Article

Saying ‘Open Sesame’ to Open Banking

gold light spills out of an open bank vault
By Roberta Staley

13 minutes

Credit unions hope the increased use of APIs will open many doors of opportunity.

The spring buds of open banking first emerged half a dozen years ago when Europe adopted a new directive for the financial sector that included making payments safer and more secure for consumers while bolstering the competitiveness of non-banks by standardizing data sharing.

Embraced not only by the EU, but also the U.K., New Zealand, Japan and Australia, open banking has changed the global paradigm for financial services operations. In Canada, open banking remains a twinkle in the eye of credit unions, albeit an increasingly brighter one.

This burgeoning enthusiasm for open banking is being accelerated by the realization that, in a COVID-19 world, a new, expanded payment system may help economic recovery. The pandemic, somewhat ironically, has also helped pave the way for a transition to open banking by forcing credit union members and other financial consumers to become more digitally savvy, with isolation protocols accelerating online banking and an openness to innovation and change.

What Is Open Banking?

Open banking is the secure, customer-approved electronic sharing of financial information through application programing interfaces that allow access by third-party providers offering new services and apps.

For example, it means a young couple thinking of buying a home could allow a credit union or bank to access their transactions and accounts at all the institutions they deal with in order to get a clear picture of their finances without providing their account logins. Some institutions have personal financial management programs in place now, but they require consumers to provide login information that can create security problems.

Open banking infographic
Open banking is the secure, customer-approved electronic sharing of financial information through application programing interfaces that allow access by third-party providers offering new services and apps.

Credit unions are likely to partner with fintechs to provide these services. Whereas credit unions once viewed fintechs almost as an existential threat, potential synergies are now being realized. Fintechs could provide credit unions with non-interest income and easier access to technologies that would otherwise be too expensive. Such partnerships will put credit unions on a more competitive footing not only with banks but other fintechs as well. In turn, credit unions will help fintechs scale distribution more quickly and cost effectively.

Open banking also has the potential to create a fundamental shift in how finance is consumed. Credit union members (and financial customers generally) will no longer be the end product, with financial institutions owning their transactional data. With a variety of new apps at their fingertips, members will become the architects of their own monetary destiny, facilitating a more bespoke (and hence more profitable) financial identity by making products, pricing and other data available for comparison and consumption, says Umesh Manocha, VP/digital and payment technology at $23 billion Central 1 Credit Union, Toronto.

“There’s no doubt that customer expectations are being reshaped around digital banking and payments,” says Manocha. “How the credit union system reacts to this change will be pivotal in how our clients can support their members.” 

Umesh Manocha
Umesh Manocha
VP/Digital and Payment Technology
Central 1 Credit Union
asset size — $23 billion
There’s no doubt that customer expectations are being reshaped around digital banking and payments. How the credit union system reacts to this change will be pivotal in how our clients can support their members.

How Open Banking Levels the Playing Field

Carrie Forbes is the CEO of Nova Scotia-based League Data, which is the CIO and enterprise technology provider for 46 Atlantic credit unions in the four Eastern provinces: New Brunswick, Newfoundland & Labrador, and Prince Edward Island, as well as N.S. (Atlantic Canada’s credit union system assets stand at $10.6 billion, with more than 320,000 members.)

Open banking, says Forbes, will be crucial to the strength and growth of the Atlantic credit union system, allowing it to compete with banks and fintechs through what she calls the democratization of data. Credit unions struggle to compete on the same scale as the big banks due to their size, but by creating alliances and partnering with fintechs with their unique, boutique approaches, smaller start-up entrepreneurial communities can “play in the same sandbox as a large tech company or bank or larger entity,” says Forbes. The opportunities presented by open banking, and the new third-party partnerships it will engender, mean credit unions can avoid large monetary expenditures on innovations.

In anticipation of the benefits of open banking, League Data has been undertaking systems change for the past four years. “We’re working to be technologically ready for whatever the open banking standards will be,” says Forbes. This includes enabling connection to new digital products and replacing League Data’s older platforms and networks in order to support new technologies. It has also increased cybersecurity and League Data’s privacy posture to bolster its digital presence.

