What open banking means for your finances

With Ottawa expected to roll out the system by early 2023, working groups are discussing pros and cons

When Colin Deacon started his career as an investment adviser 40 years ago, he made a point of working with some of the smallest customers – those who’d typically be passed over by the financial services industry.

His clients got financial and tax planning advice, help with their small business concerns and investing assistance – support that, he said, was and still is typically unavailable to the majority of Canadians.

“We still have a situation where most Canadians are not given really good, basic advice … and if you’re somebody from a marginalized community your access to that is 10 times worse,” said Mr. Deacon, now an independent senator for Nova Scotia.

Mr. Deacon said he sees the development of an open banking system in Canada as a solution to that problem. Open banking, or consumer-directed finance, would allow individuals and businesses to have control over their own financial data, and to securely share it with third-party financial service providers or authorize them to take action on their behalf.

Currently, Canadians don’t own or have the right to share their financial data, and their ability to access services provided by fintech companies is dependent on whether their financial institution permits it. This means that financial products and services aimed at helping Canadians improve their financial picture – such as credit-building products for those with poor or no credit history, predictive budgeting apps that warn the user if their account is at risk of being overdrawn and more – may not be available to them.

The federal government is expected to roll out an open banking system by early 2023, with working groups underway this summer. Proponents say this system will give Canadians access to a wider range of financial products and services, make it easier to switch financial institutions, reduce fees on transactions and make the financial system more equitable for marginalized Canadians. That includes the millions of consumers without a bank account or who aren’t adequately served by mainstream financial services.

Open banking is ultimately about consumer choice and making financial services more accessible and less expensive for small businesses and individuals, said Andrew Graham, co-founder and chief executive officer of Borrowell, a fintech firm that provides free credit monitoring and offers credit coaching and credit-building products.

Mr. Graham said open banking will also make it easier for fintechs like Borrowell to offer their existing products and services. He gave the example of the company’s new Rent Advantage program, which allows renters to report rental payments to Equifax Canada to build credit history; without a formal system it is “more complicated” for users to connect their bank account and share rent payments.

To some extent, open banking is already happening in Canada: As many as four million Canadians share their financial data with third-party providers, according to a 2020 report from the federal government’s advisory committee on open banking.

Mr. Deacon said existing services have demonstrated the value of a more formalized system: The mass popularity of do-ityourself investing and savings platforms like Wealthsimple and Questrade has given many more consumers access to advice they would not have otherwise.

However, this is done through a method called screen-scraping, which requires users to share their online banking username and password to allow a fintech access to their financial data, putting them at risk of being caught up in data breaches.

And currently, financial institutions can deny third-party service providers access to their customers’ data, noted Steve Boms, executive director of the Financial Data and Technology Association of North America (FDATA), a fintech industry association.

Mr. Boms said this can manifest itself in a few ways for the consumer. Most commonly, they’ll grant a fintech access to their data and then find the financial tool they were hoping to use doesn’t work for reasons that aren’t clear. Occasionally, when they try to make the connection they’ll get an error message. Banks may also send direct communication to the customer cautioning them that using a thirdparty is dangerous or in violation of their customer agreement.

Many Canadians are unhappy with the current financial system, according to an April survey by FDATA and Paytechs of Canada. The survey of Canadian consumers and small businesses found more than half felt stress interacting with the country’s financial services sector. Women business owners were more likely than their male counterparts to report stress and younger Canadians were more likely than older individuals to say the same. More than two-thirds of respondents said they’d benefit from more competition and transparency in the market.

Mr. Boms said driving down fees on common financial transactions such as sending payments, accessing a credit score, international wire transfers and more is a likely outcome of open banking because of the increased competition, and would be a win for consumers.

“I would not overlook the importance of lowering fees and the cost of interacting with financial services,” he said. Such payments can become “a significant blocker to financial growth for many people and many businesses.”

Studies from countries with more developed open banking systems indicate it has broadened loan access for underserved communities. An April study from the Federal Reserve Bank of Philadelphia, for example, examined the effect of fintech lending on access to credit for U.S. small businesses. It found that fintechs have been able to use alternative data to find solid, creditworthy consumers – what the report dubbed “invisible prime” borrowers – in the both consumer and small business space.

The paper found fintechs lent more in zip codes with higher business bankruptcy filings and higher unemployment rates than traditional lenders, and their internal credit scores were better able to predict future loan performance than traditional approaches to credit scoring.

“Fintech lenders have a potential to create a more inclusive financial system, allowing small businesses that were less likely to receive credit through traditional lenders to access credit and to do so at lower cost,” the paper read.

Borrowell’s Mr. Graham said he sees a lot of potential for change in the credit-building and lending space. New Canadians who don’t yet have a credit score in the country and those with troubled credit history aren’t well-served by the traditional way of proving credit, but giving them the right to share their financial data with prospective lenders provides alternative ways to demonstrate creditworthiness.

“Lenders would love to look at cash flows, how reliably you’ve paid your bills over six months or a year, if you’ve consistently kept a balance in your bank account [and] other kinds of behaviours relevant to extending credit,” he said. “Allowing consumers to easily share that information if they want to is only going to increase choice.”

Tabatha Bull, chief executive of the Canadian Council for Aboriginal Business, said this would benefit Indigenous people and business owners, who, unfortunately, have long been been seen as higher-risk than non-Indigenous borrowers.

“Open banking removes that bias,” she said. “It doesn’t matter what you look like, if you’re going through the process of providing data through an open banking situation … it levels the playing field.”

Open banking, or consumer-directed finance, would allow individuals and businesses to have control over their own financial data, and to securely share it with third-party financial service providers or authorize them to take action on their behalf.