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Open Banking Regulations Are Encouraging Competition & Innovation in Financial Services
Whether we’re talking about the amended Payment Services Directive (PDS2) in the European Union, the Consumer Data Right (CDR) in Australia, or consumer-directed finance here in Canada, there’s an underlying trend in the financial services industry that’s gaining momentum beyond geographical borders: Financial regulators are taking calculated steps toward open banking that are encouraging market competition, while carefully ensuring consumer security along the way.
But when it comes to the Canadian banking industry, change doesn’t happen too quickly. In fact, until just a few years ago, most financial services professionals would probably consider that an understatement. With regulatory oversight targeted at maintaining market stability and the industry’s financial institutions grappling to modernize their complex legacy banking systems, change was a bit of a foreign concept in the financial services industry. Change was something that happened so gradually and with such careful planning, precision, and intent that it seemingly went unnoticed—it often felt like watching the passing of a long year. When change did happen, the industry may have played it down, calling it by other names for fear that drawing attention to change itself would be too disruptive for consumers that trusted their institutions to keep their money safe. But where banking regulation and technology were once seen as barriers to change in the financial services industry, they’re quickly becoming catalysts for change, as new open banking regulations are laying the groundwork and encouraging competition in financial services jurisdictions around the world.
COVID-19 Doesn’t Care About Your Digital Transformation Strategy
Let’s talk a bit about change first. Over the past decade, Canadian banks have been laser-focused on their own digital transformations. With the seemingly endless threat of disruption and obsolescence reinforced by the emergence of new fintech companies and innovative solutions, financial institutions across the country have been tirelessly at work planning and implementing their own digital strategies. Banks have been replacing manual processes with digital processes, redefining their cultures in order to position their businesses for the future. They have been rethinking their end-to-end customer journeys, improving operational efficiencies wherever possible, and retrofitting old technology and systems in order to create modern, customer-centric digital banking experiences. But that process of updating legacy systems, processes, and platforms in order to meet demanding consumer expectations around the personal banking experience has been slow. Although digital transformation of financial institutions may have recently been regarded as a gradual journey spanning a period of multiple years, that approach isn’t a viable option, anymore. Time is running out.
Take a look at the last year. The year passed a little differently this time around. The COVID-19 pandemic drove a new kind of change in the industry without much care for anyone’s planning, intent, or digital strategy. Change wasn’t gradually implemented—it was abrupt. Suddenly, banks needed to adapt. They needed to be distant and digital and unconventionally forgiving. Early last year, banks began offering mortgage and loan payment deferrals to large numbers of households experiencing a sudden loss of income due to the pandemic. By November 2020, the Bank of Canada reported that 16% of mortgages in Canada had been deferred. On top of that, many consumers that relied on traditional retail banking services, particularly the older demographics, were suddenly forced to adopt digital solutions. At the same time, entire workforces shifted to operating remotely in only a matter of weeks. Three-year strategic plans became 12-month plans. With the implementation of physical distancing guidelines imposed on Canadians, the COVID-19 pandemic accelerated the need for banks and financial institutions to be digital and adaptable—and it gave digital transformation a new immediacy.
The pandemic redefined the meaning of change in the industry. But there was another new driver of change already at work.
How Open Banking Regulations May Drive Consumer-Directed Finance in Canada
Even before the COVID-19 pandemic hit, steps had already been taken by the federal government to weigh the risks and benefits of open banking in Canada. With the Department of Finance having announced the formation of the in Committee on Open Banking back in September 2018, the committee released its consultation paper, “A Review into the Merits of Open Banking,” just four months later, in January 2019. The consultation paper would officially launch the first phase of the federal government’s open banking initiative, which was simply to gather feedback from the Canadian financial services industry. A full year later, Canada’s Minister of Finance, Bill Morneau, would share the advisory committee’s findings from the first phase of the review, and announce that the advisory committee would begin work on the second phase—a phase that would include a further review that emphasized a focus on data security and privacy risks in financial services. As work was about to begin in the spring of 2020, everything suddenly came to a halt. By the end of April, phase two was put on hold until the fall, citing restrictions on public gathers and preventing any meaningful progress on the Canadian open banking initiative. Eventually, virtual stakeholder meetings resumed with workshop dates scheduled in November and December.
With the economy shaken by the change brought on by the pandemic, the industry is now set to face another disruptive change. One where Canadian open banking regulations may require banks and service providers to be more open with their consumer data by mandating them to share that data with a customer’s explicit consent.
