In 2018, European banks were pushed by regulation to usher in an era of financial transparency and improved customer experience thanks to the open banking initiative. Open banking promises to bring innovation and competition to the financial sector, enabling the improvement of service provision and level of use of technology. But what is open banking?
Open banking refers to a series of reforms made by regulatory authorities in Europe that requires banks and other financial institutions share certain data with authorized third party service providers and other financial institutions with client permission. It is designed to facilitate innovation, transparency, and competitiveness in a sector that has been facing stunted technological incorporation, in a bid to improve the quality of services offered.
These are the top five key open banking facts that should shape your understanding of this initiative.
Open banking offers new financial insight
Open banking allows you to share data with third party service providers, such as aggregators and initiators of payments. Customers will be able to receive better financial insight without having to undergo a tedious and risky process of collecting and sharing information with unscrupulous middlemen. It provides regulation to facilitate interaction between users, banking institutions and third parties for a convenient and seamless banking experience.
The rates at which customers have embraced technological advancement in banking suggest that open banking in Canada could be a great fit. According to the CBA, only 12% of people do not feel that the evolution towards a virtual and connected front has made banking easier. For customers within certain age groups, such as millennials, this figure is as low as 2%. For 83% of Canadians, online and mobile-app based banking offers better value than physical banking. The use of mobile financial tools is also on the rise, especially by younger customers. Open banking will provide a better avenue for these customers to enjoy financial services digitally by ensuring improved product awareness, as well as enjoying convenient integration of different financial aspects.
Open banking will lead to better products
The increased level of transparency brought about by open banking, such as the development of aggregators and other intermediaries will increase consumers’ ability to access ideal products. Most people do not have access to comprehensive product information for preference and logic-based financial decision making. They are forced to accept available products without finding those that suit their needs. Hidden transactional costs and high overdrafts are just some of the menaces that open banking will address.
Canadians feel that banks offer good value for the cost of services, with the majority of respondents appreciating the bargain and reasonably priced transaction fees on offer. With open banking, the potential for increased awareness on the pricing of different products could shape financial decision making even further. Instituting open banking in Canada could improve the level of individual financial security.
Open banking revolves around consent
Under open banking, your financial institution will only share information to which you have given your consent. Consensus building with each individual customer before collaboration is a crucial part of open banking, which means that people who do not feel the need for it can opt out. Regulated third-party players will have access to your data only after you have given your permission. They will need to ask for your consent before allowing you access to their services. Your consent can also be withdrawn at any time, enabling convenient use of the third party services.
Regulated third party service providers will guarantee data security, which is a major concern under open banking. There are bound to be a number of unregulated players, which may raise the risk of misappropriation of your information. You can confirm with the relevant directory before signing up for third-party services to ensure a service provider is authorized. If you feel that you can trust an unauthorized service provider, you will still be able to provide access to your open banking data. Some third parties already adhere to other financial regulation, meaning they might offer more protection for you until the open banking initiative rolls in.
Open banking will reshape payments
Payment initiators are a big part of open banking because they provide customers with a convenient channel through which to access their funds without needing credit or debit cards. Instead of a bulky wallet, open banking will enable secure payment models that lift the physical restrictions in place today. Customers will be able to make transactions quickly and easily, regardless of their location. Over time, banking institutions may even develop biometric authentication to make these types of payments secure and efficient.
Canadians are carrying less money over time, opting instead for digital and electronic payment methods. Seeing as the country is already one of the friendliest for these types of payment around the world, the open banking initiative could be very compatible with the market. Canadians are projected to carry about 25% less cash in 5 years, with a decline across all age groups. The open banking initiative will see Canadians make significantly fewer than the 560 million automated banking machine (ABM) transactions reported in 2017 in favor of virtual payments.
Open banking will not be limited to APIs
Open banking may revolve around Application Program Interfaces (APIs) for now, although this will not always be the case. The innovative approach to banking will evolve over time and may incorporate technological advancement for more convenient services. The future of open banking could even be rooted in the development of artificial intelligence.
Canada has silently evolved into a central hub for the development of artificial intelligence. Toronto and Montreal feature the highest concentration of AI startups and deep learning researchers globally, respectively. Top companies have shifted their AI investment into Canada to take advantage of these developments, with Ericsson joining a high profile list of brands. By taking up an active role in the development of artificial intelligence, the country could be laying the groundwork for the evolution of open banking.