4 Reasons Why Canada Needs to Adopt Open Banking

When thinking about countries like Australia, Japan and the United Kingdom, in many ways they seem like Canada’s equals. Reference points for social services, education, foreign policy and innovation. That said, when it comes to digital innovation and financial technology, Canada is lagging. In fact, in an annual study ranking global innovation capability, the Conference Board of Canada Report marked Canada 12th out of 16 countries. However, the recent convergence of several important trends has the potential to launch Canada into a position of global leadership in financial modernization. Leading that charge is the move towards open banking. 

Open banking is important for four key reasons: 

• One, it’s good for Canadian customers who deserve more options and more innovative services
• Two, it’s good for the financial institutions reeling from the threat of digital disruption
• Three, it’s good for fintechs who need unfettered access to customer data to thrive
• Four, it will be a boost to Canada’s reputation as an innovation leader 

Open Banking is good for customers

Operationally, open banking is a highly technical pursuit, but at the core it is really about giving consumers more control over their financial data. Today, that information is tightly held by Canada’s big banks. Their iron grip makes it unnecessarily difficult for Canadians to shop for and secure the best financial products and services. In response, financial technology upstarts have introduced work-arounds that make accessing this data relatively easy. Techniques known as “screen scraping”  are used to extract customer financial and transactional data with their customers banking login credentials. While this is convenient and technically legal, customers have limited control over the scope or duration of the third party access to their data and they have no effective control over how that data is used. Furthermore, it is unclear if customers fully understand the risk they are taking in exchange for a more personalized, digital banking experience.

In an environment of open banking, Canadians would have complete autonomy over their financial data via strictly controlled APIs that allow the financial institutions to communicate with each other without releasing personal login credentials to third party financial service providers. 

Customers could login into their digital brokerage, a savings account from one bank, a checking account from another and move money seamlessly between them all.  As a result one could buy insurance, apply for a mortgage or take advantage of a new promotional interest rate from a single interface. This control not only offers a new level of financial autonomy, it will force Canada’s financial institutions to develop more innovative, higher quality, and lower-cost products and services. 

Open Banking is good for banks

Far too much of the discourse around open banking puts the customer at odds with the bank. That relationship does not have to be acrimonious. With customer needs becoming more complex, it’s more important than ever for financial institutions to utilize the data and technology that puts customers first. Rapidly evolving customer expectations, especially in business banking, have the banks on their back foot. Embracing Open Banking will allow incumbent institutions to mitigate the impact of digital disruption and use their size and weight to their advantage. The conventional banks’ resistance to change has allowed agile digital-first startups to offer fresh and innovative services. Institutional inertia, not lack of ability, has been banking’s greatest impediment to change. The move to open banking would allow the big banks to capitalize on their global networks and vast resources. Open banking would be akin to uniting empires against rebellious outposts. Together they could offer such a vast array of products across a truly global network of integrated services that the barriers-to-entry would be almost insurmountable. 

According to the Canadian Bankers Association, 88% of Canadians trust their bank to offer secure digital banking services, and 85 per cent feel confident about modern banking technologies. Furthermore 39% of Canadians are planning to increase their use of online banking. It’s fair to presume that consumers will gravitate towards the business that can consistently offer the best digital experiences. Open banking will level the playing field but it won’t rebalance the resources available to the players. And that is a massive opportunity for the banks. 

Open banking is good for fintechs

For large banks that provide a full spectrum of financial services to Canadians, open banking will allow them to leverage their resources, relationships and customer base. For small and mid-sized financial banks, easier account-switching processes may make it possible to attract new customers. As powerful as the big banks are, they are not necessarily equipped to manage that transformation alone. They will need new partners to make the most of the open banking opportunity and fintechs frequently join forces with financial institutions to strategically scale products and services. 

By making customer data more accessible,  open banking should make it easier for fintechs to grow and scale their business more quickly. Consent unlocks the financial transaction data fintechs need to develop consumer- and business-centric products by reducing the friction points in the interoperability of different systems. Fintechs would no longer be beholden to the end-users contractual relationships with a bank. In other words, open banking not only gives consumers more choice, it gives fintechs the opportunity to create more products and put them in the hands of customers who need them. 

Open Banks are good for Canada

Open banking has the potential to create a competitive and dynamic framework for digital and data-driven financial services in Canada. That framework should enable business of all shapes and sizes to thrive in the financial sector, and by extension, the global economy. Fast, high-value and friction-free financial transactions free up capital, reduce bureaucracy, reduce operational costs and boost agility which ultimately make Canadian business more agile and competitive on the global stage. An aggregate outcome that is ultimately good for Canada. 

When policy works to increase competition, improve the customer experience and increase the innovative potential of one Canada’s bedrock industries everyone wins. Canada’s financial sector is stable, resilient and trusted by Canadians. While it has been a steady source of economic strength and employment open banking could make it a catalyst for global innovation and that is good for everyone. 

If you'd like to learn more about Open Banking, check out our other blog post, "How Open Banking will Help Push Financial Institutions to the Cloud".