Open Banking in Canada 🇨🇦 — How can banks and fintech offer equitable and inclusive customer-centric financial products and services — Part 3 of 3

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

Before we cover the list of areas where banks and fintech can innovate, it is important to understand the history of wealth inequality and the need for fundamental changes across financial products.

The precursor to this article -

• Understand the root cause of wealth disparity and inequality in the financial system (part 1 of 3)
• 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)
• 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?

How can banks and fintech offer equitable and inclusive customer-centric financial products and services?

Everyday banking — Chequing & Savings

• Offer monthly interest on the account balance — regardless of the account type (chequing or savings), consumers should be able to earn interest on their account balance. If every dollar deposited in the bank account is making money for the banks then every customer should have the right to earn interest on their money. See example — Chime (US)— Savings account & SoFi (US) — Checking account.
• Eliminate monthly account fees — remove monthly charges for simply operating a chequing or a savings account and any daily transactions. Banks need to rethink their value-added services and charge for such services via a subscription-based approach. To create a competitive advantage, Banks could align their subscription fees with personalized lifestyle offers and features. E.g., account features like cashback rewards, local currency debit cards for frequent travelers, travel insurance, rental car insurance, and merchandise discounts on debit transactions. See more — Chime (US) — Checking Account
• Eliminate overdraft fees — consumers should be able to get a no-fee overdraft feature based on some specific conditions, e.g., requires payroll deposits or maintaining a specific minimum account balance such as $250 or more a month. See example — Chime(US) — SpotMe, fee-free overdraft
• Eliminate statement reissue charges — there should be no charge to get electronic statements for all active/inactive/closed accounts by offering digital file downloads over a longer period (5–10 years). Currently, some banks may charge a fee (due to their internal inefficiencies) to reissue statement(s) for even an account that was closed only a month ago.
• Offer commission-free, real-time, cross-border payments (24/7)– customers should be able to get instant cross-border payments between different institutions, available anytime and guaranteed (instant credit certainty). Fintech like Wise offer low service fee, and competitive exchange rates to send money cheaper and easier than incumbent banks. Currently, fast payment methods like Interac in Canada and Zelle in the U.S. have limitations when it comes to real-time cross-border payments.
• Offer enhanced digital wallet experience — where possible, offer a single-step digital experience for many day-to-day banking needs from within the smartphone’s digital wallet app (Apple Wallet, Google Pay, Samsung Pay). For example, check balances, add to savings, make bill payments, send money transfers, use instant social payments or peer-to-peer payments, split bills, etc. across different banks. Check out the customer experience offered by Apple Card.

Bill payments using Variable Recurring Payments (VRPs) — think of it as a smart direct debit.

• Eliminate direct debit cancellation fee — abolish unnecessary historic service fees which were probably introduced due to lack of technology and/or digital automation in the past. If it is free to set up a new direct debit then why should the bank charge the consumer to cancel it?
• Build Variable Recurring Payments (VRPs) APIs — offer consumers more control over regular payments that automatically leave their accounts. Soon, under Open Banking mandates, banks will need to offer VRP-enabled application programming interfaces (APIs). VRPs will provide services similar to direct debit, but with more control for the consumer, who can automatically make payments of different amounts to suppliers, and set caps on payments. With VRP, consumers could automatically cancel direct debits after the last due date or get notifications with the option to renew or cancel after the last due date. Banks could build features and APIs that constantly sweep accounts for fund balance, upcoming bill payments, and due dates to notify consumers in advance of a payment failure.

New Payment Methods — online and mobile shopping

Introduce the PayByBank payment method in addition to debit and credit cards. The cardless payments for eCommerce purchases provide better security for shoppers and lower card processing fees for merchants. Shoppers can just select to pay using their bank account as opposed to a debit or credit card.

• Currently available in the U.K., Mastercard PayByBank with limited participating banks like Barclays & HSBC.