According to the advisory committee’s phase one findings, “the committee is of the view that enabling a consumer-directed finance framework, with the proper safeguards, will deliver greater benefits: to the sector, to the economy and most importantly, to Canadian consumers and small businesses.” In reality, enabling a consumer-directed finance framework with proper safeguards may mean that regulations are required to ensure security, privacy, and controlled access to consumer financial data among banks, fintechs, and other third-party financial service providers. If that’s the case, open banking regulations would play a critical role in driving the government’s approach to consumer-directed finance in Canada.
Regulatory enablement isn’t the only approach to establishing a secure open banking framework, but it is an effective one. Luckily, Canada has other jurisdictions and evolving frameworks to look to for insight on how to proceed with consumer-directed finance, and it’s easy to see that regulations in open banking can play a major role in encouraging competition in the industry.
Open Banking Regulations Are Already Driving Competition in Jurisdictions Around the World
The shift towards building new open banking systems and new ways of banking through regulatory enablement will continue to open up incredible new opportunities in financial services in Canada, Europe, Australia, and around the world. Those emerging opportunities aren’t just for consumers that will have more control over their data, either. The shift supports and encourages competition among banks, competition among fintechs, and competition among third-party service providers by providing a framework of controlled access to data using modern API-driven technology.
Open Banking Regulations: In Europe, the Payment Services Directive (PSD2) is Driving Open Banking
Let’s look at two jurisdictions that have already implemented open banking with the help of regulatory enablement: Europe and Australia.
In Europe, the Revised Payment Services Directive (PSD2) ultimately laid the foundation for open banking. An amendment to a regulatory predecessor that was focused on developing a single payments market in the European Union, the PSD2 was a response to an uptick in innovation in the industry and required banks to share consumer financial data with third-party service providers. The regulation’s Access to Account (XS2A) mandated that banks must provide authorized Account Information Service Providers (AISPs) and Payment Initiation Service Providers (PISPs) controlled and secure access to customer account data. With the intention of promoting innovation, reinforcing consumer protection, and increasing competition in the banking industry between banks and emerging third-party service providers, the PSD2 is a prime example of how open banking regulations are encouraging competition among banks, third-party providers, and emerging fintechs.
Open Banking Regulations: In Australia, the Consumer Data Right (CDR) is Driving Open Banking
On the other side of the world, Australia’s open banking framework is also being driven by a government-led initiative that includes a phased implementation in an effort to safeguard consumer data rights and enable marketplace competition. In comparison to Europe, the Australian open banking framework is focused entirely on AISPs and data sharing at the moment, a scope that’s limited and ultimately allows for the consideration and inclusion of payment initiation services at a later date. The primary regulatory driver behind open banking in Australia is the Consumer Data Right (CDR). The CDR was announced by the Australian government in 2017 and was intended to give consumers greater access and control over their data, providing them with the ability to switch between banking accounts and services. Officially implemented in July 2020, the CDR laid the foundation for open banking in Australia. When finalized the regulation of open banking in Australia will be supported by the Office of the Australian Information Commissioner.
While both European and Australian jurisdictions cite consumer choice as a primary driver of their initiatives, consumer choice is only possible with more competition in the industry. That ability to choose between financial service providers will ultimately be driven by two regulated systems that mandate controlled access to data and continue to encourage competition among industry players.
https://www.bbva.com/en/everything-need-know-psd2/ (Retrieved February 4, 2021)
https://www.zoho.com/books/guides/what-is-the-revised-payment-service-directive-psd2.html (Retrieved February 4, 2021)
https://en.wikipedia.org/wiki/Payment_Services_Directive (Retrieved February 4, 2021)
https://www.finextra.com/blogposting/16647/open-banking-aisps-and-pispsexplained (Retrieved February 10, 2021)
https://www.yodlee.com/open-banking/open-banking-differing-implementations-will-stifle-the-dream#:~:text=The%2520FCA%2520handbook%2520stipulates%2520that,be%2520defined%2520as%2520an%2520AISP.&text=Although%2520not%2520consumer%252Dfacing%252C%2520aggregators,customer%2520data%2520behind%2520the%2520scenes (Retrieved February 10, 2021)
https://www.accc.gov.au/focus-areas/consumer-data-right-cdr-0 (February 25, 2021)
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