Thanks for the kind introduction, Luc and for inviting me to address the Cercle de la Finance Internationale de Montreal. I had the pleasure of attending a lunch here in November and I’m grateful for the opportunity to speak before our distinguished head table and honoured guests. I extend a special welcome to members of the CBA here today. Our association has a long-established presence in Quebec – in fact, it was founded in Montreal – and it’s important that we gain from your perspective.
I’ve prepared some remarks today, and I look forward to an open discussion afterwards about where banking stands and where it’s going next.
I’ve been in my role at the CBA since last May and I’ve had a career in financial services in Canada and the United States for more than 20 years. I’ve seen a lot of change in this time but the current pace of change is truly unprecedented. As a result, it’s an exciting time to be at the CBA as we adapt and lead through this transformative period.
Today I’ll talk about three main themes that are accelerating the revolution in banking. Ever increasing customer expectations; technology innovation and the need to modernize a dated regulatory framework. I’ll also explore how the CBA and our members are responding to these forces – and the important ways banks can lead the way forward for the benefit of all Canadians.
Without question, ever increasing customer expectations is the number one catalyst for change. Think about how your expectations have changed over the last few years. Just a few years ago you were happy to log onto your computer and visit the Amazon website to buy things. Then came the Dash button, which let you order laundry detergent or paper towels with the click of a real-life button. And now it’s even easier: with the Amazon Echo you just tell Alexa what you want and it gets shipped to the front door. The same holds true for the speed of navigation in apps and response times for ride-hailing services.
Banks in Canada are fundamentally customer-focused businesses with a remarkable track record of adapting to what their customers want. And what they want is access to banking services 24 hours a day, in real time, from anywhere in the world, on a reliable, secure platform. It’s been a long time since banking meant showing up at a branch during certain hours of the day to withdraw money or apply for a loan. Even the bank machine, which turned 50 years old this year, can at times seem like a quaint relic.
The internet brought online banking into homes and offices, but mobile is now eclipsing that technology. Everyone with a smartphone now has a bank in their pocket. Millennials and younger generations think of banking as just another app on their phones and they increasingly shun cash.
Banks have responded by innovating. They’ve launched mobile apps and constantly update them with new and better features. A thumbprint scan identifies the customer, an e-transfer pays back a dinner companion, a chat feature connects with customer service and a cheque is deposited by snapping a photo. That last one is interesting: to the cashless generation, a cheque is a thing of mystery. The most searched phrase on the CBA website – and this is consistent month after month – is “what do I do with a cheque?”
Of course, none of these advances would be possible without technology. That’s the second major influence shaping the banking sector. Canada’s fertile innovation culture has produced an impressive number of fintech start-ups, many of them here in Montreal. These firms have brought expanded competition and customer choice to the landscape. Many of these companies are active in the payments space and deliver new ways for people and businesses to buy things, pay suppliers and transfer money.
Beyond payments, fintech has entered the world of investing, with robo-advisors harnessing ETFs and sophisticated algorithms to offer low-cost alternatives to financial advisors and mutual funds. Firms have also sprung up to help customers budget and save. Mobile and online services that track spending are hugely popular with consumers. Banks in Canada have partnered with robo-advisors or launched their own versions, and banking apps now routinely come embedded with budgeting tools, notifications and voice commands for Siri or Alexa.
The third factor is the regulatory framework. The federal Bank Act is the most important piece of legislation governing banks in Canada. The Department of Finance is now engaged in a statutory review – which usually happens every five years, but in this case up to seven years will pass since the Act was last revised. If you think about how much banking has changed since 2012, you can imagine how significant an update to the law is today, given that it could be 2024 or later until the Bank Act is looked at again.
Last fall, the CBA made a submission to Finance in response to the second consultation paper under the Bank Act review. We think the government is heading in the right direction as it looks to modernize this cornerstone piece of legislation, and we’re eager to contribute ideas to make sure the updated framework gains the traction it needs to succeed. I’ll share some of the highlights of our submission that illustrate how we’ll work with Ottawa and our members to shape the future of banking.
