Open Banking in Canada 🇨🇦 — Understand the root cause of wealth disparity and inequality in the financial system — Part 1 of 3
Opinions expressed are solely my own and do not express the views or opinions of my employer or any other financial institution.
Across the western world, you can visit any core downtown area or a city center and you will find banks, insurance companies with the highest skyscrapers. I’m sure consumers don’t have a problem with beautiful skylines but they do have issues with how the financial industry’s approach to profit-making was not built on inclusion or equity (more in this below). Now, with the rise of Open Banking initiatives across the world, the incumbent banks will need to change their current fee-driven business model to a new model that is customer-centric, inclusive, and offers personalized products at scale with zero fees.
What is Open Banking?
Open banking allows consumers and small businesses to securely and efficiently transfer their financial data among financial institutions and accredited third-party service providers. This transfer gives consumers access to a more complete financial picture and other useful services to improve their financial outcomes. Want to read more? — Government of Canada, Final Report — Advisory Committee on Open Banking or a TLDR version I published here — What is Open Banking? — Canada
Dedicated to Black History Month, I felt it was important to raise awareness about how the financial disparity amongst the African American citizens started and what incumbent banks, neobanks, and fintech startups can do to make our financial system more inclusive.
What will you learn from reading further?
How did lack of credit and mortgage for black families cause wealth disparity and inequality across North America? (Part 1 of 3)
History — Financial Disparity in North America
During an interview, Sidney King, the president and CEO of Commonwealth National Bank (located in Mobile, Alabama, United States) shared, “when you look at mortgages that are made by the majority banks, typically less than 1% of their mortgages are to African Americans.” (source: NPR’s podcast The Indicator from Planet Money). According to Mehrsa Baradaran professor of law at UCI Law and the author of “The Color Of Money: Black Banks And The Racial Wealth Gap.”, this disparity has its roots in the 1930s and Franklin D Roosevelt’s New Deal. In 1934, Federal Housing Administration (FHA), during the New Deal-era the credit agencies unleashed an unprecedented mortgage market which created the America that we know now. There were no mortgages before then. There were no suburbs. There was no American middle class. When the FHA subsidized the creation of these suburban housing developments, it would only do so on the condition that no homes be sold to Black families and that every home has written into its deed that it could not be resold to a Black family (shocking & yes, it is true). This meant that the benefits of this massive federal housing program went mostly to white families. The Civil Rights Act of 1968 formally outlawed housing discrimination, but Mehrsa says there was a systemic bias built into banking that was never fully addressed. To learn more, get the book linked above and watch Mehrsa Baradaran’s interview — The Racial Wealth Gap? It All Comes Down to Black Banks —
Between 1935 and 1940, the agents of the federal government’s Home Owners’ Loan Corporation (HOLC) used data and evaluations organized by local real estate professionals — lenders, developers, and real estate appraisers — in each city, assigned grades to residential neighborhoods that reflected their “mortgage security” that would then be visualized on color-coded maps. Neighborhoods receiving the highest grade of “A” — colored green on the maps — were deemed minimal risks for banks and other mortgage lenders when they were determining who should receive loans and which areas in the city were safe investments. Those receiving the lowest grade of “D,” colored red, were considered “hazardous.”
You can view these historical maps and related data via this interactive project called — Mapping Inequality, Redlining in New Deal America which was created through the collaboration of three teams at four universities. A similar map of Los Angeles created through the project was used as a prop in the Samuel L. Jackson and Anthony Mackie film “The Banker,”
As the wealth gap still remains significant across North America, you can review further analysis here — An analysis of financial institutions in Black-majority communities: Black borrowers and depositors face considerable challenges in accessing banking services — link.
Current state — Financial products in North America
In the 21st century, if the incumbent banks and venture-funded fintech startups really want to compete in an increasingly competitive digital economy then they must rethink their product offerings and align them to the financial interests of the consumer. To become an “inclusive” industry, it is imperative for the incumbent banks to consider “product personalization at scale and proactive consumer debt protection”(more on this in later articles). This will allow the banks to meet the needs of consumers or families from all walks of life, personal circumstances, or during key life milestones.
Let’s take mortgage products as an example as it is still a major source of financial disparity. There are fundamental issues in the current banking system that leaves out many consumers due to the limited type of rigid mortgage products. Most consumers do not qualify for attractive rates and the ones who do are forced to look for alternative mortgage rates every 3–5 years. These consumers have to make sure they replace the expired discounted rate mortgage with a new rate that may or may not be favorable due to the changes in their family circumstances. Instead of offering similar, rigid locked-in terms and mortgage rates to all consumers, the banks could offer personalized (bespoke) mortgage rates, length of discount, terms, etc. based on their demographics or socioeconomic information, such as employment, education, income, marital status, number, and age of children or dependents. An inclusive, customer-centric banking system should ask — what type of mortgage rate would be suitable for a family of 4 with 2 of their children starting University versus a retired couple looking to refinance their home due to an unexpected health issue?
I am not suggesting that we offer and maintain millions of product variations for every kind of consumer but the industry can offer certain products to better align with many major life milestones using machine learning and data science. If Deepmind can solve a major 50-year-old biology challenge with their AI system called Alphafold, which is trained on the sequence and structures of over 100,000 proteins and accurately predict the shape of over 200 million proteins from the sequence of its amino acids (20 different types of amino acids in each protein), then why can’t the financial industry create the building blocks to match financial products to consumers’ key life milestones. Some of these milestones are common across consumers of a certain age and socioeconomic cohorts. Few major milestone examples -
- A couple in a specific age and income bracket looking to buy their first home.
- A couple expecting their 2nd child and looking to move from a one-bedroom apartment to a larger home.
- A young professional looking for a loan to finance their first car.
- A recent graduate with a first full-time job looking for a loan to consolidate their student debt.
- A single parent in a specific age and income bracket looking for a loan to pay for their child’s university tuition fees.
Now that we understand the root causes of financial disparity, we can further build our knowledge by reviewing the following topics next —
Articles to read next —
Related reading -
- An analysis of financial institutions in Black-majority communities: Black borrowers and depositors face considerable challenges in accessing banking services, Nov 2021 — https://www.brookings.edu/research/an-analysis-of-financial-institutions-in-black-majority-communities-black-borrowers-and-depositors-face-considerable-challenges-in-accessing-banking-services/
- Racial Disparities in the Paycheck Protection Program — https://www.nber.org/papers/w29748
- Open banking benefits reports by Committee — Are there meaningful benefits for Canadians from consumer-directed finance? https://www.canada.ca/en/department-finance/programs/consultations/2019/open-banking/report.html
- FDIC initiative — #getbanked — https://www.fdic.gov/getbanked/index.html