Foreign Currency Exchange and Money Transfers

• Offer a multi-currency debit card that allows consumers to spend in local currency while traveling or for online shopping without hidden fees. Check out Wise Card in Canada.
• Be radically transparent with low-cost foreign exchange rates. Check out Wise transfer with the lowest fees.
• Offer no fee multi-currency accounts so that the consumers can hold money in multiple currencies for free. Check out Wise multi-currency account.
• Make foreign currency bill payments or receive foreign currency funds faster by getting a local account in that currency at no cost. For example, get a USD account in the US from Canada for free. Check out Wise coverage banks.

Savings and Investments Service —

Simplify the approach to savings and investment accounts for all types of consumers. Banks and fintech encourage consumers to invest based on their historic performance but psychologically, it is the uncertainty of future performance that holds back consumers from investing. Banks and fintech need to create products that protect novice retail investors from market risks and help them grow their financial net worth with predictable, guaranteed returns. It is hard to find many such examples in the market but here are a few examples of simplified, inclusive savings and investment services —

• Sofi — US — Money product with automated savings
• Sofi — US — IPO Investing — approach to inclusive investing. All active investing members can participate in IPO(s) before they trade on an exchange.
• WealthSimple — Canada — Invest — automated savings, diversified ETFs to minimize risk while maximizing rewards.
• WealthSimple — Canada — Fractional Trading — allows anyone to start investing with as little as $1 and own a fraction of an expensive, high-growth stock.
• WealthFront — US — automated, customizable investing — diversified, low-cost index funds.

Credit Builder Service —

Incumbent banks need to offer a free, rapid credit score builder service to help consumers with their financial well-being. Banks could offer short-term interest-free loans, and use data from everyday purchases, deposits, bill payments, etc. to help consumers instantly improve their credit score. See a few fintech products below —

• Kikoff — build credit, safely & responsibly. A hybrid consumer-credit and financial literacy service.
• Chime — Consumers can start building credit with everyday purchases and on-time payments. Learn more — Chime Credit Builder
• Monese — Credit builder, U.K. — Monese debuts credit builder functionality (Jan 2022). Monese creates an interest-free credit builder loan equivalent to 12 months of customers’ savings. Click here to learn more.

Payroll Payment Service —

Offer instant payroll payments — flexible payroll timetables, instant access to funds, etc.

• Chime — Get Paid Early

Credit Card Consolidation Service —

Offer credit card consolidation solutions with low-interest credit products, such as an unsecured personal loan or line of credit.

• Tally — The Tally+ credit line system strategically
  pays off multiple credit cards for the consumers on time.

Personal Loans Service —

• Offer instant adjudication — a digital experience to facilitate faster adjudication of new loans and instant access to new forms of capital without human intervention.
• Freedom to switch to low-interest loans — using online banking, allow consumers to easily switch anytime from a high-interest credit card with reward points to a low-interest personal loan if the payment history is in the good standing order. It shouldn’t be treated as a new debt but instead a transferable debt to improve financial circumstances.
• Payday Loans, cash advance, and payday advance at no cost — based on consumers’ banking history, Canadian banks could easily allow payday advances at no cost to the consumer. According to the U.S. Federal Reserve, an estimated 14 million consumers have no bank accounts and almost 20% of Americans are unbanked/underbanked. These consumers use many expensive financial services like payday loans, cheque cashing, etc. Financial Health Network analysis reported that in 2018 the unbanked/underbanked Americans spent $189bn in fees and interest on financial products. To protect low-income consumers, fintech in the U.S. offers financial tools that could eliminate the need for high-interest payday loans from the financial system. For example, Chime’s get-paid early product, SoFi’s Money early paycheck feature, and MoneyLion’s Instacash product.
• Access to pre-approved personalized products and services — offer instant access to financial rewards and dynamic limit increases for low-cost credit products based on the consumers’ financial activity (savings, responsible behavior, on-time payments, increase in payroll, etc). For example, Sofi — no free, low rate Personal Loans for key life moments

Mortgages that are driven by major life moments or milestones —

• Personalized mortgages — offer personalized (bespoke) mortgage rates, length of discount, terms, etc. based on the major life milestones, demographics, or socioeconomic information, such as a change in employment, pay for education, rise in income, marital status, number, and age of children or dependents.
• Buy-to-let mortgages — allow buyers to get mortgages on investment properties based on the potential rental income of the property as opposed to buyers’ income. Such mortgages are very common in the U.K. See example — Halifax: Buy-to-let mortgage
• Co-ownership model — offer the new home buyer the ability to get on the property ladder by helping them with their down-payment. For example, Ourboro in Toronto will co-invest up to $250,000 towards homebuyers’ down payment to help them become a homeowner.

