Open Banking: Will Canadians Trade Privacy for Better Rates?
Loren Harris has three chequing accounts at three different banks. He uses Mint to track his expenses, a password manager for online banking, and Interac e-transfer to send himself money between his accounts. The 28-year-old Vancouver resident admits that managing his financial life is a bit complicated.
“It’s not hassle-free. The easiest part is using Interac e-transfer, but then you’re using a third-party service to get that done. Preferably, what you’d want is a drop-down menu of all the accounts you have banking relationships with and all your credit card information to pre-populate,” he says.
Harris may get what he wants sooner than he thinks.
As of 2019, Canadian lawmakers are assessing a concept called open banking, having invited stakeholders to submit position papers on the idea. Open banking is already being implemented to varying degrees in the UK, Singapore, China, Japan, the European Union and Australia. It could revolutionize the way we bank by increasing competition among financial institutions and giving consumers more choice and control in their financial lives.
What Is Open Banking?
Open banking is a banking environment that allows customers to permit their bank to share their financial data—transaction history, account details, credit card details, investment holdings, etc.—with other banks and third parties across digital channels.
In the UK, where open banking rules have already gone into effect, these third parties are mostly independent financial service providers, such as lending or investment companies and web/app developers. Along with the banks, they all must be registered with the country’s Financial Conduct Authority (FCA) and adhere to strict security, privacy and technical standards.
From a customer’s perspective, open banking looks like this:
- Loren Harris opens the Mint app (or any app he wants to share financial data with) on his phone or computer.
- Mint requests access to financial data at one of Loren’s banks. After Loren consents, he is redirected to log in to his bank’s online platform.
- Loren’s bank asks him to verify his identity and confirm whether he wants to share his financial data with Mint. In the UK he is also prompted to specify what data he’d like to share, what data he’d like to keep private, and how long he’d like to grant access.
But Wait…Don’t I Already Do That?
Is open banking really that revolutionary? Mint already imports your transaction history; payment apps like Google or Apple Pay import your credit or debit card details; and it’s already possible to apply for a mortgage or loan online and be approved after a quick credit check. But in Canada, all of these financial services work in isolation, with no communication between them and your bank. They rely on information that you provide, leaving you to repeatedly fill out forms anytime you want to do anything with your data, like link an account or credit card for payment, apply for a loan, or switch banks. It’s bureaucratic Groundhog Day.
“The banks try to actively block this [open banking] from happening. They say to protect the customer, but I think it’s for anti-competitive reasons,” says Andreas Park, associate professor of finance at the University of Toronto and research director at the Rotman School of Management’s Financial Innovation Hub.
Who Should Control Your Data?
“The way the Canadian banking business works is you get a customer once and you never let go of them. It’s your customer, it’s your data — it’s not the customer’s data. I won’t say the customer has no rights, but you can’t give the customer up. You just try to upsell them as much as possible, so all of their financial services stay with you and it becomes harder for them to leave,” says Park.
Open banking could break that mentality. Instead of being the gatekeepers of a customer’s financial data, open banking mandates in the European Union and Japan force banks to share a customer’s data instantly and completely with other banks and third parties by law, even if they risk losing that customer to a competitor as a result.
So if Harris wants to use Mint to aggregate the transaction history of all of his bank accounts, his banks must cooperate with Mint to help. They can’t block Mint from receiving data and they must provide it in real-time for as long as Harris likes.
But it doesn’t stop with a budgeting app. For example, if you see a bank offering a mortgage rate superior to your existing rate, your current mortgage provider must share your data with the competitor. And if you want to switch banks entirely, open banking means your bank can’t slow you down with excessive forms and bureaucracy.
“At its heart, it’s about giving customers control over their financial data and access to improved customer experiences,” says Andrew McFarlane, managing director, Canadian Payments Practice Lead & Global open banking Lead at Accenture.
Convenience and Competition
With open banking, everyday retail services would become more personalized and convenient.
“With banks having already verified who you are, you can use these permissions as a form of identity. There are many different applications that come with the ability to link different financial activities in a verified world,” says Park.
When shopping online you won’t have to manually enter your credit or debit card details or be redirected to PayPal. Any retailer you share your data with can just be paid directly using your chequing account details. You’d only have to authorize the payment before it goes through.
Open banking will also foster greater competition in Canada’s financial services market. Since it makes it easy to share your financial details with other banks and third-party financial services, proponents are hoping it will be more realistic for smaller or newer players to compete with the Big 5. Plus, once these smaller providers know what products and services you have (thanks to the data you shared with them) there’s an opening to develop better products and services that may beat your current bank’s offering.
“Open banking is ultimately about satisfying customers’ evolving demands in an era of always-on, hyper-relevant services,” says McFarlane.
Is Open Banking Safe?
According to a 2019 study from Accenture interviewing 1,500 Canadians about how they feel about open banking, 62% are wary of the concept due to concerns about the privacy and security of their financial data.
You can’t fault their apprehension, given the way 2017’s Equifax hack affected the credit data of approximately 100,000 Canadians. Subsequent hacks at CIBC’s Simplii Financial and The Bank of Montreal in 2018 then compromised 40,000 and 50,000 accounts, respectively.
“Consumer trust is a high priority and something banks and financial institutions will continue to take very seriously as they implement open banking,” assures McFarlane.
Beyond needing to consent to your data being shared and being able to choose exactly what data is shared and what is kept private, there are some robust security features to the UK’s Open Banking Standard that could be mimicked in Canada:
- Registration with the FCA of all financial service providers participating in open banking, ensuring that the companies involved are vetted and approved by the government watchdog to help eliminate criminality
- Requiring two-factor verification before granting access to data
- Third parties and other banks are never sent banking passwords or other security information
- Customers can revoke the access to their data at any time.
- If a customer feels they were wronged, they can take their grievances to the UK’s Financial Ombudsman Service.
- Payments made using shared financial data require additional authorization.
So is open banking safe? There’s always an element of risk to sharing financial data, but Park thinks open banking isn’t any less safe than our current banking system.
“Obviously, you need to have security measures in place and you need to make sure the different third parties have secure systems, but the notion that your information is only secure on your primary bank’s servers is ridiculous,” he says.
Canada’s Open Banking Future
Despite their concerns, Canadians seem to agree with Park’s assessment. Accenture’s survey also showed that Canadians will warm to open banking if their security concerns are addressed. Half are willing to exchange financial data with another bank or third-party if they could benefit.
“This is very promising,” says McFarlane. “At this early stage, the results are very much in line with our research from other jurisdictions.”
As those jurisdictions move forward, Canada is still assessing the best approach: regulatory (like the European Union), market-driven (like the U.S. and Singapore), collaborative (like New Zealand) or something uniquely Canadian – time will tell.