In many countries, including Canada, only the largest banks are authorized to handle customer financial data. While that structure exists for privacy and security reasons, it limits what customers and companies can do with their personal financial information.
That closed loop system is about to change. A new model, called open banking, will inject fresh life, more competition and exciting new innovation in the financial industry and bring major benefits to customers and businesses across Canada.
What is open banking?
Open banking, also called customer-led banking, lets people share their financial data with third-party providers to gain new kinds of banking experiences and opportunities.
With open banking, customers authorize their banks to grant access to their financial information by third-party apps and platforms. Those app providers then leverage that data to deliver enhanced and specialized financial services to customers – for saving, investing, making payments, budgeting, and more.
For instance, home buyers might use apps that search mortgage offers best suited to their personal financial situation. Investors might authorize a financial services platform to analyze their investments and provide tailored financial advice. Busy students on tight budgets could use apps that pay their bills automatically – and always on time. Environmentally conscious shoppers might choose apps that track the carbon footprint of their purchases and encourage greener choices.
For all this useful information sharing to happen, open banking requires a new regulatory framework. Government regulators see the value of data sharing for increased personalization. They also recognized the need for big data to spur competition, spark innovation, and enhance customer service in the financial sector.
Open banking provides this long awaited regulatory shift by opening the playing field in financial services to third party app providers. These are smaller and medium-sized financial organizations and financial technology companies (FinTechs) that specialize in tech innovation and data analytics.
How does open banking work?
With a field of safe, secure financial apps to choose from, the process is simple.
First, customers find the apps or platforms they want to help them manage their finances, invest, or make payments. The app prompts the customer to link the app to their financial information. At this point, the customer provides consent to have their bank share their data with the third-party service. Most importantly, the customer does not share any account usernames or passwords. With authorization now granted, the financial data can be shared between the financial institution and the app through a secure channel and the customer can use the app for whatever it was designed for – to compare financial products, manage spending, or pay bills.
It’s not just individual customer financial data that makes open banking work, however. It’s financial information in the aggregate. With big data and predictive analytics, third-party apps can create more intuitive products that make banking customers lives easier. For instance, insights into behavioural spending trends can be used to improve spending or budgeting apps, or to alert customers about advantageous loan or investment opportunities at just the right time.
Above all, open banking needs consumer trust. When customers consent to sharing their financial data, they need to know it is protected and secure. Open banking needs a strong regulatory framework, a robust information security infrastructure and firm consent procedures. It needs high calibre of products supported by banks and FinTechs.
When products work well and address genuine needs, customers are more likely to authorize those apps to leverage their financial data in ways that benefit them most.
The benefits of open banking
Open banking gives customers more choice and provides access to a wide range of consumer-friendly, convenient and customized financial products and services. Every customer has a unique financial scenario, but financial apps help customers consolidate and manage their finances – often directly from their mobile phones.
People often keep multiple accounts, multiple cards, and multiple financial instruments (loans, mortgages, subscriptions). With so many products spread across financial institutions, it can be a challenge to get a full and true picture of your finances. Open banking provides real-time access to all of those accounts and services from a single app or platform.
Open banking apps also help customers stay on track with money matters. They can monitor a customer’s salary schedule, calculate budgets and set up instalment payments to pay off student loans or help save up for a big-ticket purchase.
Open banking can save customers time when it comes to credit checks and other financial assessments. Having all your information in one place makes it easy to demonstrate creditworthiness for a loan or mortgage, or to set up automated salary payments.
The same goes for business customers. Sharing cash inflow and outflow data with third-party financial service providers can generate insights into business cycles or sales patterns that help with credit or inventory decisions.
For the financial and payments industry overall, open banking can help reduce incidents of fraud and money laundering by making it easier to detect and uncover patterns of unusual transaction activity.
Open banking in Canada
While open banking is not yet available in Canada, the government is working to develop a safe and secure framework for Canadian banking customers. To determine the best path forward, it is monitoring the implementation of open banking in other countries, including Australia and the UK.
Some components of that framework are already in process. Open banking in Canada will have common rules and an accreditation process for all participants. To prevent fraud and ensure privacy, it will introduce concrete technical specifications for data sharing and a robust and regularized customer authorization process.
In anticipation of the changes, many Canadian banks are already customizing their own digitally-enabled services or partnering with leading and emerging FinTechs. With so much innovation on the horizon, Canadian customers have a lot to look forward to in the financial sphere.