Luge Supports Fintechs in Open Banking Initiative

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Luge Capital

4 min readFeb 13, 2019

In early January, Luge was invited by the Department of Finance to provide feedback on the merits of open banking in Canada. As an active member of the fintech community, this was an opportunity to be a voice in shaping the future of open banking legislation, and help fintech companies thrive.

A few days ago, Luge portfolio company Flinks was featured in the Globe and Mail as a technology enabler of open banking. Flinks CEO, Yves-Gabriel Leboeuf, believes new legislation would create a more level playing field in the financial industry. We agree.

Earlier this week, we submitted our responses to the Open Banking Advisory Committee. Below is a summary of the key points we addressed. You can read our full submission here (warning: it’s a 7-page text document, but it’s exhilarating).

Benefits of Open Banking

By empowering Canadians with control over their personal financial data, open banking would enable significant innovation in the marketplace. We specifically called out access to credit, insurance, wealth management, and banking as examples of areas where open banking could bring efficiency and a better customer experience.

Lending: The credit application process could be completed quickly and efficiently by enabling consumers to share their financial data securely with lenders.
Insurance: By providing insurance carriers or brokers access to their financial data, open banking would enable Canadians to receive more customized and even proactive insurance policies that can automatically adapt to their changing needs.
Wealth Management: Under an open banking system, consumers could receive investment suggestions that adapt dynamically with income, spending habits, risk tolerance, other investments, goals, and future financial needs.
Banking: Open banking would enable a consolidated view of an individual’s current and historical financial life across all their accounts. Consolidation would enable a deeper level of analysis on the financial health and future needs of an individual compared to a view into a single account. Further, open banking would make the process of switching banks or opening an account at a new financial institution seamless because the customer’s data would be transferable by consent — just like switching cell phone carriers.

Other Areas of Innovation

Real-Time Pull Payments

We believe that a robust open banking framework would have the potential to revolutionize “pull payments”. Today, pull payments (payments that are initiated by the beneficiary institution) suffer from risks of non-sufficient funds (NSF) and repudiation. These risks are common nuances of the electronic funds transfer (EFT) system in Canada and the automated clearing house (ACH) system in the US. However, a comprehensive open banking framework could enable a beneficiary institution to send payment instructions to an originating institution in real-time and not only check for sufficient funds but also place a hold on those funds until they are cleared, eliminating NSF risk, and even enabling instant pull payments.

Secure Vault for Financial Data

Currently, financial institutions are the de facto default storage unit for financial data. However, open banking would enable easy portability of such data, especially if consumers have full access and control. This context could give rise to an industry that focuses solely on the secure storage of financial data. These digital “vault” entities could then be instructed by the ultimate data owner to share only specific portions of the dataset with banks and other organizations as the individual desires.

Simple Regulation

While regulation for the benefit of consumer protection, privacy and cyber security is critical, it should be clear, concise, and functional so that emerging fintech companies are set up for success.

Luge believes that open banking regulations should adhere to the following core principles:

Providing clear guidelines that are flexible to grow with emerging business models
Cooperation with the standards required by open banking frameworks in other countries
Development in consultation with industry stakeholders such as existing financial institutions and emerging fintech companies.

We recommended that regulations be drafted to offer compatibility with other jurisdictions through a passport system that allows companies to comply with Canadian open banking regulations by complying with the open banking regulations of another country (and vice versa). While proper regulation is important, a requirement for emerging companies to comply with overlapping and possibly conflicting regimes in multiple jurisdictions would serve to hamper the growth of Canadian companies internationally.

Overall

Timeliness is paramount in the development and implementation of Canada’s open banking framework. Innovation that relies on open banking is ongoing around the world, and Canada should not be left behind. We have the opportunity to set the framework for North America. The power of open banking is far reaching and has the potential to spawn new industries. If we establish a regulatory framework that aligns with the standards of other countries, we can set up our financial industry for long-term success and help Canadian fintech companies operate in an international arena.

Authors: Karim Gillani, General Partner and Ramin Wright, Investment Analyst

More information on the Department of Finance report on the Merits of Open Banking: https://bit.ly/2FTNuj5

Luge’s response to the open banking request for consultation: https://adobe.ly/2tlB8b0

About Luge Capital

Luge Capital is a venture capital fund focused on early stage fintech and artificial intelligence (AI) applied to financial services. We invest in talented teams shaping the way the world interacts with financial services. Luge looks for founders that improve customer experiences, remove complexity, make financial institutions more efficient and use data-driven methods for decision-making. We work closely with entrepreneurs and their teams in their efforts to build world-class companies by sharing our extensive network, experience and industry insights. www.luge.vc