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Online Banking

February 2020

Open Banking Is Coming to Canada.
Here’s What You Need to Know.

Open banking—now known as “consumer-directed finance” in Canada—will give you more control of your personal financial data. Here’s how it works, when it could arrive and how it could benefit you.

Open Banking CanadaBy this point, you may have seen the phrase “open banking” while scanning the financial headlines. At its core, it means you’ll be able to share your personal financial data with other financial institutions, rather than just your bank or credit union, as is the case today.

The first question is obvious: why would you want to do that?

The answer? Because you’ll get access to new tools that can help you save money, make better financial decisions and make payments more easily. And you’ll be able to do so safely, with your data protected by security controls stronger than those in place today.

In this article, we’ll look at the state of open banking now, where it’s heading, and how it could benefit you. BlueShore Financial CEO Chris Catliff will also give you his view; he’s taken a leading role in the development of open banking in Canada through his work on the federal Department of Finance’s Advisory Committee on Open Banking.

Open banking in action

When we talk about open banking, we’re really talking about three types of new tools: those that will help you shop for lower-cost (or higher-return) investments and loans; those that let you move money more easily between financial institutions; and those that show you all of your accounts—RRSPs, TFSAs, chequing accounts, loans and mortgages, etc.—in one place, say on a smartphone app, even if they’re held with different banks or credit unions.

Let’s take that last example one step further.

That same app, run by an outside financial technology firm, or “fintech,” could then analyze your transaction history across financial institutions and suggest an account, term deposit or other investment that’s a good fit for you. You could then move your money to that new investment instantly—even if it’s with a different financial institution—without visiting a branch.

Here’s another scenario: let’s say you’re a student and you apply for a line of credit. If you have little credit history, your credit score—something today’s lenders rely heavily on—could be too low for you to qualify.

But under open banking, lenders could use a fintech’s algorithm to analyze your day-to-day transactions. So if, for example, you get monthly payments from your family, the algorithm would note that, making you more credit-worthy in the eyes of the lender.

Finally, making large purchases or moving large sums of money will be easier, skipping the need to get a certified cheque or bank draft. Instead, buyers will be able to pay sellers with the swipe of a smartphone.

“The ability to instantly move larger sums of money will likely start within the next two years, with Interac Instant, which will go from a $3,000 limit now to $25,000 and then to $100,000,” says Catliff.

Those are just a few possibilities open banking offers. Before we explore it in more depth, let’s first dispel a myth that hovers over this coming shift in the banking world.

What’s in a name?

The latest development in open banking came on January 31 of this year, when the Department of Finance released the latest report from the Advisory Committee on Open Banking. A key recommendation: move away from the name “open banking” and instead use the term “consumer-directed finance.”

“This name change is important,” says Catliff. “‘Open banking’ has been understood by citizens of other countries to mean that their privacy is being compromised and other people are looking at their personal financial information. Even in the UK, where open banking has existed for two years, 64% think that’s what it means.”

“But that’s the opposite of what we’re talking about,” he continues. “The move to open banking—now consumer-directed finance—means you can give instructions to your bank or credit union to share your information with an accredited third party of your choosing. That’s why consumer-directed finance is a better name.”

Catching up to the trend

One reason why the Department of Finance is setting new rules for consumer-directed finance is because, according to the Senate of Canada Banking, Commerce and Trade committee, four million Canadians are already giving their banking information to fintechs, most of which use a technique called “screen scraping.”

Under screen scraping, you give your online-banking login and password to a fintech, whose algorithm logs in to your accounts through your bank’s website, just as you would on your own. Mint is a good example that many Canadians might be aware of; the company uses its screen-scraping technology to connect consumers’ bank accounts to apps developed by other fintechs.

The problem is, screen scraping is exposing these Canadians to potential losses, and most don’t know it.

“Screen scraping runs counter to your agreement with your bank to not share your credentials with other parties,” says Catliff. “If the fintech is hacked, banks have to decide if they would honour any losses. This has reached such a systemic liability that the government has to act and make rules for it.”

Part of the reason why consumers may be downplaying this threat is that they’ve grown accustomed to banks covering any losses if, say, their credit or debit cards are compromised. But once you give your login credentials to an outside provider, that protection is no longer a sure thing.

Under consumer-directed finance, screen scraping would be a thing of the past. Instead, fintechs would have to pass through an approval process run by the bank or credit union. Only then would they get access to the financial institution’s application programming interfaces (APIs)—codes that let apps request information directly from the bank’s database without “impersonating” the client, like screen scraping does.

Consumers will also be given a digital ID, a single, secure password or other method of verifying your identity that you can use with many different financial services firms, not just with your own individual bank or credit union, like you do today.

Both digital ID and the required APIs still need to be built, but the financial industry is putting significant resources into them. “Visa and Mastercard are spending billions on digital ID, including hiring significant staff here in Vancouver,” says Catliff. “And the provider BlueShore uses to run its core banking system has already built more than 1,000 new APIs.”

When—and how—consumer-directed finance will arrive

Catliff is excited about BlueShore Financial’s position as the control of financial data shifts from banks and credit unions to consumers.

“BlueShore is unique because we’ve narrowed our focus,” says Catliff. “We know our clients well, and they consistently mark us 20 to 30 points higher than clients of banks in how we value their business and provide them with financial well-being.

“This deep connection helps us develop new products and services ourselves and partner with high-quality fintechs that offer tools our clients can use through secure, verified APIs.”

Catliff sees customer-directed finance as another step along the financial sector’s evolution, building on previous breakthroughs like ATMs, email money transfers and apps that photograph cheques to make deposits.

“These innovations were seen as game-changers when they came along, but they’re mainstream today,” says Catliff. “I think it will be the same with consumer-directed finance—it will continue to develop over the next five to seven years, and as it enters the mainstream, people will use it without a second thought.”

Mutual funds are offered through Credential Asset Management Inc. Mutual funds, other securities and securities related financial planning services are offered through Credential Securities, a division of Credential Qtrade Securities Inc. Credential Securities is a registered mark owned by Aviso Wealth Inc.

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