7 minute read 28 Mar 2019
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How new open banking opportunities can thrive in Canada

Authors

Abhishek Sinha

Ernst & Young – Canada Partner, Technology Consulting, FSO Advisory

Senior leader focused on the transformative impact of technology on various industries. Dreamer. Futurist. Dad.

Anthony Rjeily

EY Canada Advisory – National Leader, Digital Transformation & Innovation

Digital transformation leader. Known for building trustworthy relationships with clients and team members. Traveler. Enjoys spending time with his wife and five children.

7 minute read 28 Mar 2019

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

This article is part of our Open Banking Opportunity Index.

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 Advisory 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. 

open banking opportunity index canada ranking

Regulators begin to study the pros and cons

As noted, the Canadian Department of Finance Advisory 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 Advisory 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 10th in the Index.

open banking regulation trust consumer sentiment canada v2

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%.

consumer sentiment insights canada

This overall score derived from sub-scores in three broad categories:

  • Open banking: posts mentioning “open banking” explicitly or referring to the Revised Payment Service Directive (PSD2). The net positive sentiment here was 21%.
  • Sharing financial data: posts that discuss sharing of financial or bank data with third parties. The net positive sentiment was 36%.
  • Services: posts that discuss apps, tools or services of the type enabled by open banking. The net positive sentiment was 25%.

Discussions about innovation (38%) were by far the top driver of positive sentiment. Consumers’ major concern was cybersecurity, which accounted for 41% of all negative posts on open banking. There is also clearly some fear and skepticism of change, with innovation accumulating 19% of negative posts. Data protection was the subject of 15% of negative comments.

The bottom line is that many Canadians are uncomfortable sharing their data online; however, that sentiment is improving as more innovative offerings emerge, at least among younger consumers.

Innovation projects begin to take root

Among the four pillars, Canada’s innovation environment was the strongest of the pillars, placing Canada in fifth place. Canada has a thriving FinTech industry, plenty of private investment, government support for startups, with Toronto ranked as a leading global tech hub. The Index ranked Canada third after China and the US for the number of patents filed by its main banks and FinTechs in 2017. It also ranked first for its broader research and development environment.

Data aggregator Flinks already claims to connect to more than 250 million Canadian financial accounts, and several of the big banks have announced individual initiatives of their own. In March, RBC was the first large Canadian bank to launch an API developer portal. The portal will allow eligible external software developers, industry innovators and clients to access select RBC APIs so they can more easily integrate the bank’s services into their own products.

The Platform Organization (also known as PLATO) is a group within Scotiabank that rapidly develops new services and tools. It is now sharing applications it has developed with the open-source software community. While neither of these initiatives are technically open banking, they will lay the important groundwork for future open banking initiatives.

Open banking’s future in Canada

Open banking in Canada does not yet exist as it does in the other markets in the Index, and considering the current environment, the transition toward open banking is more cautious.

But there are powerful incentives for banks to pick up the pace. It is likely that consumers will begin to demand the kind of individually tailored products and services that open banking makes possible. Banks that are prepared can better fend off competition, and perhaps become the competition - winning new customers from open banking laggards. Bankers should also bear in mind that regulators may become more assertive if the industry resists adopting technology that is deemed in the best interest of consumers.

For these reasons, we believe it is critical that banks follow these three steps to move open banking forward: coordinate their internal initiatives, open their platforms to innovators, and proactively promote digital adoption to consumers. If these steps are taken, it could put Canada on the fast-track to delivering greater value to consumers.

  • About the EY Open Banking Opportunity Index

    The EY Open Banking Opportunity Index assesses the conduciveness of open banking to thrive across 10 selected markets. Success is viewed as the potential for consumers to adopt open banking-enabled services within a market.

    Our model uses a wide range of measures — 22 indicators and 13 sub-indicators — to assess each country’s potential, across four key conditions needed for the success of open banking: regulatory environment; adoption potential; consumer sentiment; and innovation environment.

Summary

As open banking steadily progresses, banks will have to be proactive in coordinating internal initiatives, promoting innovation and encouraging digital adoption among consumers. Canadians, particularly millennials, are becoming more enthusiastic about open banking, but consumer sentiment remains a hurdle. Powerful incentives are in place for banks to pick up the pace and make open banking possible.

About this article

Authors

Abhishek Sinha

Ernst & Young – Canada Partner, Technology Consulting, FSO Advisory

Senior leader focused on the transformative impact of technology on various industries. Dreamer. Futurist. Dad.

Anthony Rjeily

EY Canada Advisory – National Leader, Digital Transformation & Innovation

Digital transformation leader. Known for building trustworthy relationships with clients and team members. Traveler. Enjoys spending time with his wife and five children.