Open Banking in Canada 🇨🇦 — How can we reimagine the fundamental pillars of our financial products ?— Part 2 of 3

Opinions expressed are solely my own and do not express the views or opinions of my employer or any other financial institution.

The precursor to this article -

• Understand the root cause of wealth disparity and inequality in the financial system (part 1 of 3)
• What is Open Banking? — Canada — a TLDR version I published using Government of Canada, Final Report — Advisory Committee on Open Banking

What will you learn from reading further?

To maximize the benefits of Open Banking in Canada, we need to reimagine some of the fundamental pillars of our financial products. (Part 2 of 3)

Reimagining the fundamental pillars of our financial products in Canada?🇨🇦

Consumer Data — Usage, Rewards, Ownership, and Protection

• Right to use data — allow consumers to exercise their right to use, share, and move their personal and financial data in ways that benefit them and not just the financial institutions.
• Reward customers for exchanging specific data for personalized, rewarding products — allow consumers to share their data in exchange for meaningful rewards and products that lead to overall growth in their financial net worth. For example — Delphia is promising better investment returns than an average robo-advisor product by feeding retail investors’ data to their machine learning algorithm. Their business model is also based on redistributing the fees paid on their hedge fund by large capital investors to those who will be contributing data. Delphia calls it the wealth distribution game.
• Right to complete data ownership — allow consumers to own their personal and financial data so the incumbent banks, fintech have to compete for access by providing valuable, innovative products and incentives to the consumer.
• Consumer protection via numberless cards — in addition to secure data storage, financial institutions can also enhance consumer security and protection by issuing one-time-use debit or credit card numbers. For example, Mastercard numberless card is now available in many countries, but we still do not have this offering in Canada. Learn how a numberless card works.

Consumer Credit Score System

• Eliminate private credit bureaus, rethink the credit score system, and let the Central Bank manage our credit score like a currency — simply put, Central Banks are managing the flow of money in the economy and they help control the inflation that directly affects the consumers, so why not manage our credit score data too? How can the Government allow a handful of organizations (like Transunion, Equifax) to manage our creditworthiness score? What is the incentive for these private companies to ensure our data is correct before our credit score is shared with the financial institutions? The current system is bizarre — the financial institutions first give away our data to the credit bureaus which keeps them in business, and then these institutions also expect us to pay the credit bureaus for that same data in the form of a credit report! In addition, consumers have no way of holding a credit bureau responsible when they are rejected for a loan or a mortgage by the bank due to a credit report mistake. The only course a consumer can take is to open a case with the respective credit bureau(s) and go through a resolution process that is painfully slow and archaic. In 2022, we need a new responsible credit score system that works for the financial well-being of the consumer and the financial institution. We need a responsible institution, such as the Bank of Canada, to manage our credit score data free from errors (see the last point below) and protect it with greater security like a currency. Our data will be stored and safeguarded to provide the highest degree of consumer protection (learn more about the Equifax data breach here). Central Bank will also continue to evolve our data exchange policies according to the new Open Banking rules and other monetary policies.
• Access to real-time credit score & new data points — establish real-time data exchange between the new credit bureau (the Central Bank) and the financial institutions to allow greater consumer flexibility with instant credit score updates. The new credit score system should also allow the inclusion of additional real-time data points which encourages the consumer to report their responsible behavior that instantly improves their credit standing.
• Right to verify credit report data — allow consumers to acknowledge, verify, accept or dispute each credit report transaction directly with their financial institutions before the data is reported to the new credit bureau (the Central Bank). This approach will completely remove the current system where consumers wait for months for the credit bureaus and the banks to fix errors that adversely affect the credit scores.

Competitive Landscape

• Support community-focused Credit Unions in becoming primary financial services providers — mostly all credit unions offer many of the same types of financial products and services that you can get at a bank, and already many consumers in Canada use credit unions for their primary banking needs. A credit union is owned by its members since it is set up as a non-profit cooperative institution. Unlike for-profit banks, credit unions’ mission is to provide their members with the best terms they can afford for their financial products. This means members generally get lower rates on loans, pay fewer (and lower) fees and earn higher annual percentage yield (APYs) on savings products than bank customers do. In addition, as a nonprofit, credit unions are also generally exempt from federal taxes, and some credit unions even receive subsidies from the organizations that they are affiliated with. This means credit unions do not have to worry about making profits for shareholders. With the right level of support from the government and efficient use of the latest technology, credit unions can easily serve consumers with innovative financial products. Credit Unions can compete with the large banks by collaborating under a joint consortium (not just as an association like CCUA) to collectively launch new financial products, services, and technologies.
• Allow the Post Offices to play a role in the financial sector to support the unbanked/underbanked population — post offices can play a crucial role in the financial well-being of the unbanked/underbanked population by bringing affordable financial products to their local communities. According to a whitepaper by the Canadian Prepaid Payments Organization (CPPO), an estimated 10 to 20 percent of Canadians are either unbanked or underbanked, meaning they have limited access to everyday banking services. However, in the U.K. 🇬🇧, post offices offer all kinds of day-to-day banking needs from savings accounts, mortgages, loans, insurance, money transfers, etc. In fact, Post Office is the largest retailer in the UK, with an extensive network of over 11,500 branches that are placed at the heart of communities across England, Wales, Scotland, and Northern Ireland. UK Post Office ensures 99.7% of the population lives within 3 miles of a post office and 93% live within 1 mile. Learn more here — https://www.postoffice.co.uk/banking-and-bills.

