Open banking is getting press around the globe and even nosed out “Blockchain” as topic du jour at this season’s major banking and fintech conferences. Despite the hype, most Canadians haven’t yet heard of open banking, much less thought about its potential to fundamentally change the financial services landscape and improve their banking experiences.
The idea is to allow customers to easily and securely share data held by their banks with third parties, such as other financial institutions or fintech companies, who combine it with data from other sources to yield new benefits to those customers.
What kind of benefits, you ask? What about making the slow and painful process of moving money between accounts held at different institutions as easy as it is to view balances and move funds held at a single bank? The “pain of switching” will no longer govern a decision to transfer part, or all of your business, from one bank to another.
Another example: You could temporarily grant anonymized visibility to your assets, liabilities, tax and employment information when applying for a loan or mortgage, and pick the right product and lender for you. Businesses likewise stand to substantially benefit from open banking. Many business workflows that are manual today will become automated – from payables and receivables processing, to reconciliations and annual audit preparation.
Removing opacity and friction from everyday financial activities in favour of transparency will improve competition and lower costs for individual Canadians and increase productivity for Canadian businesses.
An aggressive open banking strategy also gives Canada the potential to be a global leader in fintech innovation. We are home to motivated entrepreneurs and world-class technical talent, a growing pool of venture capital and notable accounting (Bench, Wave, FreshBooks), commerce (Shopify, Hyperwallet) and financial (Finn.ai, Grow, Beanworks) startup successes to build upon. What we lack in our fintech innovation ecosystem is bank participation as meaningful distribution partners. Open banking would bring this final missing element into play. Without it, Canada’s fintechs will necessarily point their offerings at the larger and more addressable U.S. and European markets.
Open banking is hard for banks. APIs (Application Programming Interfaces) are the technology mechanism used to realize open banking. But open banking isn’t APIs. A bank can have hundreds of API endpoints and still not have open banking. Open banking requires a fundamental paradigm shift for a bank. It needs to cease thinking about itself as the sole procurer and purveyor of services for its customers and start characterizing itself as a financial services platform. Open banking requires banks to truly embrace “customer focus” and assume the platform provider’s role in an open ecosystem.
Platform providers embrace solutions created by external parties that delight customers as equally as those developed by the platform company internally. When platform providers such as Salesforce or Apple hold developer events to introduce new APIs, they close each seminar with “we can’t wait to see what you invent.” That platform provider sentiment of seeding and then greeting the unanticipated, is new for all banks and uncomfortable for many.
Europeans, beneficiaries of the regulatory combination of GDPR (privacy and control rights) and PSD2 (bank data access rights), will be the first to have control over who has access to which data and for what purpose. But even without regulatory intervention, leading North American banks such as JPMorgan Chase, with its recent data sharing announcement, have identified the massive opportunity that exists when customers can choose to take advantage of the creations of many, wrapped with security and control provisions provided by the bank.
Canada’s banks will be disadvantaged in the medium and long-term unless they become at least as open as their European and U.S. counterparts. They will be disadvantaged because the number of vendors, solution providers and fintech partners available to choose from will be lower and costs to provide the products customers will come to expect will be higher. Unfortunately, without regulatory intervention, Canadian banks will likely remain closed for several years, since our market structure lacks the competitive pressure to force openness.
Open banking is not just good for consumers and businesses, it is required for fintech innovation, and it will ultimately prove to be very good for those banks that embrace its new paradigm.
Lisa Shields is the CEO and founder of FI.SPAN, a provider of business banking connectivity solutions.