Among the top priorities for the CBA is updating how banks can invest in fintech companies. We have a number of leading startups in Canada with great technology, an ability to remove customer experience pain points and a real ambition to succeed. What they need is access to capital, a recognized brand, and most importantly, a customer base. Banks are positioned to provide all three, but right now the law often doesn’t allow it. We advocate for changes to the Bank Act that would provide flexibility around the sorts of businesses banks can invest in. Right now the definition is narrow, so that if a fintech has a small line of business in something other than financial services – say, an instant messaging feature – our members can be in a gray area. Or if it includes something like a food delivery service – likely not permitted to invest at all.
Payments app Square is an example. It offers credit and debit card processing by plugging a small device into a merchant’s phone or iPad. But Square also has a food delivery service and as a result would be off limits.
In many cases, approval from our prudential regulator OSFI or even the Minister of Finance is required. The CBA looked at 100 leading global fintech innovators and about 80 would likely require approval of either OSFI or the Minister. Approvals that can take months – an eternity for fintechs. This drives some to unregulated entities like private equity, denying them the brands, customer reach and partnership they want. Even worse, it could push Canadian fintechs to other countries.
The Bank Act review also looks at areas that will better serve consumers by fostering healthy competition and protecting customers. The CBA represents more than 60 banks, and some of our small and mid-sized members are bound by regulations that hamper their ability to compete. These smaller banks are subject to many of the same liquidity rules and capital expectations as the Big Six – which far exceed the level of systemic risk they pose but bury them in paperwork and tie up capital. The government has introduced some elements of size-based regulation by designating some banks as domestically systemically important, and subjecting them to additional requirements. We believe that more can be done to ease some regulations, to encourage small and mid-size banks to keep contributing to the Canadian economy in more diversified ways while still protecting the stability and integrity of the system.
On the consumer side, we believe that strong federal oversight offers the best framework to create a better customer experience. Recently, some have argued that provincial consumer protection regimes should apply to federally regulated banks. We want to avoid fragmenting the successful national banking system we have today with a patchwork of inconsistent rules. Imagine trying to launch an innovative new product or service and facing the confusion and compliance burden of a dozen jurisdictions. Enhancing the powers of the Financial Consumer Agency of Canada, which is already the national consumer protection regulator, has been proposed by Ottawa and we support that direction.
This brings us to the part of our Bank Act submission that sits at the intersection of technology and consumer choice. The issue is open banking – a term you’ve probably heard but might not be clear about. In its simplest form, open banking starts with the premise that customers own the information related to their relationship with a bank. This includes account numbers, balances, and the services they get. Customers can then take that data and share it with third parties – usually fintechs – who provide services like money transfers, budgeting tools, lending, and so forth. The theory is that open banking promotes choice by making it easier to switch banks or try new services from other providers. It’s already been adopted in some form in Australia and Japan, and it became the law in Europe and the UK this month. We’ll be watching closely at the impact the new regime has on our peer institutions on the other side of the Atlantic.
Finance is exploring the merits of open banking in the Canadian context, and we think it’s a good idea to take a look at how it could work here. What deserves particular attention is the way security, privacy and liability would be managed in a world where your most sensitive financial data is shared with third parties. As it stands now, banks in Canada dedicate enormous resources to comply with regulations that protect customer privacy, demand strict custody of data and require the highest standards of information security.
In an open banking world, who would be the backstop if things go wrong? Today customers are protected by their bank against unauthorized access. But in open banking, who would be liable? And would these tech companies have the risk management, anti-fraud technologies and the liquidity to make things right for customers?
Yes, innovation is a good thing. The key is striking the right balance between expanding options for customers while protecting them at the same time.
Of course, every conversation about banking inevitably turns to cybersecurity. The threat posed by cyber attacks is the number one worry of every bank CEO. I hear it from all of our members – large and small – foreign and domestic. Daily headlines from around the world demonstrate that they have reason to be concerned. That’s why our banks have invested heavily in this area. Canada’s Big Six spent more than $11 billion on technology in 2016 – a good portion of that was on digital security measures.