Financial Well-being

• Offer Government savings & investment accounts with monthly prize draws — offer savings and investment tools that are easy to enroll and simple to understand without any financial jargon. These savings and investment accounts must offer 100% principal protection and some level of guaranteed returns like the Government bonds. For example, in the U.K., NS&I, backed by HM Treasury, has been helping its citizen save for 160 years. NS&I has savings accounts and premium bonds with the chance to win cash prizes. Premium Bonds are by far their most famous product. Over 21 million people have them, which equates to nearly a third of the UK population. The concept of a government savings bank is not unique to the UK, many countries have them. NS&I is the UK’s savings bank. According to the NS&I website — Premium Bonds are often referred to as a cross between a savings account and the lottery. It’s entirely possible to win a life-changing amount of money with Premium Bonds — each month we create two new millionaires. The difference is that, unlike a traditional lottery, you never lose your stake, which is why Premium Bonds are often used as a savings account.
• Standardize fees, charges & fines — introduce standardization and transparency across financial institutions on service rates, fees, charges, and fines. There is no transparency on why a local/international wire transfer in 2022 still costs an average of $35 per transfer with the incumbent banks? Currently, foreign exchange rates, money transfer fees, overdraft fees, direct debit returned charges, etc. vary across institutions and there are no incentives in place for financial institutions to reduce such charges or provide any further transparency to consumers.
• Proactive consumer education and engagement — by law, every financial institution must offer proactive, personalized financial well-being education to the consumer. This can be achieved effectively only via real-time digital notifications for the consumer to acknowledge if their transactional behavior or inaction would result in unexpected fees, adverse debt ratio, or low credit score. These personalized notifications with related educational content must be available as a dedicated area across online and mobile banking experiences so that consumers can also easily reach out for specific advice. It is less about flooding the websites with blogs and more about being a proactive financial institution that saves consumers from adverse debt ratios.
• Right to personalized debt consolidation service — Every consumer must have a right to demand a personalized debt consolidation plan with the same financial institution that offered them the product and services that led to an adverse debt ratio and low credit score. There are some basic programs available now where a consumer can request a lower credit card interest if they are struggling to make payments but such requests implicitly affect their overall creditworthiness negatively with that financial institution. In the current banking system, if a consumer has maximized their credit card balance and also has a high debt ratio due to some personal reasons, their bank (an A lender) will refuse to consolidate the debt with a low-interest credit product. Even if the consumer was maintaining their minimum payment obligations on time for a 17%-30% interest credit card, the same bank will not offer them a 3%-5% unsecured personal loan or line of credit due to their high debt ratio (unbelievable but it’s true). For such a consumer, this vicious cycle of high-interest credit card payments and high debt ratio is hard to escape until they drastically raise their income level. These consumers can dig themselves a deeper hole if they reach out to expensive B or C lenders for consolidation as their credit score and the debt ratio will not improve to an extent where the A lender is willing to help them again. If a lender encouraged the consumer to use their high-interest credit card via compelling offers, advertisements, etc. then they should also be responsible for offering a debt consolidation plan and protecting that same consumer from further debt.
• Abolish high interest on credit cards — it is the worst financial product in the market and the Government must intervene to lower the interest rates on credit cards. These cards offer 30–50 days of credit which provides consumer flexibility but the practice of charging 17%-30% APR is predatory. There are other low-cost, buy-now-pay-later (BNPL) like options available for short-term expensive purchases but even those products are now increasing the consumer debt at a fast pace. To learn more, visit Consumer Financial Protection Bureau (CFPB), U.S., Jan 2022 article, Our public inquiry on buy now, pay later.
• Abolish high-interest personal credit loans by the “B” lenders — as shared above, if large banks and the government offered responsible low-interest financial products and always provided the option to personalized debt consolidation service then we would not need these smaller financial institutions with high-interest personal credit loans. These loans are the root cause of high consumer debt in addition to credit cards. Large banks or financial institutions can afford to offer low-interest credit loans but in the current system, they do not take responsibility for helping consumers with high debt ratios. Consumers have no choice but to find alternative high-interest lenders like CashMoney, Fairstone Financial, Money Mart, and many others in Canada. See the example from Fairstone below — where the personal loans interest rates range from 19.99% to 39.99% with additional hidden fees and mortgages at 12.49%. It is hard to comprehend why such products are even allowed by the Government and how they can help consumers in rebuilding their credit? Many of these “B” lenders have confusing marketing messaging and have been under investigation for misleading consumers. See a recent CBC report below.

CBC report on misleading Canadian consumers — A Marketplace hidden camera investigation looked into popular alternative lenders and found they’re charging up to 46.96% interest in an era when the cost of borrowing is at historic lows — (source video & news article)

Hidden cameras show questionable sales tactics at alternative lenders

Next article in this series —

• To maximize the benefits of Open Banking in Canada, we need to reimagine some of the fundamental pillars of our financial products (Part 2 of 3)