Industry
Banking
Banking Services Transformation: Unlocking Exponential Value
Highlights
- The Canadian government plans to introduce the Consumer-Driven Banking Framework or the open banking regulation to ensure financial well-being through secure sharing of data, protect consumers, drive economic growth, and strengthen the financial system.
- We believe that Canadian banks must adopt a ‘beyond compliance’ lens and capitalize on the huge strategic opportunities that the regulation will open up.
- Canadian banks can either consider one of three distinct approaches or a combination of approaches to exploit the opportunity offered by the regulation and create new value propositions basis their business model and vision.
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Budget 2024: Implications for banks
In its 2023 Fall Economic Statement1, the Government of Canada announced its plan to introduce legislation to set up a consumer-driven banking framework.
Also known as open banking or consumer-directed finance, the aim of the regulation is to oversee access to financial data and ensure financial well-being. The Government recently released Budget 20242, which promises ‘Fairness For Every Generation’ and aims to address critical challenges that Canadians face including lack of affordable houses, high cost of living, a sluggish economy and job market, and financially insecure retirement.
Budget 2024 has mandated the Financial Consumer Agency of Canada (FCAC) to oversee, administer, and enforce the Consumer-Driven Banking Framework.2 The FCAC will define the scope, system participation, guardrails related with integrity and national security, and rules governing privacy, liability, and security. Governance, scope, and technical standards will form the foundation of the first piece of legislation1, while additional aspects will be enacted in fall 2024.
The objectives of the framework are to ensure effective supervision of financial data-sharing, help Canadians achieve financial well-being by leveraging their financial data, drive economic growth, and ensure a stable financial system. While the framework puts the onus of enabling financial well-being and fair outcomes on financial institutions, it also offers opportunities to drive growth and unlock new business value. We explore the opportunities that consumer-driven banking or open banking will offer Canadian banks and present an approach to embark on an open banking journey.
Opportunities galore
The Consumer-Driven Banking Framework will enable banks to deliver an integrated financial experience to customers through ecosystem collaboration and a market-driven approach.
It will also enable secure sharing of data with customer consent, eliminating existing risky data-sharing practices, in turn improving consumer protection. We believe that viewing consumer-driven banking as just another regulatory obligation would be myopic. Financial institutions must go beyond compliance and unlock strategic advantage through accelerated digitalization, product innovation and personalization, new business propositions, and ecosystem collaboration.
Financial institutions can either adopt one of the following three distinct approaches or a combination to capitalize on the opportunities opened by the Consumer-Driven Banking Framework (see Figure 1) based on their business model and vision:
- Application programming interface (API)-first
- Ecosystem or platform or marketplace model
- API value creation
At the same time, banks will be able to address critical challenges facing Canadians and play a game-changing role in enabling Canada to achieve its economic potential.
Figure 1: Open banking bonanza for Canada
API-first approach
The primary objective of this approach is to help banks comply with the regulation.
It involves establishing an API framework and related infrastructure for the development, deployment, management, discoverability, monitoring, governing, and reporting of open banking APIs as mandated by the regulatory authority. Additionally, it includes a framework for consuming APIs from other financial institutions and service providers.
The approach must incorporate three categories of APIs:
- Public or open data APIs for ATM and branch location, product and offer details, product comparison and so on.
- APIs for sharing customer information with consent
- APIs for initiating action with customer consent
Additionally, the approach must include APIs for managing customer consent, third-party providers, information aggregation, regulatory reporting, developer portal, and sandbox. Customers can securely share financial information via APIs with regulated third parties through this approach. This approach will help eliminate unsecure data sharing practices, such as screen scraping, in turn resulting in customer-controlled safe and secure information sharing.
Ecosystem approach
This approach envisages the creation of a collaborative ecosystem or platform to bring together a network of cross-industry partners and products, frameworks, applications, and APIs to design innovative offerings and seamless experiences.
It encompasses end-to-end processes to address specific challenges faced by customers, segments, industries, and governments that impact the social and economic fabric of the region. Let us examine a few areas where the ecosystem approach can be a game changer.
Affordable housing and shared living
Canada is facing a housing crisis3—acute shortage of houses, all-time high rents, and skyrocketing housing costs have resulted in heavy demand for shared accommodation from students, low-wage earners, and immigrants. Though several accommodation-sharing apps are available, there is minimal support for owners and renters to negotiate and agree on terms, pay and settle housing deposits, and make or split rental payments.
Building a platform or ecosystem using open banking APIs can simplify the home finding process. The ecosystem must include real estate players, homeowners, renters, housemates, brokers, agents, tax agencies, movers and packers, insurers, builders, and others. Such an ecosystem will be a win-win for all stakeholders. Home owners will benefit through quick verification of the antecedents of prospective renters while renters will have visibility into the availability of houses. Both owners and renters will have easy access to a secure platform to negotiate and agree on terms.
For banks, orchestrating such an ecosystem will offer ways to drive customer acquisition, increase sales of credit products, enable account-to-account payments and settlements, and enhance business operations through effective risk management, underwriting, and assessment of customer affordability or ability to repay the loan. Moreover, with the Consumer-Driven Banking Framework, banks will be able to on-board customers of other banks as well, opening a fund of opportunities to serve them.