Last year, League Data published a whitepaper that was co-authored by Valeyo, a Canadian solutions provider with locations in Toronto; Edmonton, Alberta; Winnipeg, Manitoba; and Burnaby, British Columbia. Titled Pushing the Giants – Open banking: The Collective Opportunity for Canada’s Credit Unions, it promotes the embrace of open-banking data standardization to ensure access by all institutions. Financial data, as it currently stands in Canada, “is both anti-competitive and a deterrent to economic growth and good financial health for consumers and small businesses alike,” the report states. Furthermore, open banking will “unleash creativity in how new financial products, wealth, and indeed, new markets, are created.”

The onerous economic impacts of COVID-19 are being felt in Atlantic Canada as elsewhere around the globe, necessitating bold new innovations. Open banking, according to Pushing the Giants, will be key to recovery for the following reasons:

  • Small businesses that can’t get credit products from large financial institutions will have access to a range of new options and services via their credit unions.
  • In rural areas and smaller communities, members will be able to access new sets of digital financial tools and services.
  • Small to large credit unions will compete on a level playing field against the major financial institutions.

“With COVID-19 in particular, we’ll solve our problems with collaboration,” says Forbes. “It’s about attracting entrepreneurialism.” 

Open Banking Is More Secure

Atul Varde, chief information and payments officer at $17.3 billion Servus Credit Union, with 380,000 members and headquarters in Edmonton, also welcomes the advent of open banking, especially for its enhanced security. While an open-banking framework isn’t yet legislated by Ottawa, members can now choose to share their banking credentials with third parties via “screen scraping,” an insecure technology that, while it allows data to be repurposed, can also facilitate theft. Open banking, says Varde, should replace screen scraping with secure API-based access to a member’s account by accredited entities.

However, open banking won’t eliminate all security concerns. Data breaches are always possible, so accountability needs to be built into the framework, says Varde. Notably, Varde has been Servus CU’s representative at stakeholder workshops held by a federal advisory committee on the creation of an open banking framework called “consumer-directed finance.” Such an accountability framework will enhance consumer protection should data breaches occur, he says.

Large Credit Unions Embracing Open Infrastructure

Open banking is also being embraced by the Large Credit Union Coalition’s CIO Group, a technology collaboration of 12 of the largest credit unions in Canada, including Servus CU. Together, the credit unions serve more than two million members and hold $107 billion in assets. Among LCUC members, there is still considerable IT work needed to prepare for open banking, especially with respect to various kinds of infrastructure including digital ID, Varde says. This infrastructure development is being contemplated with smaller credit unions in mind as well, in order to ensure that open banking will bring “value to the entire credit union system.” It is also important, as open banking talks continue with the Department of Finance Canada, that legislation is sufficiently flexible, allowing individual credit unions of various sizes to enter into open banking “at their own pace,” Varde says.

Drew Wilczynski, managing director of innovation and collaboration with LCUC, says that the technology requirements around data governance, transaction processing and compliance requirements will likely preclude smaller credit unions from jumping into the open banking pool at the same time as larger credit unions. Rather, they will need to “work with system partners to implement solutions.”

Nonetheless, LCUC will support the embrace of open banking by its small and medium counterparts. “Our mandate is to not only serve our LCUC members but to work through our members to the benefit of the whole credit union system,” says Wilczynski, adding that the group has published articles about open banking (including “Why Canadians Should Care about Digital ID in Open Banking”) and is open to providing advice to smaller institutions.

Drew Wilczynski
Managing Director/Innovation and Collaboration
LCUC
Eventually some of the features, like rate comparison, will become a societal norm.

The question arises: When an open banking framework does become legal in Canada, how many credit union members will take advantage of it? Wilczynski says it is unlikely that many Canadians will “widely recognize the concept of open banking,” especially in the beginning. Canadians, he believes, will slowly become aware of the rights and control they will have over their data and how it can be used to enhance their financial lives. “Eventually some of the features, like rate comparison, will become a societal norm,” Wilczynski says.

Limited Approach Means No Free-for-All

Marc-André Pigeon, assistant professor, director and strategic research fellow at the Canadian Centre for the Study of Co-operatives at the University of Saskatchewan, says early signs are that there will be limits on the breadth of open banking, minimizing the likelihood that the country’s financial system will morph into a free-for-all. Inherently conservative, Canada’s banking system has always prioritized stability over competition, says Pigeon. In 2008, for example, when American and European banks were on the brink of collapse, Canadian institutions escaped relatively unscathed due to a conservative and vigilant regulatory system.

