How new open banking opportunities can thrive in Canada

Open banking is progressing steadily. Innovative initiatives and digital adoption could fast-track delivery of greater value to consumers.

Open banking is slowly but steadily progressing in Canada. Leading banks have launched initiatives to study the opportunities open banking offers and are using application program interfaces (APIs) to partner with FinTechs to deliver new products. Canada’s Department of Finance established an Consulting Committee on Open Banking in September 2018 to explore the potential and pitfalls of open banking for consumers. The Committee delivered a consultation document in January 2019, which identified the potential benefits and risks of open banking. The wider stakeholder consultation that follows will likely result in legislative action in the near future.

To make meaningful progress on the open banking agenda in Canada - and start delivering greater value to consumers - banks will need to consider three key steps.

1. Coordinate their internal initiatives either through an industry group or through regulators to help consistent standards emerge.
2. Adopt an open approach to spur innovation at scale and provide a level playing field to all participants versus the current “walled garden” approach.
3.  Proactively encourage digital adoption among consumers.

It remains to be seen how proactive banks will be, especially since most consumers are not clamoring for these services, at least not yet. But banks would be wise to move the initiative forward, or risk being caught off guard by new competitors that are quickly emerging from within and outside of the industry.

For now, the industry seems to be taking a go-slow approach, leading Canada to place eighth in the EY Open Banking Opportunity Index, which assessed the readiness of 10 different markets around the globe to thrive in an open banking environment.

In the Index, open banking is defined as “online banking and financial services enabled through consumers’ ability to offer third-party providers access to their personal bank account data and payment initiation.” Third-party providers can use a variety of mechanisms and tools, including “screen scraping” and APIs.

The Index also shows that most individual markets need to strike a better balance between implementing regulatory structures, building consumer trust and encouraging innovation. 

Regulators begin to study the pros and cons

As noted, the Canadian Department of Finance Consulting Committee released a consultation document that identifies the potential impact on consumers, small businesses and the risks to consumer privacy, data security and financial stability.

The Canada Department of Finance has said that making it easier for people to let third parties access their banking data could spur providers to offer more tailored products and services, and thus start delivering greater value to consumers. In addition, customers could benefit from greater transparency, helping them to make more informed decisions and better manage their finances.

Now that the Consulting Committee’s report is released, concrete regulatory action will likely be 18 to 24 months in the future. One of the big questions is whether Canada will adopt a more prescriptive approach, similar to the UK, or continue down a principles-based regulatory framework. A principles-based approach, in this context, is likely to lead to variability in standards and a hurdle to innovation. That might depend in part on how willing banks are to pursue open banking on their own.

Also, Canadian regulators would likely wait to take any specific action on open banking until the country’s big data privacy law, The Personal Information Protection and Electronic Documents Act (PIPEDA), is updated to include some key provisions, such as data portability, outlined in the General Data Protection Regulation in Europe. Having the right legal framework in place to manage customer privacy and consent before layering open banking on top will be essential for success. These factors help to explain why Canada’s open banking regulatory environment ranked 10^th in the Index.

Millennials could help drive adoption

Given this background, it is not surprising that Canada ranked 10th in the Index for consumer adoption potential: only 18% of its digitally active population are using two or more FinTech services, and only 44% of smartphone users have adopted mobile banking. However, those are averages. Consumer behavior differs by demographic segment. Many baby boomers and older senior citizens still prefer visiting branches and talking to customer service staff face-to-face. Canada’s demographic skews toward these age groups.

But there is every reason to believe that adoption potential among younger consumers - millennials in particular - is much higher and more in line with other countries. For now, however, the features and products offered in Canada are not nearly as advanced as in the European, Asian and Australian markets. This comparatively limited value proposition might be delaying the adoption potential among younger demographic segments.

Consumer sentiment remains a hurdle

In general, open banking is generating less buzz among consumers in Canada than in the US. However, Canadian consumers are becoming more enthused about the possibilities of open banking.

According to the Index, Canada placed eighth in terms of consumer sentiment among global peers. The consumer sentiment analysis in our Index was derived from social media, blogs and forums. Overall, 31% of consumer social media posts and comments were positive and 9% were negative, for a net positive score of 22%.