The Decibel - What open banking could mean for you

Episode Date: May 31, 2024

Open banking could eventually be available to Canadians, which would change how we access our personal finances. This style of banking is consumer-driven and would bring transparency to a customer’s information. but despite the talk, Canada is lagging behind other Western countries when it comes to implementing open banking.The Globe’s personal finance reporter, Salmaan Farooqui, breaks down the inner workings of open banking – its benefits and concerns, why it doesn’t exist in Canada yet, and how this new development will affect the way Canadians manage their finances in the future.Questions? Comments? Ideas? Email us at [e-mail]

The way you access your banking information could soon change. We're pleased to see Bill C-69's proposed open banking framework, which would benefit consumers and businesses alike. The ability for consumers to choose and switch providers lies at the heart of the competitive process, and giving consumers this ability will help foster overall competition in the sector. Bradley Callaghan is the Associate Deputy Commissioner

at the Competition Bureau of Canada. On Wednesday, he answered questions at a Senate committee about open banking. The Canadian federal government has begun putting some money into building out open banking. But it's still behind other Western countries in making it a reality. So what exactly is open banking? And what would it mean for you? Salman Farooqi is a personal finance reporter with the Globe's Report on Business.

He's on the show today to walk us through the ins and outs of open banking. I'm Mainika Raman-Wilms, and this is The Decibel from The Globe and Mail. Sal, thanks for being here. I'm happy to be back. So what exactly is open banking? Essentially what open banking is, is it forces financial institutions to be able to share your information with other third-party apps, other institutions, if that is something you want them to do. And there's kind of like three main ways that I like to organize how open banking can affect a consumer's life. The first is that by sharing all your information,

being able to kind of have it in one platform, you could be able to see all your financial information in just sort of one spot rather than having to log into all your different bank accounts. By sharing your information, you could also have a lot of workiveness in the financial industry because by being able to analyze your financial data, you can better understand how maybe a different bank or a different institution could much better serve you in your financial situation. So it basically is this term that describes a way to open up a lot of doors for new technology in the financial world. Okay. Okay. So this is really interesting,

and you've laid out those three points. So let's just kind of go through them sequentially then, Sal. So the first one you said was it would make it easier for people like you and me to actually see our finances. So what do you mean by that? So let's say right now, if you wanted to use a budgeting app in Canada, it's quite challenging to do that without open banking, because the only way that this third party app can collate all your all your financial data is for you to actually give them your login through kind of a secure app. And then they log into your bank account and they scrape all that data off your your bank accounts. They literally take all that data or the writing that they can see on the page and then they lift that and put it into their own app. And the problem is that kind of process, there's security issues with it, it can also be inaccurate sometimes, and on top of that, it sometimes can't even function because there's certain

platforms that specifically make it hard for data scrapers to work. So it's quite challenging to get a real know, a real good perspective of what's going on in all your financial accounts, because the reality is most Canadians have more than one banking provider and they have more than one credit card. And so being able to kind of see all that information in one spot, it sounds like, you know, not that big of a deal, but I kind of compare it to tap payments, which we have right now. You know, tap payments aren't necessarily a life changing thing, but they certainly are a great convenience and they take a lot of friction out of kind of our everyday financial process. And in the same way, this would take a lot of friction out of just being able to kind of get an oversight, a real

good view of what's going on in your finances. Yeah, you talked about too, like if you're using a budgeting app, for example, right, this could kind of bring all of your finances from different places together. So you don't have to manually input that. You just have that automatically in one place. Yeah, exactly. And you have it automatically in a way that is just very streamlined. And it's official kind of because the way it works right now is sort of this like funky workaround that it doesn't really function that well always. So the second thing you mentioned then Sal is that it could help lower income people it could actually help with credit assessing credit scores as well

