Open Banking — Opportunity for Some, Threat for Others
Are we making use of the financial technology that makes banking as convenient as it can possibly get? Well, we regularly use online banking, where customers don’t have to visit the branch to perform simple tasks, like depositing a cheque, or transferring money from one account to another. All of these things can be done in minutes with a few taps on our phones.
However, online banking is no longer the newest way in which banking is made easier. Now we have open banking, and it has already started to change the way banks around the world provide their financial services.
In the present day, the bank is the immediate “go-to” for the average customer when he/she wants access to financial services. This is because banks have an old trick to make customers stay loyal , and, resultantly, have a larger market share: they operate under an independent system where they hold and “own” their customers’ data. Other financial institutions, as well as the customers themselves, don’t have access to this data. Open banking, though, will force banks to change the way they operate.
Open banking is a system that allows customers to easily access their own data which is held by their banks, and securely share it with third-party financial service providers and firms outside the financial sector. This will give customers the chance to pick and choose the right firm/institution to do business with, for each of their financial needs.
An example of this was given in a Globe and Mail article by Lisa Shields . She said, that with open banking, “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.” The main idea behind open banking, is that customers should have control over their own banking information, not the banks. Shields also said that this system “will improve competition and lower costs for individual Canadians and increase productivity for Canadian businesses.”
But what will it take for Canadians and Canadian businesses to actually benefit from open banking? Well, first of all, our banks need to be willing to provide services through third-party channels. Of course, in order for that to happen, they need to accept the fact that data sharing can be done securely when it’s done correctly.
In a LinkedIn article called Open Banking: The end of vertical integration in Financial Services , the writer, Gianluca Corradi, gave an excellent example of how The Commonwealth Bank in Australia created a property-guide app that uses external databases and augmented reality so “customers can simply point their phones at properties in which they are interested, and they can check in real-time the history of the buildings, the previous transaction prices and a whole set of relevant information useful for taking an informed decision regarding the purchase.” He explained that “by using this app, Commonwealth increases dramatically the probability of having customers apply for mortgages instead of going to competitors.” This shows that not only can open banking benefit customers, but it can also give banks a competitive edge as well.
Thanks to open banking, banks now also have a lot of room to expand in the retail-banking market. In the same article mentioned above, Corradi discussed how the UK’s Starling Bank became a “complete one-stop shop for a consumer’s entire financial life” by “utilizing third-party providers such as Wealthsimple, Habito and AXA.” At the same time, he also discussed that traditional banks should take advantage of their current size and brand trust to expand their retail role, otherwise, “challengers may overtake them.”
This is especially true for Canadian banks and financial institutions. So far, they’ve managed to hold on to their large market shares without making any significant steps towards adopting this new system, and do this by investing in, or buying out possible competitors before they become big. An example of this is how Power Financial Corp. invested a total of $165 million in Wealthsimple, a fintech, to decrease the chances of it disrupting the finance sector. As well, for loans of up to $35K, CIBC is offering their customers the option to access funding digitally through their fintech partner, Borrowell. The funds are deposited into the clients CIBC account the next business day. This is smart because CIBC mitigates the risk of losing a small business client to an external competitor. But if that CIBC customer truly owned their own data, they may be more free to select other vendors.
That is why financial technology cannot be contained forever by means of such partnership with the big Canadian financial institutions. That is also why such firms are paying close attention to the Canadian Government’s consultations with all industry stakeholders that is currently underway through their Advisory Committee on Open Banking . This committee is exploring the pros and cons of a system which would give consumers the ability to share their financial data with third parties.
As we have seen in other industries that have resisted change, the advances in technology cannot be stopped for too long. Blackberry and Microsoft learned that lesson the hard way. So, it will be interesting to see the outcome of the Committee’s recommendations, as well as the industry’s responses to it.
Originally published at https://www.jectoronto.org on February 6, 2019.