Canadian Open Banking Initiative Presents Sterling Opportunity for Banks

By: Stiene Riemer, Joerg Erlebach, Kiran Konanur, Mark Schofield, Barric Reed and Jakob Liss

Covid has accelerated digital transformation across every industry, and banking is no exception. The pandemic-driven need to operate remotely has driven consumers to expect from their banks the same type of data-driven, innovative services offered by Big Tech. This presents a significant challenge for traditionally conservative Banks: if banks themselves don’t provide these kinds of services, FinTechs have shown that they are more than ready to step in and meet consumer expectations, though often through the use of suboptimal methods such as screen scraping.

Millions of Canadians currently utilize services offered by unregulated third-party providers that require them to share their access credentials, which the providers then use to access customers’ private banking information. Needless to say, the unregulated sharing of access credentials poses an immense security risk for consumers, especially given the number of data breaches that occur each year. While most breaches expose lower-value items such as usernames and email addresses, data breaches of the future might include consumers’ private banking credentials. The havoc this could wreak on consumer accounts is unimaginable.

To address this imminent threat and others, Canada created an Advisory Committee on Open Banking tasked with crafting a long-term vision and plan for the secure sharing of consumer data between providers within Canada. The committee reached a critical point in the design of this vision and plan with the August 2021 release of its final report.

What is Open Banking?

Open Banking is a set of initiatives under which consumers and small businesses direct the sharing of their data between financial institutions and third-party providers. Open Banking enables numerous use cases, including:

• Customer finance management: Provides consumers with better visibility into their finances across their providers
• Payments: Enables streamlined management of bills, payroll, peer-to-peer transactions, and more
• Lending: Enables faster, more straightforward, and more automated adjudication of credit applications, allowing a significantly quicker time-to-yes, better price differentiation, and ongoing monitoring of risk
• Customer engagement and retention: Enables fully personalized customer journeys with highly tailored offerings to improve client engagement and reduce churn through a comprehensive and timely understanding of customer needs
• Audit: Provides intelligent, approachable tooling to support taxes, audit processes, and more
• Portability: Reduces lock-in via streamlined transferring of accounts between providers, further crystallizing the need for impactful, personalized treatment to drive enduring customer satisfaction
• Authentication and fraud prevention: Enables authentication services as well as fraud and money-laundering prevention through cross-institution communication and a full view of customer transaction activity

According to the August 2021 report, there are three foundational elements to an Open Banking system. The first is a set of common rules for Open Banking industry participants. These rules ensure that consumers are protected, and that liability rests with the party at fault. Second is an accreditation framework and process that allows third-party service providers to enter an Open Banking system. Lastly are the technical specifications that allow for safe and efficient data transfer and serve the established Open Banking policy objectives.

The big upside to Open Banking

While Banks must exert significant effort to participate in Open Banking, there is a compelling value proposition at stake for Banks who get it right. Leaders stand to realize improved margins, reduced costs, and new revenue streams. By utilizing a broader, fuller set of customer information, Open Banking makes it possible for Banks to benefit through:

1. Supercharging of internal processes: Make banking operations easier, faster, better; e.g., improving credit-risk assessment through automated risk monitoring and data-enhanced credit adjudication processes to enable quicker time-to-yes and optimal pricing differentiation, or more efficient and effective fraud and compliance processes through comprehensive transaction monitoring.
2. Fortifying and enhancing existing offerings: Maintain and improve competitiveness; e.g., improving offer take rate by moving from segment-based offers to truly personalized offers, boosting customer engagement and reducing retention through right-time, -place, and -message communications, and improving prospecting through better targeting.
3. Developing new B2B or B2C offerings: Monetize new data, new services, or internal competence; e.g., productizing internal competencies, such as fraud-as-a-service, for sale to other businesses as unique offerings.

Planning for the future, Banks can begin to leverage their assets in the present, specifically transactional data. Advanced banks are already setting up analytically-driven processes for client outreach through preferred channels, and have enhanced internal processes, such as credit risk and compliance management, with customer data. In doing so, Banks will be prepared for a rapidly changing digital-banking environment as new, broader data sets become available.