so what is what does that entail? Yeah so maybe imagine if there was a financial technology company a fintech company that specialized in analyzing people's bank details to prove that they pay rent on time. Because this is a problem for some people. If you have bad credit, it can be difficult, especially in this very competitive environment, for you to get an apartment. A landlord might do a credit check on you and see that it doesn't look like you have the best history of paying off your debts. And if you wanted to get around that, you could have a company that could prove that you've always paid your rent on time because they have access to your financial data. You've decided to give it to them and they can show, look, these are five years worth of rent payments that this

person has made on time. You can trust that they're going to pay their rent. There's a pretty good chance they're going to pay their rent. And there's also like a situation to kind of help you to not go into overdraft as well, right? This is like one of the applications that could be here. Yeah, so it's not necessarily that it stops you from going into overdraft. It actually issues you a micro loan once you do go into overdraft so you don't get charged by the end of the day. And so I found this really fascinating. This is already in place in the UK. I was talking to kind of one of the pioneers of open banking in that country. And yeah, he was describing this service that's

available there now where basically it'll watch your bank account. And if you go into overdraft by accident, it'll issue you a microloan, low cost that is cheaper than your overdraft fee. And it'll essentially put that money in automatically once you have gone into overdraft so that you don't have to pay kind of steep overdraft fees. That's not necessarily just low income. That could be all sorts of people. But that's a way that could help you save some money on your use of your bank. Yeah, interesting. All right. The third thing you mentioned, Sal, was that open banking could help with competitiveness. So what would that look like? Right now, if you want to make your financial life as streamlined and say as perfect as possible,

if you want to make sure you're getting the best deals, the best interest rates, the best credit cards, all that sort of stuff, it takes a lot of effort. There's not really a great way to compare all the products that are out there. And there's also not a great sort of way right now to understand how your specific financial life, the kinds of transactions you make, how they might fit some of those products best. So if you're able to have an app out there that basically analyzes all your banking data and also has access to kind of all the deals

that are out there for different kinds of financial products, you could really easily be told, hey, this bank account is best for you because you have a lot of money sitting in the checkings account and it gets you a really good interest rate on that. Or it could say, hey, you spend a lot of this particular store and this credit card is going to give you the best cashback or the best points based on the way that you spend over there. So it opens the door to a lot more competition, especially in Canada, where the vast majority of people bank with the big six banks.

And there are smaller players out there that sometimes do offer better value in certain situations. So the idea is that open banking, by being able to share your information, you can basically be liberated to make better decisions about your financial life. And let's just focus for a second on this idea of sharing information here, because I think this is a concern for people when we're talking about banking, right? So open banking doesn't necessarily mean all your banking info is just out in the open, right? Like how open is open banking? Yeah, and so this is why there's different terms in open banking that some countries prefer to use.

Say in Australia, where they've implemented open banking over there, they call it consumer data rights, which isn't the most buzzy term in the world. But it kind of gets the point across that it's your data and it's your right to share it. And that's kind of what's happening here. It's not like because of open banking, all your data is going to be available to anyone who wants to see it. You have to choose to take part in open banking and to give access to your data to different fintech companies and different financial institutions. So I would say, you know, it's kind of as open as you want it to be. And it's not necessarily like because of open banking, suddenly your data is going to be out there for everyone to see.

And how long has this idea been around? Like, where else do we see this in the world actually being implemented? So we saw this first get implemented around five years ago in the UK. It's been a trailblazer when it comes to this technology and this kind of framework. But we've also since seen it come into play in Australia and Brazil. And there are other countries around the world that are in the process of implementing open banking, including the US and the UAE. So it's definitely kind of a ideology that's getting traction kind of around the world. And what do we know about how it's gone so far in those places? Like what is the experience actually been for consumers? You know, I've talked to a couple consumers in the UK. I've

talked to kind of the person who pioneered the actual framework for sharing this data in the UK. And so far, most of what I've heard is fairly positive. I mean, it's very early right now, like open banking kind of has these different stages of what you're going to be able to do with it. And right now, it's kind of in this sort of read-only stage in most countries where, you know, you can see most of your data maybe on one platform, but it's not like you can actually action a payment or that sort of thing on one platform. So because of how early it is in kind of implementing open banking, it also is still kind of a thing that maybe more like nerdy or maybe more financially involved people use. I think it still doesn't mean a whole lot to kind of the general public. And even when I was asking around to people I know in Australia or the UK about open banking, a lot of them were like,

