If you’re a bank or financial institution, you should know what open banking is. Open banking consolidates your customers’ financial information. It allows them to access their financial data via a single banking or third-party app, allowing them to make smarter and faster financial decisions.
This guide explains open banking, how it works, and its benefits.
What Does Open Banking Mean?
Open banking is a secure framework that facilitates the exchange of financial data between financial institutions and third parties through APIs (application programing interface).
Think about the last time you wanted to check your investment portfolio. You probably had to log into multiple online portals and bank accounts to get financial information.
Open banking (also known as consumer-directed or consumer-led banking) can shorten this process to a few minutes by bringing all the information to a single dashboard.
When you try to access financial information via a fintech app with open banking, your bank transmits data via a secure online channel to the app. More importantly, you don’t need to provide login credentials when using open banking.
As you can imagine, being able to pull financial data securely from banks and other institutions will allow fintechs and the banks themselves to develop innovative products that enable Canadians to manage finances more effectively.
How Open Banking Works
Here is a typical scenario for how open banking works:
- A bank’s customer downloads a fintech app to manage finances and wants to start using it.
- The app needs to access financial data, so it prompts the customer to link their bank accounts.
- The customer authorizes the bank to securely share financial data with the app.
- The bank transmits customer data through a secured online channel.
- The app provides financial insights and recommendations.
Isn’t that how apps operate anyway?
Well, yes, except for one key difference. Traditionally, when a person links an app to their bank account, it uses screen scraping and the person’s login credentials to log into it and pull financial data.
On the other hand, open banking uses APIs (application programming interfaces). In simple terms, APIs allow two systems (the banking system and the third-party app, in this case) to communicate and exchange information securely.
Banks or financial institutions are responsible for building, implementing and managing the APIs that will allow customers to connect their accounts with new and innovative apps.
Banks need to find the right API management platform and be mindful of some common open banking API challenges. Alternatively, you can book a discovery call with us, and we’ll take care of the technical aspect of implementing open banking.
Screen scraping is prone to privacy and security risks since you can’t control how the fintech stores or uses your data. The practice can also violate your bank’s electronic access agreement (EAA), which frees the bank of any liability in case of an unauthorized transaction in your account.
Screen scraping will likely become obsolete once open banking becomes available in Canada.
What is Screen Scraping?
Screen scraping is the process of capturing data present on a screen — from a webpage, document, or app — for using it in another system or app.
It’s generally used by apps that need to extract data from legacy systems that lack an API management system or any other source of data extraction.
Data accessed by apps through screen scraping isn’t regulated. Without a standardized system, all third parties use their own level of security and approach to handling data.
Screen scraping platforms also store login credentials as text strings. The lack of encryption leaves your data vulnerable to attacks from hackers.
Unfortunately, an estimated four million Canadians are accessing banking-style services via screen scraping. The growing popularity of financial planning apps strongly calls for a more secure, regulated framework like open banking.
However, open banking still has its limitations. For example, the bank might securely transmit the information to a third party, but if someone hacks the app itself, they might steal your data. So even though open banking is safer than screen scraping, it’s not fully secure.
Benefits of Open Banking
The implementation of open banking in Canada will benefit both you and your customers.
Here are four ways open banking will benefit your customers:
- Gives an overview: Open banking provides a secure framework to pull information from your bank accounts, credit cards, investment partners, and other financial institutions. An open banking app can consolidate all your financial data and provide a complete overview in one place without switching between websites and manually extracting information.
- Allows shopping around for the best deal: Comparing deals for personal loans, credit cards, or mortgages requires careful research. A comparison app using open banking can speed up the process and help you find the best deal. Apps can also help you understand how likely you are to qualify if you apply for a loan based on your financial information.
- Speeds up the application process: Applying for loans or credit requires submitting information, including your financial statements and KYC documents. Instead of manually submitting these documents, an app can store them for you and submit them as necessary when applying for a loan or opening an investment account.
- Helps make smarter financial decisions: Fintech apps can use artificial intelligence (AI) and machine learning (ML) to create financial roadmaps based on your financial data. You can use these apps to create a budget, understand your spending habits, and find the best investment options based on your risk appetite. Apps may also project cash flows based on your budget and financial obligations so that you can estimate the available balance in your account at the end of each month.
Here are four ways open banking benefits you as a bank or financial institution:
- Collaborate with third parties: Collaborating with third-party apps can help you explore data-sharing agreements and identify new opportunities. You can streamline processes and offer more related services to stay ahead of the competition.
- Prepare for the future: Open banking isn’t available in Canada, but it soon will be. Over time, your customers will likely demand the privacy and security that open banking offers. As data privacy laws evolve, open banking will ensure you’re in an excellent position to adapt to changes. Moreover, quickly becoming compliant with evolving rules without interrupting service improves customer experience.
- Increase market share: Your customers crave convenience. Allowing them to consolidate financial information securely ensures excellent customer experience. Offering open banking is critical to fulfilling your customer’s demands. Over time, you might even lose market share by not offering open banking.
- Lower operating costs: Open banking ensures banks’ data lives in a centralized, digitally accessible location. This minimizes data silos and facilitates automation. Automating banking processes like mortgage underwriting allows you to reduce operating costs.
Open Banking in Canada
While open banking is currently unavailable in Canada, it’s available in countries like the UK and Australia.
The Canadian government is working on safely implementing open banking in Canada. The government appointed Abraham Tachjian to lead Canada’s open banking framework development initiative in March 2022.
According to the Final Report of the Advisory Committee on Open Banking, the government had set a target to make open banking operational by January 2023, but implementation is still under process.
However, the government is committed to implementing open banking at the earliest and realizes the benefits it can offer to Canadians.
For example, when asked about how open banking can address the challenges facing BIPOC Canadians, small businesses, and rural/remote communities, Tachijan explained:
“While Canada’s banking framework aims to ensure all Canadians have access to basic bank accounts, some Canadians may be underbanked. Open Banking creates the opportunity for consumer-led banking, which gives consumers and businesses greater control and protection over their financial data, as well as more transparency on how it’s used.”
While the government lays the groundwork to implement open banking, you should ensure you have everything set up to offer customers open banking soon after it becomes available in Canada.
Is Your Financial Institution Ready for Open Banking?
Open banking is about to transform the financial services industry. Your customers will have the flexibility to choose how they interact with your bank, and your competitors will have the option to offer innovative solutions.
Implementing open banking can feel daunting, but partnering with the right team can simplify the process.
Blanc Labs helps banks implement open banking from scratch. Book a discovery call to learn more about our open banking solutions.