Capitalizing on the complete customer picture

Today, Banks have a limited view of their customers, with each Bank having only pieces of the puzzle. It is not uncommon for a customer to have checking accounts with multiple Banks, credit cards with other Banks, and loans with other various organizations. As such, Banks can often only infer activity and customer preferences based on a limited, albeit powerful, view of the customer.

Open Banking breaks down these informational barriers, enabling a single, consolidated view of customer data — especially high-powered transactional data — to be shared across all Banks and providers. Higher quality, more comprehensive customer data turbocharges Banks’ analytic engines, enabling them to do things they could not do in the past. For instance, Banks can utilize all of a customer’s transaction streams to deliver a truly personalized customer experience.

With the release of Open Banking, coverage of key customer data elements will increase.

While retail customers are typically the focus of Open Banking discussions, it is essential to note that these changes also apply to SME customers within Business Banking divisions. Data leveraged for these customers has historically been limited to financial statements and indicators, with high-powered data, such as transactional information, often being underutilized. Open Banking presents the impetus to change this, enabling Banks to capitalize on improvements both now and in the future as their SME customers’ data profiles expand.

However, the expertise to fully utilize key customer and behavioral data needs to be developed over time, which is something BCG GAMMA has been helping clients with around the world. Specifically, Banks need to learn how to leverage all available customer data including and, perhaps most importantly, behavioral, and transactional data, to produce new, advanced solutions. This experience has led to SmartBanking.AI, a data and analytics platform specifically built to easily execute best-in-class use cases on top of the full suite of banking data. (Read here for a more detailed description of SmartBanking.AI and how it works.)

To illustrate how Banks can capitalize on a fuller customer picture, imagine these three scenarios:

1. A customer who loves to travel has a checking account with Bank A. The customer has a credit card from Bank B that is specifically designed to reward frequent travelers through a high travel-spend multiplier. Bank A is unaware that the customer uses this card and may not think to offer the customer a special promotional offer to sign up for its own travel-rewards card. With Open Banking, Bank A can choose to offer its own optimal card based on the customer’s transaction history, significantly improving the value proposition for the customer.
2. A small restaurant chain needs a loan to finance a new location. It submits a simple loan request consisting of the amount and term to its Bank and, with Open Banking, finds that its loan is instantly approved. Behind the scenes, the Bank leverages an up-to-date, full view of the chain’s finances. Funds are immediately disbursed to any account of the restaurant chain’s choosing, which are connected without the need to input account and routing numbers. This rapid approval process would apply just as readily to individual customers.
3. A customer is behind where he needs to be on his path to retirement. Today, Banks rarely have complete views into customer investments and can only infer how well they are positioned for retirement. With Open Banking, this customer’s Bank — or his new provider — could review his complete profile and proactively help him meet his goals. This might include assisting him in reducing excessive spending or moving investments into lower-fee instruments. Or the Bank could offer him a loan to reduce his high-interest debt.

Needless to say, the number of opportunities is large and will continue to grow as new companies innovate on top of the Open Banking infrastructure. BCG can help harness this opportunity by working with clients to identify areas of opportunity, analyze the potential value, prioritize opportunities, and drive efforts to prepare for Open Banking.

Capitalizing on the complete customer picture: Client examples

While not an absolute, the more data fed into a model, the better the model performs. This is the common thread for all the data and analytics opportunities related to Open Banking: more data enables better outcomes. The following examples help to illustrate how BCG and BCG’s clients are actively developing the capabilities to capitalize on Open Banking.

Example 1: Improved product recommendations for retail customers

Data improves modeling outcomes by allowing better prediction of customer behavior, such as whether a retail customer would take an offered product or not. Improvements can be driven by more comprehensive, high-powered modeling datasets (à la Open Banking), as well as by more advanced modeling techniques.

The illustration below shows how more data and advanced models led to the improved delineation between customers who are likely to take a product offering and those who are not. This ability to delineate enables Banks to perform more targeted and, hence, more successful marketing. It also enables Banks to target customers with ads and/or offers for only those products each customer is interested in, thus helping to reduce marketing noise.

Advanced modeling on comprehensive data sets enables highly precise targeting of products to customers — Open Banking will deliver even better performance

Example 2: Earlier, better detection of credit risk events for SME customers

Another way data improves modeling is by making it possible to detect key customer signals both earlier and with fewer false alarms. Similar to the previous example but using data from SME customers, this improvement can be driven by advances in both data and modeling techniques.

