The notion of “Open Banking” has been taking the financial sector by storm recently.
Indeed, we have not observed such buzz over a term in the industry since “Fintech” itself was coined.
As with all financial terms, the first question anybody asks is “What the heck does it mean?”
What is Open Banking?
Open banking is a safe and transparent exchange of financial information across channels.
Open banking allows consumers and small businesses “to securely and efficiently transfer their financial data among financial institutions and accredited third party service providers,” according to a working definition from the Canadian government, which observes that “this transfer gives consumers access to a more complete financial picture and other useful services to improve their financial outcomes.”
The principle of open banking is that an individual “has the right to control, edit, manage, and delete information about themselves and decide when, how, and to what extent this information is communicated to others.” Without compromising the safety and security of valuable financial data, of course.
Benefits of Open Banking
For the individual, open banking can connect families to a broader range of budgeting tools and provide financially marginalized Canadians access to automated support to manage their finances. Open banking can also enable Canadians with limited credit history access to credit based on their financial transaction history.
For startups, open banking can facilitate faster adjudication of loans and provide access to new forms of capital. Automated financial tools delivered through an open banking system can streamline the management of bills, invoices, payroll, and taxes to reduce the complications of running a small business.
In theory, open banking allows for more innovative, consumer-centric financial services than traditionally provided by an oligopoly of incumbents. While Canada’s Big Five Banks are respected, a wealth of new financial technology in recent years proves that startups can create and push to market solutions which traditional institutions cannot often match.
Follow the Money
Already there is tremendous interest in the concept of open banking and its emerging reality within the Canadian landscape. The government is willing—although slow—to properly flesh out a national open banking framework, and even more telling: the capital industry has spoken.
Many new companies leveraging open banking are securing their bags from private money, including Toronto’s QuadFi, which helps provide personal loans to people with limited credit history, and Relay Financial, also of Toronto, which offers no-fee banking that streamlines day-to-day finance for small business.
South of the border, one big player in the open banking space is Plaid. Recognizing Canada as a financial technology hotspot, Plaid made Canada its first international market in 2019, showing that Silicon Valley is paying attention to how open banking unfolds in our country.
The Future of Open Banking
To determine unfolding, fintech veteran Abraham Tachjian was this year anointed Canada’s “Open Banking Lead” by the federal government.
Based on a report released last year from the Advisory Committee on Open Banking, Tachjian will help the Government of Canada establish an open banking framework that interconnects all sectors while protecting the privacy of financial data, which is a major concern for many Canadians.
The report suggests Canada pursue a “hybrid, made-in-Canada approach that recognizes the potential for government and industry to collaborate, each with appropriate roles.” The implementation of open banking should be a collaborative effort, according to the report, with Industry best placed “to manage the implementation and administration of an open banking system, while Government is needed to establish clear policy objectives, convene participants, and set a framework and timeline.”
Open banking will be successful if the availability of these new services can enhance the welfare of Canadians, support innovation, and drive economic growth without compromising the safety and stability of Canada’s financial system.