I don't really know what this is. But I think that speaks to kind of how early we are in this implementation process, because it's all about innovation. And it takes a while for that innovation, I think, to take place and to really find the best ways that open banking can kind of benefit people. We'll be right back. So, Sal, we've laid out how open banking can be beneficial for consumers, how other countries are implementing it as well. So what's going on in Canada? Where do we stand here? So the most recent news around open banking was in this year's budget. They basically allocated a small amount of money to a federal agency that they've

also decided will kind of oversee the process of building open banking, the framework behind it, and overseeing how it works in the country. So it's still very early stages. And, you know, the reaction to even that budget announcement was a little mixed. There were a lot of people I talked to who were quite pessimistic about how slowly the government was moving on it. There were other people who were at least happy that there is, you know, there is at least an agency in place that'll take care of this. But it is certainly very early. And, you know, one professor I talked to, Andreas Park at U of T,

he basically described it as the government kind of doing the least it can without losing face right now. Okay, yeah. So in the budget, they basically announced there's this specific regulatory body that's going to oversee this process. They also announced a million dollars in initial funding. What would people like to see, though, I guess? Why does this not hit the mark for some of the experts you were talking to? You know, I think it's a pretty small amount of money at the moment. And I think there were a lot more expectations from experts to kind of get a timeline would have been nice to see, I think, for a lot of people. So let's talk about how Canada's current banking system fits into this. So we have six big banks in Canada, RBC, CIBC, TD, BMO, Scotia, and National Bank. How might they react to this

idea of open banking? Well, I think the fact is in Canada, we have a pretty conservative banking environment. We also have a pretty conservative banking environment. We also have a very consolidated banking environment. And that is kind of a challenge to open banking because open banking, it really is in the interest of a lot of these smaller players. Data sharing is in the interest of, you know, consumers being able to switch their banks to other providers. There is kind of a lot to lose for kind of the bigger banks, especially with all this proprietary data they have that, you know, presumably would be would cost money for them to have a framework to share it. But then also that data itself is very valuable. So, you know, the

experts I've talked to have kind of noted that Canada's consolidated banking environment poses a challenge for how quickly it'll come out because it's not necessarily in their interest to have open banking. So this is a really interesting point then, because it sounds like there's maybe some concern amongst the big banks that they would actually lose some control if we did implement open banking in this country. Could we be a little specific here, Sal? How could open banking change things for the big banks? Well, like I mentioned, you know, with open banking giving you a way to really see exactly how different banks might be able to benefit you better than your current bank, that just allows a kind of a more competitive environment. And it

takes a lot of friction away from the process of changing your financial life, because the thing is a lot of the stuff that open banking allows you to do, it's possible, but it's just kind of difficult, more difficult than most people are kind of willing to deal with. And so by taking that friction out of the idea of changing your bank account or seeing what the best credit card is for you, that really makes it easier for people to say, oh, I'm going to switch my bank.

