How are Canada’s banks positioned for the leap into an open banking ecosystem?

In article two of this eight-part series, we explore Canada’s journey to implement an ‘open banking’ system, the first phase of which is set for launch in 2023.

After much fervent anticipation, Canada is joining a global financial services movement and taking its first steps into the realm of open banking.

Open banking will transform the country’s traditional banking models and blur the boundaries, roles, and offerings of an array of providers. As financial services become increasingly digital and API driven, it will enable dramatic improvements in customer-approved financial data sharing, forging innovative partnerships and elevating consumer choice.

Implementing an open banking framework is not an easy task, given the number and variety of players with a vested interest. And with the federal government keen on a hybrid, made-in Canada approach, collaboration between the government and industry-wide stakeholders is crucial. To promote collaboration, Abraham Tachjian has been appointed as Canada’s open banking lead to bring together the industry’s leading minds for the first 18-month phase, driving the development of a data sharing framework and accreditation model.

That’s an ambitious timeline to map out the foundation of an open banking ecosystem, but the opportunities and challenges – which we highlight below – suggest that it is well worth keeping a close eye on this ‘once-in-an-era’ initiative, as it accelerates from the drawing board into the not-so-distant real world.

What’s the opportunity for Canada’s banks?

As major stakeholders in the open banking future, the banks possess all of the ingredients for success. They are experienced in the adoption of new technologies and digital innovations, which are the cornerstones of the open banking ecosystem.

More importantly, the banks are the incumbent trusted custodians of customer data and financial assets, with strong global brands and high customer loyalty among Canadian consumers. Canadians who have longstanding relationships with their financial institutions are likely to follow them into this revolutionary new banking model.

To fully realize the promises of this new banking world, there are four major areas of opportunity for these incumbents as the gates for open banking swing open:

1. Partnerships

Banks must become nimbler – and be more inspired – to collaborate with fintechs. Through strategic partnerships or acquisitions, banks can launch, test, and refine novel products and services more rapidly, to satisfy consumers accustomed to increasingly personalized, mobile, and digitized offerings in other aspects of their lives.

A prime example is RBC’s recent partnership with open banking fintech Plaid. RBC’s more than 14 million clients will gain access to thousands of fintech applications offered by Plaid through easy and secure API-driven data sharing, building loyalty and improving day-to-day interactions.[1] And news of a similar partnership between Canada’s homegrown fintech Flinks and the challenger EQ Bank broke just weeks after the RBC and Plaid announcement to derive similar benefits for clients of EQ Bank, the digital arm of Equitable Bank.[2]

2. Creating new value for existing customers

Banks must rethink customer experience, value, and loyalty by packaging and creating innovative offerings to drive increased customer satisfaction and loyalty. For instance, deeply entrenched Canadian banks have the potential to create personalized offerings on their platforms and provide payment initiation and other similar services to those created by challenger banks in Europe. Additionally, banks have the potential to harness AI and automation to reduce costs for both banks and their clients, while giving the customers a hyper-personalized and contextualized customer experience.

3. Reaching new customers

There will be opportunities to realize additional revenue streams by tailoring products and services to specific targeted segments. Reaching and engaging a wider range of Canadians has never been more important in light of the country’s increasingly diverse array of cultures, communities, and generations. In an open banking marketplace, banks have the potential to bolster financial access, inclusion, and literacy to capture value.   

4. Reduced risk

Banks may also reduce cyber security risks through secure data sharing, leading to cost savings and reduced financial losses and reputational damage. This will help combat harmful incidents, such as data breaches, and address concerns that increased data sharing may introduce.  The use of secure API gateways and standards, such as FDX 5.1, will ensure data is transferred in a trusted and secure manner.

What are the challenges for Canada’s banks?

As incumbent banks and institutions evolve to operate under an open banking framework, they will be challenged by new mandates for liability, security, privacy, and accreditation for all ecosystem participants, including potential new competitors.

1. Liability:

If an incident results in financial and data loss, determining which party should bear the liability is difficult for all stakeholders, but especially banks, as they are the trusted custodian of funds. In the event of a breach, for instance, customers will likely default to their bank for compensation. Without a proper framework including a policy and guidelines on liability, banks may be exposed to additional legal, reputational, and financial risks.

2. Security:

With open banking, security can be a major challenge as financial institutions open their APIs to third parties and grant them access to sensitive customer data. Although APIs are a more secure method of sharing data than screen scraping, the sheer volume and speed at which data is transferred may increase the risk of breaches, attacks, and fraud. In addition, third party providers may have less stringent data security measures leading to increased risk for damage or loss.

3. Privacy:

For banks to remain trusted custodians of customer data, they must be trusted guardians of privacy. Customers who opt into open banking should have express consent and control over their data – with full transparency and understanding of how, when, and with whom their personal data will be shared or used. Privacy will be more important than ever and banks will need to ensure that they meet industry standards on consent management, data mobility and deletion, and disclosure requirements. 

4. Accreditation:

Governments and regulators are under constant pressure to promote financial services innovation and competition, and the consensus is Canada lags behind many countries in these crucial areas. Canadian banks face escalating competition from non-traditional participants such as fintech and big techs and the accreditation policies, when formulated, need to provide clarity and certainty on how new entrants will participate in the Canadian open banking framework.

New partnership models and relationships among accredited participants will create new competitive dimensions connecting incumbent institutions, fintechs, and big techs, where some of the participants will be less encumbered by legacy systems and processes to enhance nimbleness and flexibility for new offerings. To maintain competitiveness, banks and incumbent institutions must dedicate effort on enhancing organizational structures and execution capabilities to navigate the initial challenges from the legacy infrastructure currently in place.

How do we address these challenges?

The above concerns must be addressed before implementing an open banking system with a broad range of players and platforms. The good news is the risks are recognized and on the policy table. Working with a group of core stakeholders including banks and credit unions, the government is setting policy direction with a focus on these same four key areas: accreditation, liability, privacy, and security through expert working groups.

The big questions for the stakeholders are:

• How will the government maintain oversight and remain hands-off in direct management and operations of open banking?
• How will they address the needs of stakeholders in the key topic areas, and create a voice for each stakeholder to ensure broadly based participation and collaboration?

At CGI, we understand the magnitude of the challenges ahead as Canada’s financial institutions move into the new open banking world. We believe that open banking – and eventually open finance – will transform Canadian financial services and foster additional homegrown innovations that will propel our reputation as an innovative and stable banking system on the global stage. This evolutionary process is ongoing; it is not a finite destination but a journey with new features, technologies, and customer experiences that are integrated on a continuous basis.

The changing financial landscape is ripe with possibility for all participants, whether an incumbent financial institution, fintech, or big tech. By having the opportunity to observe from countries with both regulatory- and market-driven open banking frameworks, Canada has declared its intention to create a hybrid model that simultaneously protects consumer interests while elevating innovation with the help of all stakeholders.

Moving forward, it is important to recognize that open banking is part of a greater movement around customer-consented data sharing and that parallel government initiatives, such as the recently introduced Bill C-2 aimed at giving Canadians more control over how their personal data,[3] are necessary guiderails for a successful transformation.

How CGI can help

CGI is ready to help you. We work with banks and financial institutions across the globe to transform business models, develop pragmatic roadmaps that support the execution of strategy, and deliver technology and digital capabilities that drive innovation and growth. If you would like more information on our work in this area or to discuss how we can support your open banking or open finance journey, please contact  Roy Kao, Practice Lead, Financial Services Innovation (CGI Business Consulting – Global Wealth, Capital Markets, and Banking)