Open Banking

We’ve teamed up with Plaid to help make payment processing faster, more efficient and more secure. Before we dive into how it all works let’s get to know each of them a bit better.

Meet VoPay

VoPay is a leader in payment innovation, digitizing direct bank payments with speed and transparency. The VoPay Platform enhances how digital platforms initiate and accept financial transactions using a single, open API.

Meet Plaid

Plaid is a technology platform and data network that enables applications to connect with users’ financial accounts. They focus on lowering the barriers to entry in financial services by making it easier and safer to use financial data. Today, they support developers across North America and Europe.

How VoPay + Plaid Payments Work

VoPay layers Plaid’s Auth, Identity, Balance, and Transactions solutions over top of its core payment engine to deliver the most powerful EFT payments solution in the market.  The result is a seamless payment experience with reduced NSFs, verified bank accounts and improved payment speed.

Current Payment Challenges

There are three main hurdles when it comes to existing EFT payments:

1. Lack of visibility: Paper checks or electronic payment systems for bank account payments do not allow visibility into the bank account at the time of the payment.

2. No traceability: Businesses accepting check or electronic payments can not track the payments, the status of the transaction or when the funds will be available.

3. High risk: The current paper check and electronic payment service do not offer balance verification at the time of transaction.

Common Payment Use Cases

Some of the most common use cases include lending and market places where the solution can dramatically reduce NSFs, optimize cash flow, streamline back-office operations and improve payment security. Another would be legal and real estate where you can increase revenue with significantly reduced fees and decreased chargeback risk.

In summary, together VoPay + Plaid payments improve efficiency by verifying user identity and bank information prior to processing the transaction, minimize NSF fees by having visibility into available funds and reduce the access to funds time to just 24 hours.

Are you a developer? View more details here.

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.

Many people around the world have lost their jobs, had hours cut, and are facing financial crises during this challenging time. Of the many things that have been drastically affected, consumer habits are among them. Some of these consumer changes, however, may turn out to be positive and stay for the long term.

Cash, for example, is no longer king at brick and mortar shops. It’s been replaced with contactless payments, such as debit and credit cards, for health and security reasons. The same goes for paper versus digital cheques, as another digitization example. 

With so much financial and economic uncertainty and upheaval taking place, people are becoming more aware of their financial situations and wellness. They are taking control of their finances and managing what they can. Hopefully, this greater awareness of one’s financial wellness may stick around once the health and safety risks pass and normalcy resumes.

Making the best of a bad situation: Fintech apps to manage finances

Nearly one million people applied for employment insurance in Canada, for example, in the wake of the coronavirus outbreak. While some bill payments can be deferred, expenses tend to add up, especially when little to no income is coming in. 

A recent National Post article referenced Erin Lowry’s financial advice book called “Broke Millennial.” In it, they discuss an emergency plan for paying bills, which includes assessing the damage, stalling fixed debt, prioritizing your needs, and riding your credit cards. 

Depending on the individual’s financial situation, this last point should be a last resort. Credit card debt can be crippling in interest payments over the long term. Wherever possible, spend what you have on essentials. For example, when making bill payments or shopping for essentials online, use your chequing accounts rather than your credit cards to avoid extra debt. We wrote posts about how ACH and EFT transfers work for more information on digital payments that don’t increase credit card debt.  

When it comes to managing money, such as assessing the damage and prioritizing needs in an emergency, consumers may need help. That’s where financial applications come in. Thankfully, there are hundreds of financial applications available right at their fingertips. We wrote about 15 helpful fintech apps that might even come in handy during this time. Consumers can stay on top of their finances, bills, savings, income, debt, goals, investments and so on right from their phones in various apps. 

Fully functioning fintech applications and open banking

However, earlier this year, the Financial Data and Technology Association (FDATA) of North America released data that 1.8 billion consumer accounts in the U.S. could lose functionality to financial apps they depend on. The FDATA North America determined that impacted consumer and small business use cases would include:

• Over 530M loan accounts that help consumers with retirement planning, debt reduction, and financial wellness
• Over 310M accounts to help Americans manage account balances, provide overdraft protection, and make on-time payments
• More than 330M investment accounts
• More than 210M accounts to help Americans save and move money
• Almost 200M transaction accounts
• Almost 140M accounts to protect Americans from fraud and provide identity authentication
• Over 100M credit accounts

All of these various financial application accounts used by Americans every day could be affected if screen scraping was prohibited and only the largest financial institutions’ APIs were available because required data fields would be lost. The other, more convenient, consumer-friendly, and secure alternative is open banking. 

