What’s good for the consumer is good for the industry: Open banking and the future of financial services in Canada
In August of 2021, the federal government released its long-anticipated report on the future of open banking in Canada (aka, consumer-directed finance or open finance).
Since at least 2018, open banking has been on the Fed’s radar, as many other nations around the world introduced open banking regulations and subsequent systems that have transformed their financial sectors and fostered innovation.
Now, Canada’s government is laying the groundwork to develop our own regulatory framework and open banking system that will give Canadians greater control over their finances and data. As the report notes, the spirit of open banking recognizes that “an individual has the right to control, edit, manage, and delete information about themselves and decide when, how, and to what extent this information is communicated to others.”
In fact, the Government’s goal is to establish an open banking system by January 2023 that is usable by consumers, small to medium businesses and members of the financial services industry. Some have called this an ambitious timeline to achieve in just over a year, while others have pointed out that Canada is still well behind many of its global counterparts.
Why has open banking taken so long to reach Canada?
Many people are asking the same question: why has open banking taken so long to reach Canada?
A key reason we have been slower to adopt open banking than other countries is because we have a strong and healthy financial system in Canada. We didn’t have the same impetus for change that other jurisdictions experienced following the 2008 financial crisis, where our counterparts in the UK and other areas of the world experienced significant economic downturn and subsequent consumer distrust of their national financial systems and banks.
In fact, most Canadians trust their financial institutions to make sound decisions, so there hasn’t been a widespread push from the public for system-wide reform the way there has been elsewhere over the past decade.
Most Canadians trust their financial institutions to make sound decisions, so there hasn’t been a widespread push from the public for system-wide reform the way there has been elsewhere over the past decade.
Our ability to avoid the serious economic impacts that were seen elsewhere and maintain consumer trust is in part due to our financial services industry being heavily regulated by provincial and federal governments. With the Big 6 banks controlling over 85% of approximately $4 trillion in domestic assets, they have had a major role to play in bringing open banking to Canada and informing the governmental assessment and eventual roll-out of consumer-directed finance.
That’s not to say other stakeholders haven’t had their say in shaping open banking in Canada – the Government’s consultation included representative from across fintech, banks, credit unions, other financial service providers, academia and government. And, the Canadian Credit Union Association (CCUA) was heavily engaged to ensure the credit union system was represented in decision making.
But, it’s important to keep in mind that the Big 6’s relationship to the federal government is an extremely important piece of the Canadian open banking puzzle, because this change will be mandatory for them and they will be expected to help facilitate the implementation in many ways, starting by allowing their customers to take ownership of their personal data and share it more broadly with FinTech’s and other financial institutions like credit unions.
Although banks in Canada will be mandated to participate, other financial institutions (including credit unions) can opt in at the same time. We’ll get into this more later when we discuss what credit unions can do to prepare for and participate in open banking.
Consumer data storage and sharing practices today, and what’s set to change
As it stands, financial institutions effectively have total control over how consumer data is stored, shared and accessed. FinTech’s and other providers use screen scraping to gain access to customer data, which includes requiring consumers to share their private login information, such as their passwords.
This practice often shifts liability to the consumer, placing them in breach of their account agreements with their financial institution, whereas open banking enables the consumer to securely provide consent and keep their passwords private when sharing their information with a third-party.
The Financial Post points out that currently, “a customer attempting to log in through a third-party provider could receive an error message, and assume that they are unable to access their financial data due to a technical issue. But it is the consumer’s bank that is rejecting access”.
This can be frustrating to customers, but what they don’t realize is that financial institutions choose to block access to protect all parties involved and maintain security. Knowingly providing access to customers’ financial information can mean the financial institution may be held liable for any breaches.
