The financial services sector today is facing a unique set of challenges as innovative new technologies and expectations from digitally native customers run up against risk management constraints and regulatory requirements.
What do these global shifts mean for Canada’s financial services industry, which has a well-deserved reputation for trust and security, but has been slow to adopt new technologies?
To explore this question, I recently joined more than 30 thought leaders in government, banking, and financial technology at The Future of Money conference hosted by the University of Toronto Munk School of Public Affairs. This in-depth conversation on open banking and digital currencies highlighted the unique opportunity Canada has in the financial services space, as one of the few countries in the world where trust in financial institutions has remained relatively high.
Open Banking – the train is moving; the only question is when to get on
Across the globe, we are seeing growing acceptance of open banking practices. Two countries that have led the way are the UK and Australia, both of which have had a regulatory-driven move to Open Banking.
While consumers in both countries have benefitted, the gains have been somewhat muted. In the UK for example, there are 300 credited open banking institutions, serving 5 million customers. This is certainly significant progress, but it is far from wide-spread adoption.
Because financial institutions in Canada were able to maintain consumer trust following the 2008 global financial crisis, there is a unique opportunity to take a different approach than in countries where consumer trust fell drastically. Canada can learn from countries like the UK and Australia, and work with the five major banks to implement an Open Banking framework that will be adopted more broadly, and to greater benefit.
The risk, of course, is that legacy financial institutions could oppose regulation and slow down the implementation. This is where events like the Future of Money conference are so valuable – as representatives from legacy financial institutions, fintechs and academics were able to share their perspectives on what an Open Banking system should look like.
While there were a range of views expressed, I was really impressed by the universal passion for ‘Brand Canada’, and the common desire to create something that will truly benefit the whole country.
There was widespread acceptance that the Open Banking train has left the station, and it’s not a question of if it will happen, but when Canada will get on board, and how to ensure the maximum benefit for all citizens in doing so.
Digital Currencies prepare to enter the mainstream
The second major point of discussion was around payment modernization. The emergence of crypto, blockchain, and other monetary technologies has radically transformed the trajectory of the financial services space. App-based payments solutions are also emerging as the go-to service in some Asian markets, with social media intertwined in the open banking model.
Each market will evolve in unique ways, however in our inter-connected world, customers in every market are demanding more advanced technology and better customer experience. As these changes take place, security will be mandatory table stakes – but it also won’t be accepted as an excuse for why new services aren’t available.
For digital currencies, there is also a real need for greater education and trust in the system if they are going to gain mainstream acceptance. The average person does not have a strong grasp of blockchain, crypto, or other emerging financial technologies, leading to fear of the unknown and a belief that these are only available to insiders or others with specialized knowledge. The news of the past couple of weeks has only heightened that sense of insecurity.
Ensuring that crypto currencies are better understood, properly regulated, secure and integrated into the financial system may go against the initial motivation driving their creation. However, if these currencies remain inaccessible to the average person, they will remain a niche part of the financial ecosystem and fail to fulfill their potential.
As Canada builds this regulatory framework, it will need to find the right balance of fit to purpose regulation that ensures the financial services space remains trusted and inclusive, but that also allows innovation, creativity, and access to new technologies.
In ten years, banking will look very different. Are you prepared?
One of the most telling comments during the conference was from a bank executive, who was supportive of increased innovation, but also stressed that they had a bank to run – which is highly regulated and needs to support the majority of business that has not yet moved to the cloud.
This was an important perspective to share with the fintechs in attendance, who continue to push the envelope on what is possible. But it can’t be an excuse for inaction. Open banking and digital currencies will only grow in importance, and if banks are going to remain relevant, they will need to invest in the technology to drive change.
For Canadian financial institutions, this means investing in digital transformation to reduce time-to-market, increase accessibility, and provide new and innovative banking services to the modern banking customer.
Canadian regulators will also benefit from learning from what others have done, developing ‘fit for purpose’ regulations that are simple, understandable and can increase trust and inclusivity, and continuing to encourage collaboration with legacy institutions and fintechs.
For those interested into a deeper dive on the future of banking and money, I would encourage you to read the Munk School policy white paper, which formed the basis for our conversations at The Future of Money conference. Also look out for a summary of our conversations and recommendations going forward, which will be shared by the Munk School shortly.
Brian Hayes is the Senior Director, Financial Services Industry, at VMWare. He works with leading global financial services organisations to help them digitally transform. For further thought-provoking insights on the financial services sector, read more here.
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