Open banking in Canada?
The next wave of financial innovation in the country could potentially be around the corner as Canada considers implementing open banking regulations. What exactly does the idea entail and what’s in it for the consumer?
Briefly, open banking is part of a larger move to give consumers the opportunity to leverage their data to provide services tailored to their needs. At present the focus is on enabling regulations to allow for sharing of consumer financial data held by banks with third party providers. Australia, Europe and UK are currently leading the implementation of open banking across their financial services landscape, with necessary regulations firmly in place.
North America has been lagging in this area, with both Canada and US adopting a less hurried approach on implementing open banking regulations. This delays the surge of innovation that could have been realized with a timely intervention and implementation of regulation. While Canada is currently undergoing a second round of consultations regarding the regulatory framework, when these consultations become regulation is anyone’s guess.
The external impetus to implement open banking in Canada is burnished by organizations such as the Open Banking Initiative Canada (OBIC), an advocacy group which is actively engaged with policy makers in Canada to shape the debate and ensure swift implementation of open banking regulations in the country.
The scope of open banking regulations has varied across countries. Australia, as a case in point, allows for read access only whereas UK, EU and Japan allow third party service providers both read and write access. Additionally, the type of data to be included in open banking regulations is a key question that needs to be answered to provide greater clarity. The UK, for example, is the only country of the 4 identified above that allows aggregation of customers’ data for use by third party service providers.
Although in its nascent stage of implementation, open banking has picked up pace in the UK. Increasing usage and adoption can be gauged from the fact that API calls have risen from 65 million in 2018 to over 6 billion in 2020. These numbers are only expected to improve further in the coming years.
What it means for the incumbent banks
The advent of open banking has the potential to disrupt current operating models of the incumbents. Will banks continue to operate as full-service providers with their own products, services and distribution channels under an Open Banking regime?
Or will banking institutions have greater involvement and partnerships with fintech firms that could result in banks outsourcing distribution to third party service providers while focusing only on product development. Such an arrangement is likely to throw up additional risks for the incumbents in terms of privacy and data liabilities.
An extreme and unlikely scenario would entail banks completely delegating products and services to fintech firms, focusing solely on providing channels to interested third party service providers. Such an outcome is often cited as a ‘dumb pipes’ scenario where banks act solely as conduits for fintech firms and consumers.
How do consumers benefit?
The current data sharing paradigm is severely limited by regulatory blind-spots. Service providers either use screen scraping or bilateral agreements to access consumer data. Open banking promises to provide the regulation to greatly streamline the process of financial data sharing by allowing customers agency over how and who can access their data.
The advantages of such a move are clear. Perhaps the most important is empowering consumers with the right to share their data with third parties. A key cornerstone of open banking is consumer consent in sharing data, without which banks would be unable to share consumers’ data with a third party.
There are other clear advantages that accrue from such a move. That financial institutions hold vast quantities of data that cannot be accessed by third parties provides an unprecedented opportunity for fintech firms to leverage this pool of data and come up with innovative products and solutions. For example, data aggregation services that aggregate disparate consumer data across different financial institutions and provide a bird-eye view of consumer financial health is one obvious use case for open banking. Data aggregation services such as Yoddlee already exist but operate mainly through bilateral agreements as mentioned above.
Open Banking should allow for the development of a marketplace, as consumers are able to compare products and services across a variety of providers and select the ones that suit them best. Greater competitive forces could lead to a reduction in bank profits but should ultimately benefit consumers greatly.
The provision of real time, holistic data and analysis is a key aspect of open banking. The provision of such real time analysis could result in a wave of innovation in financial wellness, liquidity management and credit analysis. Paired with technologies making use of artificial intelligence and machine learning, the financial eco-system could witness a significant boost in terms of financial innovation centered on a more personalized consumer experience. In the UK, Plum, a financial management app, does just that. Using AI enabled technology, the app automatically calculates and sets aside an optimal amount of money from the user’s account, allowing an AI directed approach to saving. The app also scours for better deals for users, allowing users to make use of a marketplace of services to improve financial wellness and reduce bills.
But perhaps the greatest push for open banking comes from the ability of such a network to process real time payments. Payments under open banking will be processed in real time and at a much lower cost. According to a report published by Yapily vendors could see a 92% reduction in payment processing costs under an open banking regime. For context Yapily is an enterprise connectivity platform which operates in the UK and has raised $18.4 million in funding to date.
Being the current leader in Open Banking, Europe also provides some clues as to what offerings an open banking eco-system could entail. A host of use cases were identified by Tink. These include digital identity services, KYC automation, transaction monitoring for fraud, financial management services and automation of on-boarding processes. For context, Tink is an open banking service provider that lets consumers connect with over 3,400 banks across Europe using 1 API.
How Canadian Consumers View Open Banking
Open banking is increasingly being taken up by consumers across the World. In the UK, nearly 3 million consumers have signed up and are currently using the service. In the context of Canada, EY recently conducted a survey to gauge consumer sentiment with regards to open banking. While consumers are willing to share product preferences data, ranging from 44% to 52% dependent on age, a smaller percentage was willing to share financial account data, with willingness to share ranging from 6% to 11% of survey participants.
These numbers are not surprising given general Canadian outlook on data privacy and usage. However, if open banking participants feel the benefits outweigh the risks, uptake could increase more than suggested by the EY survey.
Canada has already lost precious time in implementing key regulations to kick-start open banking. Open banking has the potential to bring about major changes in how consumers interact with their financial information. By giving consumers greater control over their financial data and allowing said data to be analyzed by third part providers, open banking regulations could pave the way for increased financial innovation.