“Open banking” is a term that has been on people’s mind in the last few years. It is not always straightforward to define. Think of it as a movement which empowers financial institutions to securely and rapidly enhance their digital offerings using an ecosystem of third party applications and services.
In the beginning there was… the API
The rise of open banking is closely aligned with the rise of APIs (application programming interface) allowing third party developers to build applications and services around financial institutions, increased financial transparency options for account holders, and the use of open source technology to achieve these goals.
Banking data is made available in real-time, providing consumers with potentially more efficient ways to conduct transactions, save, and invest their money. Consumers may also have access to better loan terms since lenders will be able to look at historical transactional data to determine a borrower’s risk level. Furthermore, open banking also aims to give consumers more personalized information for making sound financial decisions.
It is important to distinguish the different levels of API “openness”:
- Private APIs: used within the traditional banking organization, reducing friction and enhancing operational efficiency.
- Partner APIs: such are usually between a bank and specific third-party partners, enabling the expansion of product lines and channels.
- Open APIs: with a true Open API, data is made available to third parties that many not have a formal relationship with a bank. More and more institutions are considering adopting this approach.
Open banking around the world
Germany (and the European Union): the Open Bank Project has existed in Germany since 2010 and works with most German banks to create an ensemble of third-party applications for customers.
This led to the Payment Services Directive (PSD2) which was put into place in January 2016 to regulate financial innovation.
“Under PSD2, consumers must have a right to use online services that provide consolidated information from their payment accounts whether or not there is an arrangement in place between the information provider and the account provider. Banks have to open their APIs so their customers can access information and make transfers from their bank account through third parties. PSD2 is a big step forward for banking and financial technology in Europe.”
United Kingdom: The United Kingdom’s Competition and Markets Authority chose a different approach than the EU. It requires the implementation of a single API standard, scheduled to begin with transaction data for major banks in early 2018.
Asia: Australia’s four major banks will enable open API access for customers by 2018. The national government has budgeted AUS$1.2 million for the Treasury in 2017–8 to assess what the open API schema should look like. In other major economies such as Japan and India, leading companies have taken steps to enable third-party data sharing in the absence of specific regulations.
United States: fintech companies like Mint popularized the concept of independent financial apps that aggregate various bank accounts and credit cards to provide consumers with a more complete financial view and the ability to compare various banking products. 18 months after Mint’s launch in 2006 there were 4,000 to 7,000 new users everyday. The US remains without any specific open banking legislation or standard, with many financial institutions being hesitant sharing data.
The current situation in Canada
Canada’s situation mirrors the US in the sense there is a lack of regulation. It’s also important to note we’re a much smaller market where financial institutions hold a lot of power. Hence, there is much potential for open banking, especially considering bank customers are often tied to one specific financial institution (due to habits or other circumstances).
There are a few companies in Canada which took an interest in the open banking movement and are offering financial services APIs. Montreal-based Wealthica is one of them. Founded in 2015, it offers an API-powered investment aggregation platform (for the sake of transparency: I am a brand ambassador for the company). Wealthica allows users to consolidate their investment accounts and portfolios in one simple interface with various reporting functionalities. The company is embarking on an ambitious journey to $10B aggregated investments. Other Canadian startups that are part of such emergent ecosystem include Questrade and Flinks.
It’s still early for the Canadian open banking space yet its future is quite promising.
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Disclaimer: Wealthica Financial Technology Inc. has contributed financially towards this article.