Open banking gives consumers power over their finances. Consumers have the choice to use (and approve) fintech applications in order to support their financial goals and wellbeing now and in the future. 

The world’s greatest inventions don’t exist in a vacuum. They cannot be attributed to one person or company. They compete with each other and build on past learnings. Innovation thrives with competition.

Even now, the Edison Awards’ discuss the importance of healthy competition in order to innovate. History hasn’t removed this necessity to compete, innovate faster, discover something first, or use and build on the learnings of others. The article references a PwC survey that said that 80% of CEOs believed that innovation drives efficiencies and leads to a competitive advantage. For every Steve Jobs, there must be a Bill Gates.   

The same goes for the financial technology (fintech) industry. Healthy competition fuels innovation. 

Healthy competition and innovation in the financial industry

But, just like how Edison published his findings and many built upon his inventions, fintech companies today require this same openness in order to compete. They need data and access to it. They need open collaborations. Permission to innovate. Permission to create a better world (or product, service, or experience) for the people.  

In order for the fintech industry to innovate, compete, and build on the learnings of others—just like Edison, Westinghouse, and Tesla did in the late 1800s—open banking must exist. 

Open banking and competing to innovate

We wrote on the meaning and importance of open banking in the past, but to save you time, here’s what it means. Open banking is the sharing of data. It is the collaborative innovation between banks and innovators such as agile fintech companies. Open banking gives consumers the power to give innovators access to their data. Without this permission and data, companies are innovating in the dark with missing information and a lack of access. 

Without open banking, competitive innovation is challenging at best and nearly impossible at worst. But beyond just the lack of innovation that this could trigger, without open banking or similar means to get data and information, the functionality of millions of applications could start to fail. 

Innovation and functionality in fintech without open banking 

In fact, in a recent post called Financial Wellness Apps Bank On Credential-Based​ Authentication, we discussed findings that the Financial Data and Technology Association (FDATA) of North America published in January 2020. The data showed that 1.8 billion fintech consumer accounts in the U.S. would lose functionality to financial apps they depend on without open banking and similar competitive options. 

Broken down into parts, the impacted consumer and small business use cases in the U.S. alone would include 530 million loan accounts or fintech apps for retirement planning, financial wellness, and debt reduction. Over 310 million accounts that help people manage and pay their account balances on time or provide overdraft protection could lose functionality. More than 330 million investment accounts and 210 million accounts that help Americans move and save money could no longer work. This is just the tip of the iceberg.

Demand and competition fuels the unstoppable innovation train

Back when Edison invented the lightbulb, people used candles and fire to light and warm their homes. When the richest among them were given the opportunity to use lightbulbs powered by electricity, lightbulbs that they paid for and chose to use. They were a welcome novelty. Soon they became more efficient, effective, cheaper, and accessible. Consumers still had the choice to bring electric light and power into their homes, but the improvement to their way of life was dramatic.

This same freedom of choice for consumers must continue to exist today—as does the need for healthy competition among innovators (and inventors). People use financial applications to improve their lives and financial wellness. They rely on them and need them to function properly. Without open banking and the collaborative and competitive innovation and sharing of information, what does the future of fintech hold for us? 

Open banking gives consumers a choice over what innovations, products, and services they support. Open banking provides data and learnings and necessary for innovation and healthy competition. Without open banking—a regulation that only the U.K. is currently blessed with—only those with the information can innovate and compete. Currently, this is financial institutions. Unless these major banks of the world collaborate with innovators, which they often do, there won’t be any healthy competition, inventions, or progress. 

Without healthy competition in the financial industry, we’d all be signing cheques in the dark. 

With the dawn of our new decade comes innovations, connectivity, speed, ease, and security in banking like never before. It is a thrilling time to be in digital banking. Payments can be made in an instant by merely saying the words aloud, tapping our phones or even driving. The future of digital banking is now and it’s invisible, open, and highly connected. 

