letter from David Skok, the Logic’s CEO and editor-in-chief.
“There are major institutional players—including Canada’s big banks, insurance and credit-card companies—seeking to maintain their market share, and there are startups and credit unions—some even propped up by the big players—looking to steal market share,” he wrote more than a year ago. “At some point, the country needs to define what kind of innovation it wants to support: will it be incumbents trying to transform their businesses, or will it be the little guys seeking to disrupt them?”
Skok concluded: “Trying to please everyone pleases no one.”
The more I think about it, the more I think that open banking governance is a convex problem that calls for a convex disposition. Let’s hope the federal government decides accordingly.
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