Even if the bank doesn’t reject access, consumers encounter a host of service reliability and access issues with the current screen scraping practice. Consumers need to manage their online banking passwords in multiple places – both with the financial institution and with the third party to keep them in sync. Improvements to online banking login and security processes may break a third-party’s screen scraping process, thereby breaking access to the consumer’s data. The current screen scraping practice doesn’t allow for sound password management, prudent security management and doesn’t support a reliable and consistent experience for consumers.
With the current state of affairs, financial institutions are experiencing negative impacts to their reputations because their hands are legally tied when it comes to granting access to customer information. Open banking will allow for secure information sharing whereby all open banking participants will need to adhere to strict security and privacy standards.
In the information age, data is power, and in the case of Canadian financial institutions, this will mean giving up power and control in a market where a small number of players have maintained a long-time stronghold. Loosening their grip on customer data will mean opening the floodgates for increasing competition – and likely losing out on what have been historically dependable revenue streams.
But, what’s good for the consumer is ultimately good for the financial services industry. It’s important to remember that the value of data is diminished when siloed, and consumer-directed finance in Canada will open a whole new world of possibilities for not only start-ups and FinTech’s, but for financial institutions of all sizes. This is because open banking allows for more equitable access to data across the board and ultimately empowers consumers.
We’ve already seen the benefits of open banking through the successes that have been realized with our commonwealth counterparts, the UK and Australia. These countries have introducing greater choice for consumers and given them increased control over their finances. The open standards that come with consumer-directed finance have allowed institutions in these countries to reduce processes that would normally take hours or even days down to a matter of minutes because information about consumers is easily portable and transparent.
Open banking has also allowed institutions to assess risk indicators of individual customers more accurately across a broader set of data, allowing them to offer risk-based pricing, where consumers can take advantage of better rates on loans as they decrease their level of risk to their institution.
Perhaps one of the most compelling developments of open banking is its ability to provide more equitable access to financial services for underserved populations. Newcomers and people with thin credit history who may have never held a loan or credit card with a Canadian financial institution will have greater access to products and services. This ultimately gives them the ability to better participate in the broader economy and reap the benefits of increased financial security by helping them avoid things like predatory lenders, since their financial information will be fully available to reputable institutions who can accurately assess their risk.
The initial stages of open banking and what happens first
A crucial point to remember is that the Government is rolling out open banking in phases, and although January 2023 is fast-approaching, the first phase is quite conservative. Despite this, financial institutions need to take action.
Betakit points out that, “the initial scope of Canada’s open banking system [will] be limited to data currently available to consumers and small businesses via online banking, and comprise read-only activities.”.
The read-only component is key, because in this first phase, consumers will only be able to share their information with financial service providers, not move money around or open new accounts. This approach will allow time to test the waters and ensure sound governance is established.
Still, this phase will solve some real pain points for consumers, making it easier for them to manage their money across all their financial products, compare their products across competitors and allow for more inclusive access to some products. When the federal government decides to grant write access (the ability to move money, open accounts, etc.) we will see increased efficiency, innovation that spans the entire consumer journey, and new business models emerge.
Giving open access to Canadians’ data will provide third parties with the information they need to innovate and actively promote competitive offerings based on accurate product and rate comparisons. This means credit unions need to embrace their members to ensure they are delivering value and effectively managing their members’ experience today.
Industry players like PayTechs of Canada make a compelling argument for introducing write access sooner as we undergo widespread payments modernization in Canada, and with today’s political parties making open banking a priority, the red tape typically seen with large-scale changes like this is likely to be cleared quickly.
There is a thrust from industry and government to ensure that we can compete globally helping to drive open banking forward. Open banking is seen as critical to our economic recovery from the COVID-19 pandemic, meaning write access may happen sooner then we think.
What does this all mean for credit unions and how can you get ready?
As mentioned earlier, according to the Government’s report, federally regulated banks will be expected to participate in the first phase of the rollout.
Credit unions and other provincially regulated financial institutions on the other hand, can choose to participate in phase one on a voluntary basis. Another piece of good news for credit unions is that along with banks, they will likely be exempt from seeking accreditation from the federal government to participate in the open banking system because credit unions are already regulated entities, unlike many FinTech providers who will want to get in on phase one.
