Open Banking

The Convenience Factor

In the digital age more and more consumers seek convenience in banking, and this is demonstrated with the digital payments industry reaching a value of US$721 billion in 2017. This desire for convenience is especially true of the younger generations with a survey by Accenture finding that 1/3 of those aged 18-44 were happy to share their financial data with non-banking third parties if they would benefit through deals or better user experience, whereas the average figure for individuals aged 45+ was half that.

Therefore, as an increasing number of consumers seek a better payments experience, technological innovations are necessary to adapt to and fulfill this need.Open banking is one such innovation which is causing a stir as fintechs continue to revolutionize the global payments landscape. Open banking not only increases convenience for consumers but it also reduces friction and saves businesses both time and resources.

However, as with all new payments’ innovations, it is necessary to introduce regulations and legislation that safeguard against potential security risks. This ensures the public feel confident in the knowledge that new innovations are secure while also providing the smoother payments processes that they crave. Further evidence from Accenture echoes Canadian consumers desire for these regulations with 71% of respondents citing that additional security measures would help alleviate their open banking concerns.

Security Implications

The introduction of such regulations is causing hesitancy in the adoption of open banking in Canada. This is leaving room for practices, such as ‘screen-scraping’ whereby third-party providers (TTPs) access user financial data by logging into digital portals, that pose potential privacy and security risks.

So what solutions exist to overcome these potential security risks?

Tokenization is a solution that we use at VoPay to ensure consumers remain protected while enjoying this increased convenience. Tokenization is a security technology method that is designed to reduce the amount of data necessary for a business to access in order to complete financial transactions, thus protecting consumer’s credit card transaction data. This is achieved through replacing the sensitive personal data with unique identification systems that are randomly generated. These tokens retain the essential information needed for the transaction while protecting the security of the data. Some of the benefits of this solution include:

1.     Quicker transactions: tokenization is completed with smart contracts which allows for elements of the process to be automated, reducing administrative time and improving the speed at which transactions can be completed.

2.      Payments efficiency: improves the potential for more efficient and easier transactions.

3.     Increased accessibility: this is especially true for small to mid-sized businesses as tokenization is empowering them to increase the security of customer’s credit card and e-commerce transactions and keep up with the larger competition.

Solutions such as this demonstrate that open banking does not have to compromise security and we are beginning to see Canadian authorities taking action to meet customer demands for banking innovation and convenience.

Learn more about the solutions we provide at VoPay.

The rise of financial technology (or fintech) companies around the globe opened pandora’s box on the question: who owns the financial data? What will they do with it? 

The way that the current financial services ecosystem operates in Canada and in most countries, other than the UK, is that the banks own the data. Not the consumers, innovators and disruptors, or governments. In the U.S. and Canada currently, a customer’s financial data, such as transaction history and balance, is not legally owned by that customer. Yet. 

This financial data is often unorganized and siloed, so much so that it limits a bank’s ability to access and use it in a meaningful way. Even when the information is accessible, a bank’s IT infrastructure often cannot compete with innovative fintech startups that are more agile and hyper-focused on solving specific financial challenges. 

Consumers (especially Millennials) now expect—and demand—the same level of choice, control, user-experience, security, and innovation that they receive from other industry’s products and services. Consumers are fuelling a major disruption in the financial industry.

To help smooth the transition into a future with superior financial services, a collaborative model aims to bridge the gap between data, banks, consumers, and technology. It’s called open banking. 

What is open banking? 

Open banking is a collaborative model or set of objectives for how banking should and could work. As our fintech partner Flinks puts it, it’s “the promise of access to data across platforms and institutions.” In this new banking model, banking data is shared between major banks and third-party players, such as fintech companies like ours.

Open banking gives consumers control over their own financial data.

The consumer—and only them—decides how, when, where, and whom to share their financial data. For example, if they decide to purchase a flight online using their debit card as an option, rather than their credit card, they can grant access to their financial data for that particular use-case. In an open banking ecosystem, the consumer’s major bank would allow the third-party application to access their information. 

The current state of open banking around the globe

Open banking in Europe

Open banking regulation came into effect in Europe in 2015 in an effort to bring innovative, new businesses to the financial industry and lessen some of the hegemony of European banks. In 2016, the UK used this same set of rules to force major banks to collaborate with fintech companies. This meant that if and when a consumer requested or allowed a fintech company to access their financial data, the bank must allow it. 

Perhaps unsurprisingly, open banking use-cases are gaining momentum in the UK. According to reports from the Open Banking Implementation Entity, there were 110.5 million successful use-cases of open banking APIs in August 2019, up from 4.2 million in August 2018. 

Open banking in the U.S. and Canada

The Canadian government announced back in 2018 that it would explore the merits of open banking. Since then, legislation has been slow-moving for various reasons, including privacy and security concerns and its potential impact on the stability of the Canadian financial system. 

Likewise, 2018 research in the U.S. suggests that customers have trust issues as well. Almost nine in ten American consumers said they are concerned with sharing their financial data with third-party services. Yet, 56% would like to control the access to their information—which is inherently baked into the set of guidelines of open banking. 

Banks and enterprises should adopt and adapt, not retreat

According to Accenture’s open banking report, open banking is coming. For example, nearly one-third of banking customers already use fintech apps. Given this, Accenture reports that “Canada’s banks have a golden opportunity on their hands. But they need to seize it.” 

As with all disruptive technologies, there are early market adopters, mainstream adopters, and skeptics or late adopters. Regardless of where along the adoption curve consumers fall, banks must position themselves to empower customers with the choice to adopt or not—and have it be a seamless transition when they do. 

Open banking—and the future of financial services—requires collaboration, cooperation, innovation, security, and trust between all parties involved. “That is their biggest challenge,” says Andrew McFarlane, Managing Director, Canadian Payments Practice Lead & Global Open Banking Lead, “—can [banks] be innovative and offer new products and services, or will they stay cautious and be unable to face down fintechs and challenger banks that are waiting for the start of open banking?” 

VoPay, security, and open banking

VoPay is an innovative fintech company that bridges the gap between major banks, consumers, and businesses. Our technology allows businesses to accept, collect, and send direct bank payments just like credit cards. That means instant access to all available funds for consumers and the elimination of costly NSFs. 

We validate bank account information without having the customer’s bank account details ever be visible. Unlike traditional bank account payments, we generate and share a token, rather than actual bank information, for every linked account. This gives the consumer the security and privacy of knowing that no account details are shared and gives the business greater assurance of getting paid.

It’s time to adapt and adopt or risk getting left behind.

Learn more about open banking and VoPay.