I'm going to use a different service. And that kind of empowerment is, I think it would be a concern for any bank that already enjoys kind of a large share of the market right now. But I guess I wonder, couldn't the big banks just offer similar apps that the smaller players are offering? Couldn't they be competitive with those smaller players and still then be relevant in that way? I think so. And I think that's kind of the way that one of the experts I spoke to is trying to sell that point to banks, basically. His name is Barry O'Donohue, and he is basically behind the company that set up the framework for open banking in the UK. When he talks to players in the industry, he tries to sell the point that as a big bank, you have a lot of resources to maybe set up some open banking

functionality yourself. And so if one of these big banks was to really be a pioneer in this area, that could also help them shore up a lot of interest and a lot of customers. So Sal, we've talked a lot about the potential benefits of open banking, but I think we should address the other side of things. Like, are there concerns, are there criticisms about open banking? I think the main concern and criticisms that people have is just around data privacy. There is definitely a legitimate concern about how all this data is going to be protected if you're sharing it on this platform. It's a scary idea, you know, to think of all your financial data out there at risk.

So I think a really important part of this is taking the time to develop a really safe and trusted platform that consumers can can kind of trust. But so far, we have seen in other countries that, you know, the rollout has been pretty good. And, you know, so far, I haven't heard of any large data breaches when it comes to open banking over there. So I think the fact that it's already been put into place by other countries is kind of a reassuring thing to see for consumers. Another thing I want to ask you about is the fact that our banking system here in Canada is seen as incredibly stable, right? We've talked about this quite a bit. Would open banking affect that? You know, when I think about stability and

banking in this country, I think about the kind of protections that are in place for consumers around how banks act and how much cash they have to have on hand and that sort of stuff. These are the kind of rules that prevent banks from shuttering down like we've seen in the U.S. at points such as with Silicon Valley Bank, when there was kind of that whole meltdown going on over there, we were pretty safe over here. But I think when I think about open banking, I think that's kind of like a whole separate thing that doesn't necessarily change a lot about some of the ways that the banks function. It's more to do with data sharing. So personally, when I think about, you know, the safety that we have as consumers, I don't necessarily think open banking would change that as long as there are kind of robust mechanisms and infrastructure in place to make sure that

open banking is kind of done correctly and securely in this country. Just in the last couple of minutes here, Sal, I know that you said earlier that open banking doesn't mean a whole lot to the general population. And you actually spoke to an expert who said that part of the issue with open banking is actually getting consumers to care. What does he mean by that? And why is this such an issue? I think it's hard to get consumers to care about something that is so nebulous and doesn't seem to have like one direct meaning about how it's going to affect your financial life. And, you know, I use that tap payment example. I used it before because, you know, when you think about it, it's not like tap changed our lives in a huge way.

You know, it has made a lot of things easier. It's nice to leave your house without your wallet sometimes and just be able to pay with your phone. And the difficulty with open banking is, you know, it refers to the pipes behind the system, the things that actually make this data information possible. If you refer to tap payments as RFID technology that allows payments to be possible from your phone, I think people's eyes would glaze over. And the problem with open banking is that there's just so much that it accomplishes, I think that it's hard to kind of give it a more flashy name. So that's kind of the challenge that we see in terms of think that it's hard to kind of give it a more flashy name. So that's kind of the challenge that we see in terms of, you know, getting a lot of support behind open

banking. But the reality is, is that there are a lot of ways that it could it could really empower you as a consumer. And it can just make your financial life a lot easier in terms of making decisions, saving money at the end of the day on the kinds of banks you use and the credit cards you use. So Sal, from the conversations that you've been having around open banking, the experts that you've been talking to, will we ever actually see this system in Canada? It kind of depends on how much of a push we see from the government to actually make this possible. Because I think another thing a lot of experts said to me is that open banking isn't necessarily something that the business community leads,

because as I mentioned, it's not always in the interest of a lot of big players to have open banking out there. So it'll really depend on how much of a push we kind of see from the government. Sal, always great to talk to you. Thank you so much for taking the time to walk us through this. Thanks for having me on. That's it for today. I'm Maina Karaman-Wilms. Our intern is Aja Sauder. Our producers are Madeline White, Cheryl Sutherland, and Rachel Levy-McLaughlin.

David Crosby edits the show. Adrian Cheung is our senior producer, and Matt Frainer is our managing editor. Thanks so much for listening, and I'll talk to you next week.