What the open banking push could mean for your finances

When Colin Deacon began his career as an investment advisor 40 years ago, he made it a point to work with some of the smallest clients – those who would typically be overlooked by the financial services industry.

His clients got advice on financial and tax planning, help with their small businesses and help with investing – support that he said was and still isn’t. available to the majority of Canadians.

“We still have a situation where most Canadians don’t get very good basic advice…and if you’re someone from a marginalized community, your access to that is 10 times greater. worse,” said Deacon, now an independent senator from Nova Scotia.

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

Currently, Canadians do not own or have the right to share their financial data, and their ability to access services provided by fintech companies depends on whether their financial institution authorizes them. This means that financial products and services aimed at helping Canadians improve their financial situation – such as credit enhancement products for those with poor or no credit history, predictive budgeting apps that warn the user if their account may be overdrawn and more – may not be accessible to them.

The federal government is expected to roll out open banking by early 2023, with task forces 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 transaction costs and make the financial system fairer for marginalized Canadians. This includes the millions of consumers without bank accounts or who are not properly served by traditional financial services.

Open banking is ultimately about consumer choice and making financial services more accessible and cheaper for small businesses and individuals, said Andrew Graham, co-founder and chief executive of Borrowell, a fintech company that provides free credit monitoring and offers coaching and credit. – construction 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 already exists in Canada: up to four million Canadians share their financial data with third-party providers, according to a 2020 report by the federal government’s advisory committee on open banking.

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

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 to gain access to their financial data, causing them to puts you at risk of being caught 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. .

Boms said this can manifest itself in a number of ways for the consumer. More often than not, they’ll grant a fintech access to their data, then find that the financial tool they were hoping to use isn’t working for reasons that aren’t clear. Sometimes when they try to establish the connection, they get an error message. Banks can also send a direct communication to the customer warning them that third-party use is unsafe or in violation of their customer agreement.

Many Canadians are unhappy with the current financial system, according to an April poll by the FDATA and Paytechs of Canada. The survey of Canadian consumers and small businesses found that 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 people to say the same. More than two-thirds of respondents said they would benefit from increased competition and transparency in the marketplace.

Boms said lower 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 due increased competition, and would be a win for consumers.

“I wouldn’t overlook the importance of reducing the fees and cost of interacting with financial services,” he said. Such payments can become “a significant impediment to the financial growth of many people and businesses.”

Studies in countries with more developed open banking systems indicate that it has expanded access to loans for underserved communities. An April study from the Federal Reserve Bank of Philadelphia, for example, looked at the effect of fintech loans on access to credit for small American businesses. He found that fintechs have been able to use alternative data to find strong, creditworthy consumers — what the report dubbed “invisible primary” borrowers — in the consumer and small business space.

The article found that fintechs lend 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 performance. future loans than traditional credit scoring approaches.

“Fintech lenders have the 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 do so at a lower cost,” says the document.

Mr Graham of Borrowell said he saw a lot of potential for change in the credit and lending space. New Canadians who do not yet have a credit score in the country and those who have a difficult credit history are not well served by the traditional method of credit proof, but giving them the right to share their financial data with potential lenders offers other means to demonstrate creditworthiness.

“Lenders would like to look at cash flow, how reliably you paid your bills over six months or a year, whether you always kept a balance in your bank account [and] other types of behavior relevant to granting credit,” he said. “Allowing consumers to easily share this information if they choose will only increase choice.”

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

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

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