It is this prudent approach to risk that has created a high degree of trust in Canada’s banking system by consumers, according to a 2019 survey from Accenture Consulting, Open Banking in Canada: Opportunity Knocks. The trust level means that open banking presents a “golden opportunity” for financial institutions to seize. However, caution is still warranted: Nine out of 10 Canadians are concerned about financial data privacy. Younger Canadians—one in three—are more open to third-party providers accessing their financial data, especially if it means they would receive a better deal or benefits.

Canada traditionally has set high regulatory standards, making it difficult for new financial institutions to set up shop or grow to a size that could challenge the large banks. To some extent, the incumbent banks enjoy this privileged position because of the way they are tightly stitched into the country’s institutional fabric.

For credit unions, the potential for open banking to radically reshape the financial landscape is likely to be constrained in another way. Only a tiny handful of credit unions—those with federal charters—can legally operate across provincial boundaries. This prevents, for example, provincially regulated credit unions from backing a mortgage in a province other than their own. To allow credit unions to take advantage of a new national open-banking framework, each province will likely need to revisit its consumer protection rules to make sure they are aligned with new federal rules, Pigeon says.

Democratization of Services Will Help Consumers

Jose Carreres, VP/digital experience at $15 billion First West Credit Union, with 250,000 members and headquarters in Langley, British Columbia, anticipates that open banking will create a large suite of standardized services that will be delivered to members easily and seamlessly. He envisions the democratization of services with the creation of “platforms where businesses and consumers could be connected, whether you’re a small credit union or a large bank. A consumer will have the option to choose the services they want to get.” A key requirement, Carreres adds, is that any products and services should be “low cost and very low barrier to entry for both consumers and merchants.”

Carreres anticipates that there will be specific areas where credit unions can apply open banking very successfully. These will be personal financial management tools and such business solutions as accounting software. Although most credit unions already have these services in place, “it’s not optimal because there is no standardization, which makes implementation harder.” It is crucial, therefore, that open banking creates standardized application programing interfaces that allow access to third-party providers, ensuring that all platforms are “speaking the same language.” This behooves the financial system to establish standardized APIs federally to reduce costs and create a smooth banking experience that is simple and easily maintained, he adds.

Kim Andres of Andres Consulting, a Vancouver-based credit union consulting agency, says that, in the long run, open banking should drive down operating costs as well as present myriad ways to make things easier for members. Take, for example, a self-employed entrepreneur and credit union member. If a credit union had access to all of that member’s financial information, even if some accounts resided with other institutions, staff would be able to analyze the individual’s cash flow and accounting patterns. This would give staff information on the various services the member might benefit from, aiding in the creation of a peronalized proposal, providing the member with more “informed opportunities,” Andres says. “That’s how I hope open banking moves: to a more trusted sharing of information that can actually drive new opportunities for customization and service.” Such initiatives would “have to be transparent and require explicit consent.”

Kim Andres
Kim Andres
Andres Consulting
That’s how I hope open banking moves: to a more trusted sharing of information that can actually drive new opportunities for customization and service.

Manocha says Central 1 CU is already creating a platform that will build an API marketplace for credit unions to maximize open-banking opportunities. He sees open banking as the third pillar of a new and changing landscape, complementing Central 1 CU’s payments modernization efforts and revamped digital identity that will reshape customer expectations. As progress continues with payments modernization, it builds a foundation for open banking. For example, a 2018 European directive obligates financial institutions to open up access to customer data to third-party service providers.   

Manocha expects real-time payments, which are expected to roll out in 2022, “will have a huge impact on commerce.” He notes that Ottawa plans to open access to the real-time payments system to third parties, such as fintechs.

Canadian credit unions are gearing up to embrace the brave new world of open banking. Pigeon doesn’t anticipate there will be a legislative framework in place before 2022, due to the economic and financial insecurities wrought by COVID-19 and a federal election this year, which will push much government work to the sidelines. But when the government finally does sign off on consumer-directed finance legislation, the interests and concerns of credit unions will have been heard loud and clear, says Manocha, with institutions like Central 1 CU active at the negotiating table.

In the end, open banking will be transformative, Manocha says. “Open banking will have significant implications beyond just compliance. Not playing is not an option. Data scale is the name of the game, and smaller institutions will need to act fast.” cues icon

Roberta Staley is a Vancouver, BC-based magazine writer and editor, author and documentary filmmaker.

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