By Gary Schwartz
Open banking is the creation of well-defined protocols and standards for sharing and exchanging real-time data in a secure and in a trusted manner between financial institutions, third parties and customers. The market is demanding modernization. Payments Canada is looking to the key requirements to compete globally. Worldwide there is an effort to enable real-time, data-rich ISO 20022 payments (the standard for electronic data interchange between financial institutions).
We know speed and data power this modernization. Open banking is a crucial prerequisite. It aligns with the Government of Canada’s mandate to become a global player in innovation, data and technology. An open banking mandate in Canada will position our country as a global leader, alongside the European Union and the United Kingdom.
Department of Finance Canada is conducting a review of open banking. As the president of the Canadian Lenders Association (CLA) we have submitted a response as we view open banking standards as an essential step in normalizing the Canadian marketplace and bring vibrant, customer-first financial services to our economy. It is the next step and the natural evolution of Canada’s banking and financial services.
As payments and financing services evolve and modernize, multiple stakeholders need to work together to develop the appropriate risk, policy, liability and compliance framework.
Air travel analogy
Moving toward an open banking economy is analogous to the transformation of other verticals both internationally and in Canada. One illustrative example is the airline industry. Travelers historically were required to contact incumbent airline companies directly to book or manage reservations, check availability, check in and check arrival times. Modern standards in our airline industry have now placed the customers in control, enabling them to decide what, when, where and how they wished to consume airline services. This amounted to expanded and improved services for would-be travellers.
The modernization of the travel industry allowed for open functionality through secure application programming interfaces (APIs). This re-visioning of the industry enabled customers and third-party apps to perform most, if not all of the travel functions, without the need to ever contact the airlines through slow, analogue channels. It allowed for a proliferation of enhanced functionality and services which are now accepted and indispensable and which have helped incumbent businesses to thrive while opening the door to innovation across the sector, thereby spurring a larger and more vital economy.
Similarly, open standards in banking will bring that vitality to the financial services marketplace. It will create new and enhanced functionality and services that will become indispensable parts of our growing economy.
Open banking benefits
Open banking brings significant benefits to the Canadian market for customers and businesses. Providing all Canadians agency over their data also allows them to benefit from the resulting financial access, efficiency and innovation.
Here is a list of some of the meaningful benefits that the CLA and our members expect from open banking standards.
- Greater innovation and competition. Open banking will fuel and fast track Canada’s FinTech and innovation ecosystem. It will open the doors for FinTech start-ups to offer customers the ability to better manage their debt and get sound real-time investment advice and offers. Open banking will also spark increased competitiveness between financial institutions and open doors for new entrants to provide increased financial services and options to Canadian customers.
- Improved access and efficiency. Open banking removes a huge burden off customers by giving them the ability to consent and choose what data can be shared with whom, thus allowing for faster and broader access to funds. It will allow customers to effectively access third-party financial tools and products and make it easier for them to pay and get paid. Open banking opens the door to third party providers to deliver services such as consolidation of payments (multiple invoices) and of account statements for treasury and investment purposes. Customers can give consent and provide instructions to their bank(s) to make multiple payments on their behalf, share their account balances with other banks and/or payment providers and save themselves the inconvenience of logging in to each bank separately.
- Standardization. Open banking gives customers a consistent user experience across all banks. Customers can better manage their financial health through better and broader access to their financial data; they will be able to see their credit scores in real-time through their bank accounts, get real-time advice to improve their scores and better manage their debt. Customers will also have the ability to change their addresses with all banks and/or service providers without the need to do so separately with each institution. Without open banking FinTechs rely on offerings that might compromise banks’ security, such as bank scrape technology. Open banking allows for these services to be more standardized and secure and will give banks the ability to monetize these services and make them readily available to customers.
- Serving the underserved. Open banking will make banking broadly available to the underserved market including women, new Canadians (immigrants) and indigenous peoples. Lenders are requiring more and more banking data to understand their customers’ spending habits and behaviour to be able to provide funding. Open banking streamlines access to this data and will result in more access to funds for the underserved customer segment.
- Customer-first design. Open banking allows customers to have agency over their data that is critical to develop trust and accountability and allow the customers to better participate in essential financial services. With open banking, customers can access and safely transfer their banking data to trusted parties. It will provide customers with more control over their data as they will have more visibility into what data their banks have on them and can select which parts of that data can be shared and with whom. Moreover, open banking provides customers more options to shop and compare products and end up with best products and rates. Crucially, open banking will result in more educated and active financial services customers.
- Commercial benefits. Open banking will allow more small-midsized businesses (SMBs) to access capital more efficiently than ever before, which increases economic output. It will increase cash flow by streamlining access to capital for SMBs and increase the competitiveness of alternative lending options. At the same time open banking will decrease the amount of time SMBs dedicate to business administration, allowing them to spend more time investing in the success of their operations.
Security and compliance
Open banking relies upon the accessibility and sharing of customers’ data, and thus demands a higher degree of privacy safeguards, protection and information security provisions. APIs provide access to broader sets of data in a simpler and more scalable manner. But this means that a breach of these APIs could be extremely costly and could have significant consequences due to the vast amount of data that could be breached and leaked.
In order for customers to feel safe and protected, there must be government-mandated standards and framework that all financial institutions must comply. The rules within these standards should be comprehensive and cover all risk profiles and tiers by putting the customers in control of what data can be shared, when and with whom.
Banks today use their customers transactional data to educate their fraud detection systems and algorithms. Since open banking allows customers to perform certain third-party tasks and transactions from within their banks, those transaction details might not be available to the banks to analyze. However, it could make it more difficult for banks to protect customers from fraudulent transactions that are not within their control.
Open banking also will introduce new types of transactions that incumbent banks are not necessarily familiar and might require time to adopt proper security to manage. A period of transaction history may be required to build appropriate fraud detection tools and algorithms.
In order to make open banking operate effectively and efficiently in Canada, unlocking its full potential and value for the customer, we believe that standardization and compliance is crucial. The Personal Information Protection and Electronic Documents Act (PIPEDA) already provides a robust framework for the privacy and protection of customer data. PIPEDA can be enhanced to make it more comprehensive by including open banking standards.
Crucial government role
The federal government must play a leadership role in bringing open banking to Canada. Any open banking initiative necessitates that all stakeholders in the financial sector participate in it.
First, it is essential that the government mandate standards and enforce them in order to create a unified vision of open banking that all stakeholders in the industry can comply. It should establish and advance them by working horizontally with incumbent and alternative sector stakeholders.
Second, the government should evolve the customer-first data policy, thereby ensuring the protection of customer data by placing the customer in control of their own data.
Finally, the government should work across ministries, benefiting from standards in privacy and consent investigated by the Treasury Board’s Digital ID initiative.
Gary Schwartz is author of the award-winning books “Impulse Economy” and “Fast Shopper, Slow Store.” Gary is president of the Canadian Lenders Association (CLA). The CLA (www.canadianlenders.org) represents and promotes services and innovation in the Canadian lending sector. The CLA’s lending members provide credit to both the SMB and consumer markets.