Open banking is kind of like hot summer weather. It’s going to get here eventually, but probably not until it arrives in other places first.
Open banking involves using digital technology (predominantly APIs) to open up access to customer financial data (which resides mainly with banks) to fintechs and other financial service providers. It also requires regulatory changes in most jurisdictions regarding the sharing and handling of financial data.
By creating more competition in the marketplace, open banking will likely give consumers more choice, and thus drive fees lower. As an added bonus, tasks like switching banks or moving assets between financial institutions will no longer be as painful as having a root canal.
(While APIs are already used by banks, they’re mainly deployed to share information. Open banking would take APIs a step further to actually enable DIY asset transfers between different financial institutions.)
Open banking will obviously create growth opportunities for fintechs. But what will it mean for banks?
Benefits to big banks
More data sharing could allow banks “to see a fuller picture of their customers’ lives, which helps them create a better customer experience through new products and services,” according to an assessment by PwC Canada.
“Open banking also has the potential to reduce other risks faced by big banks, such as fraud and money laundering, as the increased access and sharing of data among institutions will make it easier to spot anomalies,” the report added.
Of course, open banking may create some downsides for banks.
“Banks will need to address the potential loss of revenue from existing payments revenue streams resulting from the lowered barriers to competition,” McKinsey warns in its own industry analysis.
Perhaps this fear — of increased competition eating into their profits — hasn’t made bankers super eager to jump into the open banking fray.
In its submission to a federal advisory committee exploring whether to allow open banking in Canada, the Canadian Bankers’ Association barely mentioned how open banking would benefit consumers. Instead, it highlighted how open banking could increase risks to consumer protection, privacy and financial stability while possibly giving a boost to financial crime.
Canadian banks, it seems, are not exactly clamouring to bring open banking to Canada. A recent panel discussion on fintechs in Canada provided some insight into one potential factor behind the banks’ reluctance.
The fintech view
At that Toronto event, panelist Randy Cass shared his own experience with Canada’s big six banks. When he was a member of the Ontario Securities Commission’s fintech advisory board a few years ago, Cass wondered why none of the Big Six would accept digital signatures.
Cass, founder and CEO of Nest Wealth (a Toronto-based fintech providing an automated, AI-driven wealth management platform), discovered there were no regulations restricting Canadian banks from using digital signatures; the banks simply refused to accept them.
Although digital signatures have since come into use at Canadian banks like RBC, Cass said this OSC experience reluctance led him to an epiphany: The biggest issue standing in the way of digital transformation at Canada’s banks, he said, “is more of a corporate driven one” than a regulatory one.
Remember when we said open banking will arrive elsewhere before coming here? Australia, the United Kingdom and the European Union have already enacted legislation allowing more open data sharing between banks and third-party providers.
Although regulatory changes have not been enacted in the U.S., American banks have forged ahead with two industry initiatives: new specifications for a financial sector API and the formation of a sector group to craft data-sharing standards.
Banking on the future
Since open banking came to the U.K., British customers still prefer incumbents to new market players. It makes sense, given the brand recognition and longstanding trust that existing banks have forged with consumers over centuries.
If Cass’s hunch is correct, regulatory change in Canada will make it legal for banks to engage in open banking — but it may not change their culture.
In an opinion piece for the Globe and Mail, another Canadian fintech CEO, FI.SPAN’s Lisa Shields, argued for a shift in that banking culture.
“Open banking requires a fundamental paradigm shift for a bank,” she said. “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.”
Along with APIs, open banking may force banks to (eventually) adopt a whole new attitude.