Here are the top five trends in digital banking for 2020 and beyond. Perhaps most interestingly, yet unsurprisingly, is how connected they are. One cannot thrive or exist without another. 

The future of digital banking: Top 5 trends for 2020

1. Invisible banking and payments

Invisible banking is just as it sounds: banking behind the scenes that takes place automatically or with a simple tap or even drive by. It’s banking that we don’t have to think about, explains Penny Crosman’s in the American Banker article, The Rise of the Invisible Bank. 

Invisible banking happens behind the scenes when, for example, we tap our mobile phones to pay for transportation, coffee, or gas. It takes place with voice banking when we tell Alexa or Siri to pay a bill or transfer money. Invisible banking connects to our mobiles, wearables, laptops, POS applications, cars, and other Internet of Things (IoT) products. 

Invisible banking—and invisible payments, for that matter—happen everywhere, all around us, and at any time. Every device can accept and transfer payments, pay bills, save money, or invest it. We can now pay when, how, and wherever we want.

VoPay is a great example of invisible payments at work. Users connect their bank account and can make digital payments instantly and easily from then on without a second thought. In 2020 and beyond, invisible payments like this will be the new norm.

2. Mobile payments

Analysts predicted that mobile payments would hit the $500 billion mark by 2020. That represents a yearly growth rate of approximately 80% in five years. That is major growth, but not unsurprising. Mobile innovations have changed the way humans live, work, connect, and now bank and make purchases.

In our two-part blog series, 15 Fintech Companies To Watch In 2020, we discussed only some of the hundreds of innovative financial technology companies on the rise. Revolut, for example, is a tech company that is now one of the world’s fastest-growing bank account providers. Fintech companies are leading the shift toward mobile banking—and millions of mobile users are signing up for their applications.    

3. Open banking

In order for invisible banking, invisible and mobile payments, and innovation in the digital banking sector to continue to boom, we need open banking. We wrote a post on open banking, which dives into much more detail, but essentially it means “open bank data.” It is the sharing of customers’ financial data between banks and innovators, such as VoPay and other fintech companies. Collaboration for a greater purpose, if you will.

4. Financial wellness 

The digital transformation of banking and payments will be powered by both banks and fintech companies. Working together. Financial data ownership and control has been a challenge for years. Banks own the data that fintechs require to innovate. Yet, we’re seeing more countries begin to consider open banking regulations and more banks and fintechs are entering into equally advantageous partnerships.  

The challenge with invisible banking is that because it happens without much thought (not unlike breathing, according to ING’s CIO, Benoit Legrand), users will have to take extra care to keep track of their money and spending. Kristen Berman, a scientist and lab co-founder at Duke University said that ‘overarching trends in money have had mixed results for financial wellness.’ Essentially, financial apps have made it too easy to spend money. 

There are, of course, mobile applications to counter this issue. In our 15 Fintech Companies To Watch In 2020 post, for example, we discussed many financial wellness applications that aim to help us to budget, save, invest, improve our credit, spend less, and learn more about financial literacy in general. 

For example, Alan McIntyre of Accenture explained in the American Banker article that “the U.S. banking industry still has tens of billions of dollars of insufficient-funds fees and we’re getting to a point where technology should save customers from that.” However, fintech companies like VoPay aim to put an end to this: digital payments can be secure and easy for consumers, without the non-sufficient fund fees and risk for merchants.

5. Security, service, and AI

Regardless of how, where, and when consumers and merchants choose to bank, they will always demand superior security and service. When it comes to digital banking, security is of the utmost importance. 

It is essential for fintech companies and banks to continue to innovate security solutions and be transparent about data use. As open banking regulations come into play, consumers will own and control their personal financial data. Giving up this data control does not loosen the implied and expected security that consumers need from their banks, third-party fintechs, merchants, and other service providers. The coming years will see new developments in payment security and authentication, especially via AI and Machine Learning. 

When it comes to customer service and user experience, there is, however, a fine balance between AI and human support. Customer support can be automated and digitized to a point. After that, humans are increasingly wanting human support and connection to help troubleshoot or problem solve. McIntyre explained that Accenture’s research found that the majority of people want the reassurance of talking to a human being. 

Learn more about VoPay and the future of digital payments. 

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.