Capitalizing on the combination of a full, internal-only customer data profile and advanced modeling techniques, Banks can detect adverse client credit events up to 18 months earlier than the existing, expert-based modeling approach. As can be seen in the illustration below, predicted creditworthiness deteriorates slowly over time rather than dropping precipitously over a month. This gives Banks significantly more time to treat customers effectively, allowing the Banks to shift from reactive to proactive measures while also ensuring cost-effective servicing by relationship managers and maximizing the effectiveness of credit risk reviews.

Data and analytics provides clients with significant lead time to treat customers based on relevant signals

Example 3: Transaction and account data key, but not the entire picture

When evaluating the predictive power of each data category, account and transaction data have the highest predictive power, even when data coverage for customers is not 100% complete. Thus, extending the coverage and the completeness through Open Banking will provide a solid boost to predictive power. Beyond this, other data categories synergistically drive a performance boost above and beyond that of account and transaction data alone. Expanding completeness and coverage of these additional categories will also contribute to a boost in predictive power.

Expanded data coverage through Open Banking will drive more powerful modeling performance

For BCG’s clients, every ounce of predictive power is essential. Better models mean, among other things, more streamlined credit processes. This, in turn, drives operational efficiencies, faster time-to-yes for credit decisioning, and more precise risk assessments for more attractive offer pricing for customers: a win for both Banks and customers. Banks should look for ways to leverage Open Banking to drive a significant modeling boost through expanded completeness and better coverage of shared data categories.

Countries actively pursue Open Banking standards

Banks in the UK are currently operating under one of the world’s most advanced Open Banking initiatives. UK regulations require Banks to cooperate with third-party providers, follow strict accreditation processes for certifying new providers, and implement technical infrastructure to facilitate sharing among all involved parties.

This initiative was not implemented overnight. A roll-out of these regulations was beset by numerous delays. In fact, six of nine UK account providers failed to meet the initial launch deadline and had to receive government extensions to qualify. This did little to inspire confidence among a public already wary of online privacy. The UK is not alone when it comes to roll-out delays. Australia and Brazil experienced similar delays when attempting to roll-out the first wave of their Open Banking initiatives. But three years later, the UK has a growing marketplace of Open Banking-enabled apps and services (over 109 at the time of writing) and has experienced continued growth in user adoption and confidence. Clearly, there is much to learn from the UK’s Open Banking initiative.

Within the EU, Open Banking initiatives are currently regulatory-led. The EU’s Payment Services Directive (PSD2) mandated that, beginning in 2019, all EU Banks had to make it possible for customers to securely share their account information with other financial service providers. To date, Mastercard’s Open Banking Tracker shows that nearly 500 third-party providers have, in accordance with PSD2, registered to provide national regulators in the EU with consumer account information or payment services. Meanwhile, EU regulators continue to move ahead, with a review of PSD2 having begun earlier this year (2021). The final review will have significant implications for the current requirements, as well as for PSD3. Participants should expect a broader feature set from PSD3, such as more customer accounts (credit cards, loans, and more), non-financial industry data, customer authentication, fraud detection, and/or new contactless payment methods.

Within the US, Open Banking is industry-led. With no current regulations requiring Open Banking, many financial institutions are stepping forward on their own to make data available via API. Some also allow third parties to facilitate various actions from customers’ accounts, such as transferring money. However, unlike the UK, there is no one single US data-sharing specification, with the closest being the Financial Data Exchange (FDX). FDX is an industry-led, non-profit standards body operating within the US and Canada whose goal is to accomplish many of the same objectives as Open Banking.

Lack of data-sharing specifications has opened the door to many innovative FinTechs, such as Plaid, that are seizing the opportunity to act as a data-exchange layer, facilitating easy, secure access to multiple providers. Other FinTechs provide interesting new products for consumers and small businesses. Mint, for example, offers products for financial monitoring and planning, while Venmo enables effortless P2P payments.

