Open Banking is a hot topic in the finance world; but for a system that touts improved clarity, many people are unclear as to what exactly it is. This past September, the Federal Minister of Finance established an advisory committee to debate the merits and risks of an open banking system in Canada, meaning we could see this system like this in the near future. Here's everything you need to know about what could be the next frontier in Canadian banking.
What is Open Banking, anyway?
The concept of opening banking is that consumers and small businesses will be able to share financial information electronically in a secure, and fully-consenting, way with third-party financial institutions and financial technology companies. In short, you share your information, and in exchange you get expanded (and easier-to-use) financial products and services.
What are the benefits of Open Banking for consumers?
By having full access to financial data, and the ability to share it, consumers would be able to use that information to gain a better understanding of their finances and obtain better access to money-saving comparison tools.
This could mean:
- Better financial understanding. Open banking would give people a comprehensive look at their finances. It would become easier to view and obtain all your financial information in an instant.
- Use of third-party financial service apps. Currently, there are fintech companies that will access your finances to provide you a service, but they currently rely on “screen scraping,” literally visually pulling numbers off the screen, to get your financial information off your bank's website. This information could be unreliable; open access to financial information, on the other hand, would be clear and correct.
- Easily compare financial products. Allowing third-party apps to access to financial information would empower them to use your information to find the best financial products for you. It may also pressure banks to offer you better online services, if third parties are competing with them to provide those services and find you the best product.
- All your information, in one spot. Rather than having to manually gather information from various sources to apply for a product such as a loan, all of your information could be made available to you in one place.
- Easier transactions. Instead of accessing and completing transactions through your financial institution’s system, you would have direct control over your funds and would be able to access it and send money, however you'd like, without your bank's involvement.
What are the benefits of Open Banking for small businesses?
For similar reasons, Open Banking could mean more streamlined and personalized services for small businesses, as well as consumers. Here are the potential benefits:
- Faster approval for loans. Applying for a mortgage or credit line means submitting financials from many different sources. With Open Banking, you would be able to access all your information from one spot.
- Banking automation. Where time is money, giving access to your banking information would allow small businesses to aggregate their payroll, auditing, and accounting processes.
What are the risks of Open Banking?
The problem facing Open Banking is the concern over reduced cyber-security and privacy. Even the name makes it sound like everyone, at any time, would have access to your financial information.
Equitable Bank is one of the financial institutions that are advocating for open banking in Canada. The company feels this system would provide a clearer financial picture for consumers, easier portfolio management, and reduced administrative fees.
To address concerns over privacy and security, this bank is asking the federal government to be involved in the process and to serve as an unbiased gatekeeper. In their view, Open Banking would include a robust accreditation process for third-party companies wanting access to a customer's information. The government would also create a digital identity for consumers, similar to a federally-issued passport, for further verification and protection.
Equitable Bank actually argues Open Banking would create a more secure system than our current one because it wouldn’t rely on services such as screen scraping that simply pull information off a website. Authorities would also make sure that customers understand the obligations and associated liabilities with Open Banking and ensure that all information sharing would be done with informed consent.