Canada’s small and medium-sized construction companies are being shortchanged by the federal government’s foot-dragging on open banking, say a University of Toronto finance professor and a Toronto-based fintech proponent.
The January 2023 deadline for the launch of open banking recommended by the Department of Finance’s Advisory Committee on Open Banking has come and gone and the federal budget released last week provided no further timeline for its implementation, to the frustration of the Financial Data and Technology Association (FDATA) North America.
“We are disappointed at the lack of progress in Budget 2023 toward the implementation of Canada’s open banking regime, particularly since the timeline set forth in the 2021 Open Banking Advisory Committee report has now passed,” stated the FDATA North America in a release.
But the organization said it hoped open banking would become a reality “in the coming months.”
Both Caary Capital CEO Chris Whyte and Andreas Park, professor of finance at the University of Toronto, say open banking, with its promise of flexible new tech-enabled banking products and services for niche businesses, would be well suited for many firms in the construction sector. They note small and medium-sized builders often have trouble accessing loans from traditional banks because of irregular cash flows, negative trade credit records and records of financial disputes.
Canada’s big banks, say White and Park, with their generalist instincts, their tendency to make lending decisions based on cash flow rather than credit history or personal guarantees, their antiquated software and their reluctance to share data, too often refuse to support the working capital needs of contractors.
With open banking, said Whyte, “The ability for an individual to sort of mix and match…will go way up. So I’m running my construction company, I’ve got financing with these guys over here, I’ve got other financing with these guys over here, your ability to source financing from multiple sources and manage it centrally (improves).”
As defined by Finance Canada, open banking allows consumers to securely transfer their financial data among financial institutions and accredited third-party service providers — that is, fintech firms. The data transfer allows borrowers to work with the alternative lenders to come up with personalized lending arrangements.
The data sharing and proliferation of app-assisted financial services are currently not allowed within Canada’s regulatory system, although open banking has been in operation in the U.K. and elsewhere for years.
The Liberal government keeps promising to implement open banking, Park said, there has been ample consultation including federal hearings, and just a year ago in March the government appointed an open-banking lead. But Park remains a skeptic.
“I’m actually really negative about this,” he said “The Canadian Bankers Association essentially made it very clear that they don’t want to see open banking in Canada. They’re hugely resistant to it.
“I think politically, politicians don’t see the benefit because customers don’t understand it and so nothing’s going to happen unless our banks somehow, for whatever reason, find a competitive advantage doing it. I can’t see this actually happening.”
Addressing the federal advisory committee studying open banking in 2020, the bankers association said it believes consumer-directed finance can “enhance the financial services landscape for Canadians” but it has concerns in four areas: consumer protection, privacy and confidentiality, financial crime, and financial stability.
There was no immediate response to a request for comment from the FBA.
Whyte’s firm offers a variety of products and services including lines of credit, credit cards and a fintech spending management platform but full lending capacity will only be enabled when and if banking reform legislation is passed.
“The next iteration on our platform is adding that instalment lending capability,” he said.
Until then, Whyte said, don’t expect the traditional banks to develop the specialized products that contractors are looking for.
“They do a little bit in a whole bunch of sectors, but they don’t really build up specific expertise,” he said. “Open banking opens up that data-sharing capability such that people (in) specific targeted segments can access the data and build products and services specifically oriented to a particular niche.”
Hits on trade credit that prevent some contractors from accessing loans will continue to impede the sector until there is reform, said Whyte.
“In the real estate and construction industry, I would expect to see negative references on real estate and construction companies’ credit history because it’s the nature of the business.
“Sometimes there’s a dispute, right? ‘I think you owe me this much money and you think I owe you a 20-per-cent discount because it was three days late.’ While we’re in that dispute, you register your lien which puts a negative credit on your system.”
Fintech firms will understand those nuances, Whyte said.
Park explained traditional banks prefer to work with borrowers with collateral because “banks like to give out loans that they can collateralize.”
“Whereas when you have a construction company, which has labour, and they buy materials basically when they need them, and then they get paid over time, what they need is working capital, but they never really have anything they can back it up with.”