Open Banking | Consumer-Directed Finance 101

What is open banking?

In simple terms, open banking is a government mandate that will enable Canadians to safely share their financial data, stored at banks, with third-party solution providers like fintechs. The average Canadian citizen generates a multitude of different financial data daily by making in-store and online purchases, receiving and sending money to and from bank accounts, paying bills, earning savings, paying mortgage amounts, etc. All this financial data is currently safely stored by the banks who are guarding it against any criminal activities that put financial data at risk. However, by keeping our financial data safe and secure, banks are in effect also making it difficult for third-party financial solution providers, with good intentions, to access this data.   

Why would you share your financial data with third-party providers even if they have good intentions? 

First, let’s understand who are the potential third-party financial solution providers that would want access to a customer’s financial data. Primarily these are fintech companies that provide alternative solutions to existing market offerings in various financial segments such as:

  • Personal Finance Management/Budgeting solutions: (e.g. Mint, Sensibil) who provide money management services by taking a holistic view of a consumer's banking accounts and spending habits (based on banking and credit card statements, spending categories - groceries, restaurants, gas) and providing savings recommendations.
  • Alternative Lending Management (e.g. Lendified) these are fintechs that analyze clients' financial history and based on that provide access to loan funds faster and easier than traditional lenders.
  • Alternative Insurance Services (e.g. Sonnet) who provide insurance policies online (for condo, car, etc.) in a matter of minutes and in a more seamless way than traditional insurers.

There are many more fintechs in other financial segments that would want access to your financial data in order to improve the decision-making process. For example, if a fintech offers you a loan or provides insurance, the process becomes faster while tailoring the product offering to your specific needs. This will make fintechs more competitive in the market. Traditional financial players will have new competitors, while Canadians will have more choices, better customer experiences and lower prices. 

How does open banking work?

Open banking has already been introduced by governments all around the world. European and Asian countries have open banking set as a mandate, directing the banking sector to allow access to customers’ data to third-party providers.  This access is enabled via Application Programming Interfaces (APIs) which serve as bridges between banking and third-party financial solution providers. These APIs must be standardized so that access rules and patterns are consistent across all the banks that grant access to third-party providers. 

Once the banks grant access to customer’s data, third-party financial solution providers must obtain authorization and approval from the end-user to access their data. For example, if a user would like to enable a third-party financial solution provider such as PayTM to make a bill payment on their behalf, PayTM would request the user’s authorization (e.g. in the form of Touch ID on a mobile phone) before a bill payment can be made. 

Who else benefits from the open banking concept besides the consumers and fintechs?

Traditional banks could also benefit from granting access to their customers’ data by creating new business models. These new business models could take the form of partnerships with banks on one side and large retailers, tech giants and fintechs on the other side. Banks could potentially open an archive of customers' data and create revenues from static and enriched data monetization. They can provide new products and services by leveraging access to data from other banks, such as providing a dashboard view of all of bank accounts’ balances, and key statements all in one place. Banks can also extend their ecosystem offerings by partnering with non-financial partners, for instance DBS Bank in Singapore and RBC Ventures who are offering non-financial services around utilities, car and home solutions.

Small and medium businesses will benefit from open banking as well by having quicker and easier access to loans, more insights into their operational activities (accounting, payroll, finances), and lower loan rates coming from more competitive offerings on the market. 

Things to consider

  • Customers’ trust is the most important factor for the successful adoption of open banking in Canada and around the world. Proper security measures, privacy laws and customer’s rights need to be in place by all ecosystem participants for open banking to fulfil its benefits and vision
  • In January 2019, the Canadian Department of Finance published a first consultation document (DoF open banking) reviewing the merits of open banking in Canada and asking for Canadian ecosystem participants (e.g. consumers, businesses, banks, fintechs, etc.) to provide their feedback on the following three key questions:
    • Would open banking provide meaningful benefits and improve outcomes for Canadians? In what ways?
    • In order for Canadians to feel confident in an open banking system, how should risks related to consumer protection, privacy, cybersecurity and financial stability be managed?
    • If Canadians are of the view that Canada should move forward with implementing an open banking system, what role and steps are appropriate for the federal government to take in the implementation of open banking?
  • On January 31st, 2020, the advisory committee on open banking in Canada published a new report and provided the following recommendations:
    • The term open banking should be replaced with a new term consumer-directed finance in order to prevent any consumer misunderstanding. The term consumer-directed finance, per the advisory committee, provides more clarity for consumers when it comes to controlling and protecting their data.
    • Given that between 3.5 and 4 million Canadians are already using “screen-scraping” solutions (consumer-directed finance) in Canada, the advisory committee has recommended to the Federal Government to continue pushing forward with the open banking mandate.
    • The Canadian government should publish clear timelines on delivering the consumer-directed finance mandate. The committee is expecting the mandate to be published within one or two years given the timelines experienced in other countries.
    • Growth of a vibrant financial ecosystem and innovation should be given an equal focus to privacy and cyber-security concerns.

In some countries around the world, the payment initiation process on behalf of a banking customer or a small-medium business is either part of the open banking mandate or payments modernization, however, this is still a debatable item for Canada and its Payments Modernization program.


Marko Pavlovic, Head of Digital Payments Practice at Prodigy Labs

Marko has 15+ years of experience in payments strategy and solutions, in business and technology. This experience has extended to many industries, such as telecom, retail, quick service restaurants and banking. At Prodigy Labs, Marko showcases digital payments technologies and solutions focused on real-time payments, ISO 20022, and payments innovation.

Click here to connect with Marko.


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