Insurance

Offer pre-approved, modern home and auto insurance, powered by artificial intelligence and real-time data.

• Hippo — pre-approved or instant home insurance approvals
• Lemonade insurance — instant payouts, many insurance products — home, car, pet, renters, term life, etc.

Newcomer or New Immigrant Services

Offer newcomers access to immediate credit (loan, line of credit, mortgage) using technology to translate international credit data from their country of origin into North American equivalent credit scores. Also, include other potential sources like the employer guarantee letters, and payslips to provide credit up to certain amounts.

• Y-combinator fintech — NovaCredit offers credit cards and auto loans to new immigrants.

Lifestyle Rewards — travel, health, and leisure experiences

• Offer meaningful rewards that lead to a net increase in financial well-being and not overconsumption of consumer goods via superficial discounts.
• Flexibility to redeem rewards into cashback, travel miles, or investments.
• Frictionless travel bookings with personalized recommendations, deals, and rewards based on behavioral data.
• Encourage leisure activities with a positive impact on consumers’ health as well as their financial net worth with insights based on behavioral economics, such as age, income levels, cost of living, macroeconomic trends, etc.

Frictionless Financial Service and Support

In addition to the product features above, to demonstrate true innovation, it is imperative that incumbent banks also rethink their approach to consumer support and offer a frictionless banking experience.

• Eliminate friction from moving funds within internal banking divisions and across other institutions — offer financial services where consumers are able to digitally exercise full control over their financial decisions. Consumers should be able to easily open accounts and move their funds online from a product in retail banking to another in wealth management. They should be able to fund a product by appropriately acknowledging their decisions digitally without any human intervention. Currently in Canada, if you open new accounts with your bank’s wealth management or direct investing divisions and want to fund those new accounts from your chequing account that is held with the bank’s retail division then it would require human intervention, manual paperwork, and even visits to the branch. After the account is transferred, the ongoing transfers are easier but adopting new products or services within the same bank or moving to another financial institution can still take weeks or months.
• Offer enhanced self-management and personalized financial literacy — in addition to credit score monitoring, spending breakdowns, and financial insights, the overall banking experience must offer personalized financial literacy and the ability to customize alerts and notifications to help manage bill payments, avoid fees, etc.
• Community-driven personalized customer service — offer authenticated omnichannel customer support for financial products across the web or mobile devices, banking apps, and channels (email, phone, chat). Allow access to personalized financial advice and internal experts via thematic communities to customers based on their needs.

Lastly, see how Open Banking is fueling innovation across the world —

Canada🇨🇦 — slower innovation in anticipation of Open Banking

• WealthSimple — Invest, Cash, Trade, Crypto, Tax apps
• Tangerine — Savings with a catch — 2.25% interest in your savings account for 5 months
• Tangerine — no-fee chequing account

Rest of the world🌍 — disruptive innovation due to the adoption of Open Banking

Brazil 🇧🇷

• NuBank

Europe 🇪🇺

• N26
• Klarna — Shop, Buy-Now-Pay-Later (BNPL), Rewards

U.K. 🇬🇧

• Revolut
• Monzo
• Tandem
• Wise — previously known as TransferWise

United States 🇺🇸

• SoFi
• Chime
• Varo money
• Marcus — by Goldman Sachs
• MoneyLion
• Zelle
• Acorns
• Tally — low-cost credit card payment solution
• Ripple— global payment network technology, Ripple provides one frictionless experience to send money globally using the power of blockchain
• Apple Card (US) — with high variable APRs ranging from 10.99% to 21.99% based on creditworthiness but it is one of the first credit card products that is making some progress towards supporting consumer financial wellbeing — https://www.apple.com/apple-card/financial-health/

Photo by Christine Roy on Unsplash