Have you ever felt the need to look at all your financial data with banks and other financial institutions without risking your privacy? If yes, then the solution to it is “Open Banking”.
The banks in Canada have a very big presence in the Canadian market and among the customers. They have tons of customer data that they are successfully managing themselves. We can say that they are trusted custodians with the potential to get into an open banking framework.
Being a developed country with a major network of banks, the open banking system in Canada will go a long way. In this blog, you will get to know more about the concept of Open Banking. We will also discuss the future of open banking in Canada along with its pros and cons.
Open Banking Meaning
Before we jump to the future of open banking, it is important to understand the meaning of Open Banking. To understand in layman’s terms: Open banking is a simple practice that will permit third-party financial providers to get access to customer records from banks and Financial Institutions.
Now you might be thinking how is it possible? These third parties will use APIs to get access to the data. APIs are the programming interfaces that permit access. Let us take some examples to understand it.
Open Banking APIs Examples
Many powerful and developed countries like the UK and Australia have implemented the system of Open Banking. This simple practice has helped them to integrate the customers’ financial data with banks as well as fintech companies.
Obviously, they are doing so with complete safety and privacy. Here are some examples how:
1. Authenticity and Identity
In this, only the customers have access to their accounts. APIs like LoginID and Salt Edge are used to prevent fraud related to authenticity and identity.
2. Payment Processing
In order to ensure that the authenticity of payment lies between the banks and customers, payment processing APIs are used. Adyen and Fena are some examples of APIs that can be used to prevent payment fraud.
3. Data Analytics
Open Banking allows access to customer data for market analytics purposes. It is basically helpful for marketing purposes. Finicity and MX offer great APIs for Data Analytics.
Risks Associated with Open Banking
No technology is without risks, right? Even though open banking is helpful for banks, customers, and third parties, there are lots of risks associated with it. By now you know how easily it can streamline the costs.
But can we ignore the risks, absolutely not! Here are some of the major risks associated with Open Banking.
1. Attackers:
Attackers always find some way to hack sensitive customer information. With practices like open banking, it will be like a cherry on the cake. If they are successful in breaching the security access, all the financial information of the customers, their data, and the whole financial status will be compromised.
2. Trust Issues:
Leaving the whole traditional system of banking and shifting to a newer concept is a big risk. Not every customer will feel safe and comfortable with establishing relations with third parties. These trust issues can become very big flaws in the later stages of implementation.
3. Many new hacking techniques:
Now customers know what are the possible cyberattacks when it comes to online banking. But with the new system comes new possible attacks apart from phishing. Customers will feel more threatened to adopt an open banking framework
These are just some of the possible risks in the Open Banking system. What if the financial institution adopts a weaker security system that is easy to breach? Something that is not yet implemented can be seen as a big risk until some measures are adopted to implement it.
Pros and Cons of Open Banking
Open Banking will create a new ecosystem wherein the banks, customers, and third parties will be able to interact. It will create new opportunities, grow business, solve needs from every end, and do a lot more in the financial sector. Yet there are certain pros and cons to this framework. Let us delve into the pros first.
1. Customer Experience
It becomes very difficult to get replies from the bank for every small query. With a conducive ecosystem that open banking will create, all the queries will be easily resolved. If a customer has access to technology, he can get every doubt resolved in a few seconds.
2. Centralization of Information
With open banking, banks will become the central administrator. They will be with the customers at every step. Be it taking loans, doing transfers, or even getting finances.
3. Help to Boom the Financial Market
When Open banking is successfully implemented in countries like Canada, the increase in customers will help in faster growth of the financial market.
With the advantages come certain disadvantages! Here are some of them.
1. Customer Credibility
When it comes to adopting changes, the customers are always resistant. The same goes for the system of open banking. With so many parties, security concerns rise leading to less customer credibility.
2. Fintech
In countries like Canada, the fintech market is growing. It is causing a rift between the banks and such companies. Lots of banking services are given by such fintech companies. With open banking practices, banks will suffer even more because of third parties.
3. Deterioration of Bank and Customer Relationships
As a third party is introduced, banks and customer relationships become less credible. It is majorly because customers will contact third parties for any issue, instead of going to the bank.
Future of Open Banking in Canada
When talking about the Canadian market, it will be a huge task for the regulators to start with the practice of open banking. Initially, it will be very difficult to decide the parties that will participate in it. Selecting the right, banks, customers, and third parties is a major job. Another possible issue that can arise in implementing this framework is deciding on the APIs.
If someone asks you to give your consent to share your financial data, will you agree? In addition to selecting parties and choosing APIs, another issue will be getting customer consent and dealing with privacy issues.
It is safe to assume that open banking in Canada will start in a very limited fashion and then increase gradually. In starting only the major banks of Canada, will be a part of it and the uses of open banking will be limited. In 2022, the government of Canada, appointed Abraham Tachijan to head the open banking development in the country.
Neil Parmenter, President, and CEO, Canadian Bankers’ Association, said: “We like a federated model for digital ID. What, in essence, that means is that it allows the provincial government, the federal government and industry to all participate.”
There are going to be a lot of challenges in implementing Open Banking in Canada. It is mainly because banks are under Federal rules.
Will the customer embrace it?
The main question now should be “Will the customers embrace such a regulatory framework?” The people of Canada love technology in every way. Some studies have shown that more than 90% of Canadians use financial apps and wallets to make payments, manage their finances, etc.
But do you think that sharing sensitive financial information with third parties will be easy for the people of Canada? It cannot be said immediately that they will adopt such a framework wholeheartedly. But gradually when they see the benefits of Open Banking, they will surely do so.
Final Thoughts
Compared to the current financial system, the Open Banking framework will add some freshness and newness to the financial network. In fact, it is the main objective of Open Banking to bring certain innovations in the existing trends.
Even though in most countries like Canada, it is still something that is going to come in the future. The advantages have astounded customers, banks, and fintech companies. With more options for customers, it is going to be a great boon.
If you also feel that this practice will be helpful in the financial sector of Canada, then feel free to express your views below.