Open Banking Opportunities for the Canadian Payments Ecosystem

The gaps in the Canadian payments infrastructure, highlighted by the pandemic, are substantial between what consumers need, what fintechs and banks can offer and what regulators will universally support. Finding common ground toward a financial ecosystem that works for all stakeholders is critical in making an open banking system a reality in Canada.

Open banking is a movement that provides third-party financial service providers open access to consumer banking, transaction and other financial data from banks and non-bank financial institutions using APIs. Open banking enables a networking of account and data across institutions for use by consumers, financial institutions, and third-party service providers — instead of a centralized banking system. Advocates say that open banking gives consumers greater ownership over their financial data and is the gateway for financial services innovation by allowing for greater market competition.

Canadian payments industry leaders are looking at places like the U.K. that just commemorated its three-year open banking anniversary. By many accounts, the U.K. has set the standard of how to establish an equitable framework for an open banking system — recently surpassing the one million customer adoption milestone.

“Open Banking has been a huge success in the UK and has made us a world leader in the technology. From better tracking of payments to stop customers getting overdrawn, to utilizing data to improve access to finance, Open Banking has brought real improvements to the people and businesses using it,” according to John Glen, who serves as the UK’s Economic Secretary to the Treasury and City Minister.

The pandemic has accelerated Canada’s digitization push by an estimated 6-10 years, according to the Open Banking Initiative Canada’s (OBIC) research. This digital transformation presents economic opportunities through open banking in Canada. Using the U.K. for a model as inspiration, the OBIC estimates that open banking will generate an additional $440 million for Canadian consumers alone.

The Case for Open Banking: The Consumer Perspective

Another item in the open banking discussions is the role of prepaid in accelerating the movement. This is largely because of prepaid’s cost-effective, low-regulatory burden that enables nimble, relevant offerings. For comparison, prepaid acts as the backbone of the banking-as-service advancements as the movement toward open banking strengthens.

As prepaid cements itself as a key component of the digital payments market — while enabling regulatory-friendly payment solutions that spark greater partnerships between fintechs and banks — this platform should continue to be part of the discussions. Jennifer Tramontana, the executive director for CPPO, authored a Global FinTech Series article that touches on this subject.

“More than ever, pressure has been put on governments, financial institutions and fintech players to enhance the payments industry to deliver businesses and consumers faster, more inclusive, more secure payment and payout solutions. On the backend at fintechs and finserv companies, a push for cheaper, nimble, and more efficient true banking-as-a-service tools has become an arms race,” she wrote.

Tramontana explained “continued support for the open banking movement across the paytech and fintech market will deliver better, cheaper payments solutions. At the heart of this topic is the regulatory discussions around how to streamline open banking through APIs in a manner that supports efficient data integrity.”

The regulatory framework around open banking is the lynchpin in this entire conversation. As are discussions around how to fairly support the business interests of financial institutions, and emerging fintechs that are rushing to bring the next generation of B2C AND B2B payments and payout solutions to the market. Of course, there’s the consumer’s interests to consider, who in large part, just want simple, fast and secure ways to pay for things and get paid. Fintechs and banks have different perspectives on how this can happen, and how much they are willing to collaborate.

Senator Colin Deacon, member of the Standing Senate Committee on Banking, Trade and Commerce has been a strong advocate for open banking in Canada and has been a featured guest speaker on OBIC’s recent video series. He echoed Wright’s sentiments by saying “competition and productivity growth are central to our prosperity.”

In a recent Parliament committee hearing on open banking, Deacon doubled down on his support for open banking by citing why an open banking system is central to supporting consumer’s “right to safely use their financial data for their own benefit.”

“When consumers control their own data and direct their bank to safely share that data with an accredited financial technology company, or fintech, consumers can receive highly valuable insights or services,” Deacon said, later highlighting the urgency of this issue.

“Close to 1 million Canadians are unbanked, and 5 million are underbanked. What we found with consumer-directed finance is that marginalized Canadians can very much further their economic well-being because of the use of alternative data,” Deacon continued.

Leila Wright, Associate Deputy Commissioner at the Competition Bureau of Canada shared in a recent OBIC web series how open banking will increase competition in the marketplace — while increasing GDP for Canadian families. There are still obvious challenges in the financial ecosystem that underscores why there is apprehension for open banking in the traditional banking selector.

Wright pointed toward some realistic challenges that Canada’s open banking movement faces. Canada’ split federal and provincial structure, for example, creates regulatory complexities since businesses have to get approval from 26 different regulators to comply with all the government’s various requirements. Open banking would also open up a wider competitive landscape for consumers, which puts the pressure on banks to keep up their fintech counterparts — particularly with digital offerings. Still, there are opportunities for everyone in the equation.

“Open banking will result in a whole slew of new business models. That will give Canadians more choice. It will give them new, innovative ways to deal with their money,” Wright said. “Canadians are really sticky when it comes to financial services. They don’t switch very often. Open banking will create a way for Canadians to switch more easily. Which means they’ll be taking advantage of competition in the marketplace. They will also be able to compare services better, which will get them the right services they need for their lives and for their financial situation.”

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