So, although you can participate in open banking in the early stages, the question for credit union leaders really becomes: Should you?
My answer is yes, all credit unions should at least consider it, and here’s why.
Open banking aligns well with the values of co-operation. Credit unions have a long history of bringing innovative products and services to promote their member’s wellbeing and address issues of inclusion. Open banking is meant to provide the vehicle for greater innovation and more inclusive access to banking for Canadians while providing them with the tools to manage their finances more effectively. It does this by giving them a right to their data.
Capitalizing on open banking early will help credit unions not only prepare their operations but also help them along in their digital transformation journey.
Open banking will provide the mechanism to quickly partner with third parties and respond to the changing landscape. It presents a chance to review your operations and policies for member centricity and transparency, positioning you well for future stages. A key benefit is providing access to more innovative solutions while removing friction from the member experience and gaining the efficiency needed to remain competitive.
Credit unions have a deep understanding of their members’ unique needs and their communities. They hold members’ trust and have an opportunity to embed literacy goals and curate fintech services better tailored to the needs of their members, giving members confidence in new tools that will support their financial wellbeing.
Moreover, organizations that fail to readily integrate to third parties may appear to have fallen behind by not allowing their members to exercise their data rights and by not providing a secure method for them to share their data. This can impact the organization’s brand, and ultimately, the member may feel that they are relegated to using unsecure, archaic screen scraping tools to aggregate their finances or perform their accounting functions, placing them at a disadvantage and taking on undo risk.
Not only does open banking align with credit union values, but credit unions also enjoy a size advantage for implementation in comparison to big banks. Because credit unions are generally smaller than banks, you can be more nimble and agile with rollouts, especially in the initial phases. Collaboration is inherent in co-operation and provides credit unions with the distinct advantage to leverage shared investments for infrastructure to enable open banking.
In my opinion, it’s better to get in early, and get ahead of the curve to introduce the changes open banking will bring for members. Credit unions can seize this as an opportunity to play a pivotal role and educate members about how they can safely participate in a changing digital economy.
Finally, with phase one granting only read-only access to member information, the main thing credit unions need to do to participate is ensure they have the infrastructure in place to support not only read-only access but also support future changes towards the emerging digital economy, such as payments modernization and digital identity. This means having a robust technology stack that includes a modern digital banking solution to optimize your members’ experience and an integration layer to support the exchange of data via APIs.
Integrating through an API-enabled marketplace is good approach to access third-party innovations and future-proof your organization. Marketplace platforms grows in value over time as they encourage third parties to collaborate and innovate, growing the number of solutions available to marketplace participants.
Credit unions who have recently modernized their digital platforms or are planning to do so as part of their 2021 strategic plan are going to be well-positioned to capitalize on the changes that will come with open banking. Advancements in digital banking have provided the flexibility to expose new services available through a marketplace that transform the member experience and streamline back-office processes. These are not only vital to your future relevancy, but set credit unions up to succeed in an increasingly competitive sector that will soon be flush with emergent FinTech’s thanks to open banking.
Eventually, all this change means credit unions will need to revisit the services that they deliver. There will be a distinct experience offered through a marketplace-enabled opportunity for members, where credit unions can access third-party tools and use their digital banking implementation as a launching point for broader digital transformation.
In addition to a digital banking platform, it’s important for credit union leaders to think about future phases now to ensure you’re ready to participate in the emergent FinTech marketplace that will come with the complete rollout of open banking.
As the lead of Celero’s digital transformation consultancy, Deborah helps credit union executives shape their digital transformation strategies and implement them. Deborah holds a masters of management in co-operatives and credit unions, and has over 20 years’ experience leading digital transformation initiatives with in the credit union system.
Other posts by Deborah Moore, Director of Digital Transformation