The Department of Public Safety is leading the effort to see what legislative changes may be necessary to make Canada a global leader in cybersecurity. We support those efforts. Banking is about managing risk, and cyber is the biggest one. The risk isn’t limited to privacy breaches or crashing servers – it also reaches areas of critical infrastructure. Banks along with the rest of the economy rely on power grids, transportation networks and communications systems. The Internet of Things has connected all of these, so we need to prepare for threats that are cyber-physical. It is critical that Canada has a legislative and regulatory framework for cybersecurity in place that captures all critical infrastructure providers to protect Canadians and the Canadian economy.
We applaud the efforts of Public Safety to coordinate preventative measures and incident responses among our industry, telecom, energy, law enforcement and government. But much more can be done.
As I said at the outset, it’s a remarkable time to be in banking as we go through this period of extraordinary change. The CBA and our members have been agile in adapting to the shifting environment. And we’re also looking ahead in bold new directions.
I’d now like to shift gears and talk about one of the biggest opportunities for Canada and a fundamental building block of the digital economy. We have a vision to create a Canadian digital identification system. We’re already living in a digital economy, yet we’re still tethered to an analog model to establish who we are in the multiple daily transactions we have with government, businesses and each other. Banks are perfectly situated to play a key role in creating a digital ID that will revolutionize the way we use personal data to interact with the world.
The current system is deficient in three major ways. First, it’s outdated. Proving your identity often relies on physical documents like drivers’ licences and utility bills. These documents can be forged or stolen and used fraudulently. Relying on physical ID also places a burden on those in remote communities who are forced to travel long distances to conduct basic business or access essential services.
Second, it’s clumsy. The two-factor identification used online, where you enter a user name and password, is more easily compromised and a burden for customers. Most people have more than 30 usernames and passwords to remember – and I know nothing breaks me into a cold sweat like a notification every 90 days that it’s time for me to change my password.
Third, it’s a drag on economic growth. Inefficient methods of establishing identity slow down the speed of transactions, introduce uncertainty, and are prone to costly errors.
There’s a better way. With digital ID, you don’t simply store and share electronic versions of your driver’s licence, passport or birth certificate. Instead, your ID is based on a uniform system of interconnected data from government and the private sector that proves who you are. This data doesn’t reveal any information beyond what’s necessary for the transaction at hand. Citizens gain enhanced privacy and security because they control who has access to information about them. At the risk of introducing an idea that requires its own dedicated speech, digital ID could be based on blockchain technology, which is proven to stop identity theft, prevent data tampering and thwart denial of service attacks.
If you’ve recently checked your Notice of Assessment or RRSP contribution room online with the Canada Revenue Agency, you’ll see that banks are already partnering with government services to authenticate taxpayers through online banking credentials. Consumers benefit by conveniently and securely accessing their tax information through bank websites they know and trust. Government benefits by not having to build secure portals for this information and through reduced call volumes and fulfilment requests at their contact centres. This model could easily be expanded to securely connect Canadians to other government services.
Finally, digital ID is squarely aligned with Canada’s innovation agenda to compete in a digital world. It harnesses the power of our telecoms to transmit data, engages our engineers to design the technology and enables entrepreneurs to create new business models. And it benefits all Canadians by enhancing secure access to essential services from anywhere they live.
This is Canada’s moment to lead. Our talent is among the best in the world and our standing as a welcoming country is attracting bright minds from all over the globe. We have a rare opportunity to set the standard for digital ID worldwide. Let’s not squander it, or we’ll find ourselves inevitably conforming to rules set by someone else in another country. Now is our time to act.
The banking sector has always been central to Canada’s history of growth and prosperity. It will be just as vital to our future, and all the stars are aligned to capture that potential. Banks are investing in tech labs. Millions of dollars have been invested in AI in Montreal, which is poised to become a world leader in the field. In Toronto we have Ryerson’s DMZ, the MaRS Discovery District and Communitech in Kitchener Waterloo.
Innovation has become a national rallying cry and customers are ready to embrace everything new and better. All we need is a modern legal framework, the imagination to see what’s possible and the will to make it happen.