In August 2021, Canada’s federal Department of Finance released the final report of its Advisory Committee on Open Banking, which set a brisk 18-month roadmap for the implementation of open banking in Canada. In March, the federal government named Abraham Tachjian the open banking lead. Tachjian, alongside the Department of Finance, is charged with developing a “made in Canada” system that follows the report’s recommendations.
With 2023 right around the corner, it’s now become essential to understand open banking — and, more importantly, the possibilities it can unlock for Canadian businesses and consumers.
What is open banking?
Open banking allows consumers and small businesses to securely transfer their data among financial (and other service) providers, which can facilitate the offering of financial services products that meet their needs. Consent underpins the framework: Account holders retain full control over their data, including how and when it’s used. Without open banking, there is no secure way to share data from your bank account with fintechs or entities other than your own bank.
(Note that so-called “screen scraping” is often used for similar use cases as open banking — budgeting apps, for example — but it’s a different, and potentially risky, practice. Screen scraping involves sharing one’s banking username and password to give access to an external service. This can increase the risk of hacks and may violate the user’s agreements with their financial institution.)
For account holders who are consumers, open banking has the potential to improve the customer experience. For business account holders, open banking can fuel enhanced accounting or enterprise resource planning (ERP) applications. And for financial institutions and fintechs, gaining access to user data can help build innovative products better suited to meet consumers’ needs.
What open banking looks like in real life: Use cases from abroad
To understand what open banking will look like in Canada we can look abroad, to countries where adoption is further ahead. In markets with broad similarities to Canada, such as the United Kingdom and Australia, account holders are already able to share their data across an ecosystem of service providers.
With that in mind, here are a few global use cases to give a preview of what the near future could look like.
Account aggregation and powerful budgeting apps to manage personal finances
Australia is relatively new to open banking: Phase 1 took effect July 2020 and full implementation is still in the works as of 2022. Yet consumers in that country, a similar market to Canada in many ways, already enjoy access to a budding ecosystem of apps that give them a bird’s-eye view of their finances across accounts and institutions.
Even at this relatively early stage of open banking, a number of money management and budgeting apps can connect users to their accounts (chequing, savings, credit, investing and more) across dozens of Australian financial institutions and service providers.
By choosing to participate in open banking, consumers are making a trade that can result in a financial benefit. In exchange for offering their data securely to an external app or provider, they receive a clearer picture of the fees and interest they’re paying — one that can potentially tell them how much they could save by switching providers.
Open banking makes it easier for consumers to choose products that best suit their needs. This fosters an economy of competition among service providers and encourages the development of innovative solutions.
Enhanced credit reports to make fairer lending decisions based on alternative data
Open banking can empower lenders to make better-informed decisions thanks to data-sharing APIs that, in essence, give them the ability to run credit checks based on a more robust suite of data about the applicant. Already in the United Kingdom, 55 per cent of credit providers told Equifax that they planned to implement open banking in 2021, and more than 90 per cent were planning to do so before the end of 2022.
Proponents believe using open banking to supplement credit checks with real-life transaction data can lead to decisions that are both more rigorous than existing systems — and fairer.
Many consumers could responsibly afford more credit than they’re offered. Yet they have difficulty proving their credit worthiness through traditional means. Because it involves a more complete picture of an applicant’s finances than a traditional credit check, open banking can expand opportunities to borrow for people who have been unbanked or lack certain documents (often an issue for newcomers).
For example, being a reliable renter has not traditionally improved one’s credit score. Yet, thanks to at least one rental agency in the U.K., some consumers are already seeing their credit scores rise when they pay their rent on time.
Mortgage applications powered by open banking to improve the customer journey
There’s a sense in the mortgage industry that digitizing the application process — to reduce the need for paperwork and physical appointments — could make mortgages work better for everyone. That’s an especially pressing concern for a geographically vast country like Canada. Researchers with the Canadian Mortgage and Housing Corporation noted that taking away the requirement for a physical presence to complete an application could improve credit access for underserved borrowers, including those who live in remote areas.
Because of pandemic-related necessities, applications have already become less of a face-to-face process than they were just a few years ago. Many borrowers and lenders are preferring to streamline the process by completing more steps remotely.
Open banking to the rescue? By offering a secure digital means for would-be borrowers to share their financial picture, open banking could improve the home-buying process. (Digital ID represents another potentially useful digital tool to streamline mortgages.) The CEO of one Canadian online mortgage platform said open banking could help financial institutions avoid fraud and give consumers a clearer view of their options via mortgage brokers.
At the same time, open banking could simplify the application process itself. As one British mortgage provider promises, enabling open banking will mean most customers won’t have to hand over copies of bank statements to support their mortgage application. Solutions built upon an open banking framework will allow customers to share the same information immediately and securely.
More powerful software for small businesses to streamline accounting processes
According to Forbes, British small businesses have been even more enthusiastic about adopting open banking than individuals. Enhanced, cloud-based accounting applications are one reason. These can give businesses (including accountants and bookkeepers) a detailed view of cash flow, accounts owing, and other information — potentially from an easy-to-use mobile app.
Thanks to the arrival of open banking, around 70 U.K. financial institutions now offer access to customer transactions via cloud-based accounting software, up from around half a dozen previously.
This is helping small businesses deal with late payments, to give one example of the benefits. The Federation of Small Businesses estimates that 30 per cent of payments to British SMBs are late. In response, open banking-based services have emerged that facilitate automatic invoicing and other money-request features, to cut down on late payments from clients.
Trust and the importance of a Canadian-made solution
What do all of the use cases above have in common? They deliver tangible benefits to the end user while allowing them to retain control over their data.
At Interac we believe control and strong value propositions that benefit the consumer as well as the financial ecosystem must be among the guiding principles for a made-in-Canada approach to open banking. (Read more about the Interac perspective on open banking here.)
It’s clear that open banking could deliver benefits for consumers, financial institutions and fintechs. Plus, with a focus on innovation, new revenue streams and industry competition, open banking could benefit the Canadian economy as a whole.
Canada is ripe for open banking, but a question remains: How can stakeholders and participants ensure Canadian customers are comfortable, educated and secure when opening up their data in exchange for improved services?
As Canadians’ most trusted financial services brand, with decades of experience delivering financial transactions to this unique market, Interac is well positioned to collaborate with partners across the ecosystem to build a system that Canadians will trust.