Over the past two years, there has been a lot of discussion around the concept of ‘Open Banking’ and the potential benefits it holds for both Canadian consumers and businesses. Since its inception, open banking has taken the North American payments market by storm by offering consumers an alternative, and flexible payment solution. Yet, as we enter a new decade, it’s anticipated that we will see government and industry leadership surrounding open banking in Canada boom, especially as it relates to its impact on small and medium sized businesses. Currently, 71% of financial institutions are willing to invest up to $20 million in open banking solutions.
On January 31, 2020 Finance Canada released its report outlining the findings and recommendations of Finance Canada’s Advisory Committee on Open Banking. One of the key takeaways of the committee is that Open Banking “delivers tools that would support Canadians in improving their financial outcomes, by enabling them to use their information to secure better rates or products; manage their small businesses more easily; and access new tools that help improve their financial health.”
So what is Open Banking, or Consumer Directed Finance?
At its core, Consumer-Directed finance recognizes that consumers and businesses should be in control of their financial information and should be able to benefit from the use of it. An Open Banking system does not mean that all data is open to everyone but rather that consumers can authorize accredited third-party applications to access their data to provide them with services that will benefit their business and improve their financial operations and business efficiency. Think of it as a technology layer that sits on top of the current legacy financial institutions enabling new technologies to create new and beneficial services based on your financial data that are targeted to your own specific needs.
Why do we need Open Banking?
Canada’s legacy financial institutions are over 100 years old consisting of many separate siloed technology systems that have been built over the past 50 years. Because of this business structure, information cannot flow between systems in a transparent manner that can give the business financial professional any type of holistic visibility of their financial position. Something as straightforward as viewing and reconciling transactions across consolidated bank balance is not possible, or managing cash collections and payments across multiple vendors and customers. Currently, more than 80% of businesses are demanding more payments options.
Open Banking enables a third-party financial technology company to access bank account data across multiple accounts in multiple institutions, consolidate it into a single balance and can automatically reconcile financial transactions as they occur.
Payments, the first commercial use case for Open Banking
Payments represent one of the best examples of the potential of Open Banking. According to Payments Canada over 90% of the total value of payments in 2018 ($8.8 trillion) were bank EFT and cheques. There were $3.9 trillion in cheques processed in that year, over seven times the total value of credit card payments processed ($0.5 trillion). These bank payment methods are rife with inefficiencies and challenges of our legacy systems. Lack of visibility into the successful settlement of payments; Non-sufficient funds; uncertain payment periods; and an inability to easily integrate any e-commerce system into the current payment system makes cash and treasury management a painful chore for almost all finance departments and a significant barrier to entry for Canada’s small and medium-size enterprises.
The ability to collect and send payments while successfully reconciling and managing a business cash positions is the lifeblood of any business. More than 80% of Canadian small businesses are looking for more payment options. In today’s digital world increasing the number of payment options directly increases a businesses total addressable market and provides their customers with a better experience. For enterprises whose average payment size is greater than the average credit card payment (C$93) or online transfer ($304) digitizing checks and integrating EFT services is still a major barrier to entry to growing and managing their business.
Open Banking enables payment technology businesses to offer a technology layer that sits between the legacy banking system and any businesses e-commerce or ERP system. With Open Banking data the payment technology provider is able to immediately verify banking payment transactions and provide payment transaction transparency that allows for easy reconciliation and the automation of cash management activities.
Open Banking technology is much more than just access to financial data for novel client applications. It is the first necessary step in the creation of a new financial technology stack that sits on top of the regulated financial institutions that in the future will enable the automation and interaction of all businesses cash and treasury functions with businesses and financial institutions around the world. It will provide businesses with access to the capital that they need on a ‘just-in-time’ basis by quickly analyzing capital requirements, creditworthiness and immediately connect to the appropriate capital providers. This new Financial Technology Stack will drive in a new world of interactive Finance 2.0 the same way that adding Internet and data to the telecommunications providers did for e-commerce at the beginning of the Millenium.