Care economy
There is increasing demand for geriatric services in Canada. The Consumer-Driven Banking Framework offers financial institutions an opportunity to orchestrate an ecosystem to enable ‘on-behalf’ banking services—this entails allowing authorized persons to operate the accounts of senior and challenged customers, with appropriate consent formalities in place. Care providers, insurers, private medical practitioners, and after-life service providers including funeral services and estate settlement and liquidation too can be part of the ecosystem. With such a platform, banks can tailor financial products and services to meet the specific care needs of the elderly population. Such an ecosystem will be a boon for seniors: it will increase awareness of care homes, facilitate timely access to affordable healthcare, personalized care services, and offer alternative insurance cover. It will also enable intuitive digital experiences through wearables and internet of things (IoT) devices. All this will help drive loyalty and customer retention for banks.
SME services
Small and medium-sized enterprises (SMEs) often encounter difficulties in effectively managing their cash flow and obtaining working capital financing due to thin credit histories. By combining open banking data from accounts and transactions statements with information from invoices, bills, and inventories, banks can assess creditworthiness and provide timely working capital and case management solutions.
Moreover, by collaborating with financial intermediaries, banks can gain deeper insights into customers' finances and the overall supply chain network. Streamlining invoicing and payment processes through digital solutions can address cash flow issues and help banks extend their reach to the supplier network who are in financial need, thus transforming from B2C to B2B2C players. Open banking can enable banks to offer contextual advice to help SMEs identify new revenue opportunities and design business solutions across functions like accounting, payroll, HR, finance, and recruitment by offering embedded finance products.
Access to education
To help achieve Budget 2024’s slogan of Fairness For Every Generation2, Canadian banks can offer financial assistance to students. They can orchestrate a platform that allows students to search for appropriate courses and professional certifications that they can enroll for. Open banking APIs can enable quick verification of grades, offer visibility into placement availability, simplify loan and repayment processes, and facilitate secure payments for course fees, accommodation, among other things. It can also help students to share their academic progress and career ambitions. By collaborating with the industry ecosystem and assisting students in the job search, banks can retain their customer base.
API value
With this approach, banks can create distinct business propositions, products, services, and experiences, to unlock new business value.
Investments in the API framework and the collaborative platform can be leveraged to identify and capitalize on new opportunities.
Digital-only financial services for immigrants
Given Canada historically welcomes immigrants and will continue with this policy, this offers an opportunity to offer basic accounts to immigrants by utilizing the government's digital initiatives for identity verification. With a basic account, immigrants should be able to transfer funds, make payments, and use cards to shop for essentials as soon as they arrive in Canada. Immigrants will find it difficult to access financial assistance given thin or non-existent credit histories. Banks must explore offering credit facilities to immigrants based on the credit history of their home country.
Better financial planning
Canadian banks can help their customers to obtain a holistic view of their spends on various categories such as groceries, entertainment, transport, medical and so on. This will help consumers understand their spending patterns, evaluate their service providers, and contextually switch to alternative providers for better service and value. Banks can create a cross industry API network to offer freemium or premium services for the benefit of customers, at the same time building a transparent and competitive ecosystem.
Retirement planning
Banks have comprehensive understanding of customers’ retirement savings. By analyzing financial data and integrating it with individual needs, wants, and desires, banks can create personalized retirement plans with investment options that offer better returns. Banks can also facilitate the redemption of loyalty and reward points, craft affordable credit products, and identify alternative funding sources. This will help improve older customers’ overall financial health especially as this segment is currently encountering challenges with their existing pension plan.
Credit pre-qualification
The Canadian Government has promised a good, middleclass life for every generation in the recently released Budget 20242, and building more affordable homes is part of that pledge. This presents an opportunity for banks to offer solutions to potential homebuyers. By accessing a customer’s financial information across banks through the Consumer-Driven Banking Framework, banks can pre-qualify or pre-provision eligible customers by determining affordability and arrive at the mortgage loan amount. With this, banks can onboard new customers and increase the product per customer. Customers too benefit through the ability to identify the best lender for their needs, pinpoint the right product, and negotiate the terms of the loan to their advantage throughout the mortgage lifecycle.
Getting ready
Infrastructure readiness, consumer literacy and collaboration with tech providers will play a critical role in the successful adoption of the Consumer-Driven Banking Framework.
Areas such as API management, partner onboarding, and data privacy will require attention. Adopting a product mindset for building the API network on a subscription model can generate additional revenue for the bank. Educating consumers about the benefits of consumer-driven banking is crucial to promote adoption.
For Canadian banks, adopting a compliance mindset to the Consumer-Driven Banking Framework will be short-sighted. Financial institutions must embrace a beyond-compliance lens and identify opportunities to unlock new business value. Additionally, they must proactively prepare for the shift by investing in a solid API foundation, infrastructure, governance, and data and reporting platform, which will act as a springboard for a beyond-compliance journey and create new business value. And obviously, the first movers will steal a march over their peers.
1 Reproduced with the permission of the Department of Finance, Government of Canada, 2023 Fall Economic Statement: Policy Statement on Consumer-Driven Banking
2 Reproduced with the permission of the Department of Finance, Government of Canada, Budget 2024
3 Reproduced with the permission of the Department of Housing, Infrastructure and Communities, Backgrounder: Solving the Housing Crisis: Canada’s Housing Plan