Canadian Banks: Act quickly to shape Open Banking’s future

Canada is currently experimenting with a mix of regulatory-led and industry-led activities. It was regulatory-driven activities that produced the above-referenced final report on Open Banking, which stipulates that consumer data sharing infrastructure must be in place by January 2023.

At the same time, multiple industry-led initiatives are active within the Canadian market. Symcor hopes to build upon the success of COR.IQ, the fraud product it has successfully deployed in partnership with TD, RBC, and BMO. Meanwhile, numerous Canadian Banks, including the top five Canadian Banks (RBC, TD, Scotiabank via Tangerine, CIBC, and BMO) have joined the FDX.

Given the significant overlap of objectives between Canada’s industry- and regulatory-led initiatives, Canadian Banks must act quickly to develop an action plan or risk wasting substantial time and effort and potentially losing market share to upstart FinTechs.

It is imperative that Canadian banks come together to develop and present a refreshed Open Banking strategy that addresses the final report and ongoing activities. Canadian Banks must clarify how the report and industry-led initiatives will dovetail to enable the smooth and timely roll-out of Open Banking services within Canada. While taking a cooperative approach to rationalizing their efforts, these Banks must specify a clear regulatory response and compliance plan — and assume a prominent role in shaping Canadian banking’s future. Furthermore, these Banks must provide a clear answer to the question of coopetition between Banks, service providers, and others for the proposed solutions.

Canadian Banks must propose their own version of Open Banking, including a clear set of standards, a governance model, an accreditation process, an organization to manage and coordinate coopetition, and the technical specifications for secure data exchange. This version of Open Banking will likely result from blending existing initiatives and the August 2021 final report.

Ultimately, the path Canada chooses will determine the range and type of opportunities available as a result of Open Banking.

Significant work ahead to prepare for Open Banking

Consumer expectations for more digitally enhanced and personalized banking services are proliferating. As such, Canadian Banks must quickly assess their existing internal capabilities to make sure they are ready for Open Banking. They must ensure that several key capabilities are in place if they are to effectively capitalize on this emerging trend. These include:

1. An operating model, organization, and capabilities to deliver on the final plan at scale and pace
2. Solid technology infrastructure and capabilities to support scalable, data-intensive APIs — along with the software development capabilities to iterate and improve over time
3. A rapid innovation and commercialization capability to develop and implement data-driven Open Banking use cases such as personalized product offerings, customer retention management, and enhanced credit risk tailored for retail and SME customers
4. A fully analytics-empowered organization within the retail and business Bank with business processes targeted and optimized for the use of analytics to drive customer satisfaction and Bank operating effectiveness
5. A bolder, faster approach to developing partnerships, ecosystems for aggregation, and other use cases as required

A timeline for Open Banking winners

With 2023 set as the target date for launching Canada’s initial Open Banking capabilities, Canadian Banks have little more than a year to prepare. Given this abbreviated timeline, the next three months will be critical. Within this challenging time frame, Banks must accelerate their own actions to develop necessary capabilities and assert their role in shaping the country’s future Open Banking model. We propose the following 18-month high-level timeline to get started:

First 3 Months: Accelerate and expand Open Banking enablers

• Set up core business processes and technology infrastructure necessary to ensure success, drive decisions fast, and deliver on no-regret actions.
• Build out core data and analytics infrastructure required to enable key use cases.
• Develop an initial set of key customer-focused use cases, covering both retail and SME, such as cross-sell/upsell and retention.

Following 6 Months: Innovate and incubate

• Build out the regulatory, data-exchange utility, aggregation, and technology capabilities required at pace.
• Continue developing key analytics use cases such as credit-risk monitoring.
• Continue building the critical analytics capabilities, such as omnichannel orchestration and experimentation tracking, necessary to experiment at scale.

Final 6-plus Months: Commercialize and Implement

• Prepare for launch, complete with commercially viable and ready-to-deploy solutions.

It is not hyperbole to state that the outcome of the next 18 months will shape the structure of the Canadian banking industry for years to come. Structure drives conduct, which ultimately drives performance, which, in turn, will shape the industry’s future. Banks that have not come up to speed quickly enough stand to lose market share to Banks (and FinTechs) that have. The winners will be those Banks that move quickly, invest aggressively, and focus on regulatory-compliant commercial outcomes.