Consumer Advocates Can Help Put the “Consumer” in Consumer Directed Finance

June 14th, 2020

“The information about money has become almost as important as the money itself.” -Walter Wriston, former Chairman and CEO, Citigroup

In a data-driven world, financial commentators and consumer advocates will need to be as good at advising people on how to use their data as they are at providing financial advice. Fortunately, there is a pathway to give consumers more control of their data and stimulate new financial solutions. Open banking solutions — or consumer-directed finance, as we refer to it in Canada — have the ability to change consumers’ perspective and pain points experienced with every day crucial financial decisions like retirement planning, finding the right mortgage, or financing a new car. Yet despite these advantages, the topic of open banking is not top of mind for many.

In the last few years, countries like the United Kingdom and Australia have adopted open banking standards and experienced an explosion of innovation in consumer-driven finance. But what exactly is open banking? What are its benefits? And how can we shape its adoption in Canada? Given open banking’s importance to Canadians’ future financial wellness, we believe it is vital to inform and engage more consumer advocates in this discussion. Please note, the terms Open Banking and Consumer Directed Finance are used interchangeably in this article.

With these questions in mind, it was my pleasure to moderate a conversation with three experts in open banking innovation: Chris Gorst, Director, Nesta Challenges at Nesta, UK; Imran Gulamhuseinwala OBE, Implementation Trustee, Open Banking Implementation Entity (OBIE), UK; and Julien Brazeau, Partner, Deloitte Canada. Together we shared lessons from the UK’s open banking evolution and implications for our own path to adopting open banking standards in Canada. Our key takeaways are summarized below.

Why Consumer Advocates Should Care about Open Banking

Broadly speaking, open banking is a set of technical standards that allow consumers access and control over their financial data, including the ability to share that data with third parties without compromising security. Implemented properly, open banking standards have the power to fix urgent cybersecurity and data rights issues, all while providing consumers accessible tools to take control of their financial lives. Control can mean more fee transparency, better ability to do household budgeting or the ability to seek best terms for a given financial product, such as a mortgage.

Consumer advocates should care about open banking first and foremost as a powerful tool to rebalance power between consumers and their financial service providers. Historically, the financial services industry has not been as attuned as they should have been to the needs of their customers. Without easily accessible financial literacy tools, greater transparency or the ability to move their business easily, countless Canadians find themselves stuck with the wrong credit card or the wrong mortgage, often paying unnecessary fees. As best-selling author and consumer advocate Kelley Keehn puts it: when it comes to these life-changing financial choices, so many of us fall prey to the law of least action.

By increasing transparency and accessibility, open banking creates an environment that puts power back in the hands of consumers and has the potential to solve poor consumer engagement in financial services. Some of the biggest decisions in life are financial services decisions. Yet consumer financial literacy is low, and consumers do not spend enough time engaging with financial services. By allowing customers to access their data, third party services (and their alerts) can help ordinary people stay on top of their situation and make healthy financial decisions.

Open banking can also solve pressing data privacy issues by requiring banks to allow their customers to share data with reputable third-parties — through a common infrastructure — or “universal secured data highway”. Right now in Canada, an estimated 4 million Canadians regularly give their account information to third-party services that provide financial analysis while putting personal data at risk. Under UK open banking standards, consumers may provide their login data to third-parties with consent that is time-bound and tied to a specific use case. Revoking your consent is as easy as turning off location services on your iPhone.

Beyond solving security issues, giving consumers access to their data is an important advancement for data rights. Today our data is for the most part inaccessible — and even harder to analyze it. While this barrier used to exist for technical reasons, most financial services companies have now built more modern platforms and often through APIs are able to upload information in but not out. Open banking is the technical manifestation of truly giving data rights to consumers for financial services.

Consumer & Small Business Benefits from Open Banking Innovation

Since the adoption of open banking standards, consumers in the UK have benefited from a whole new suite of products, services, and experiences powered by open banking infrastructure. Participants in Nesta UK’s Open Up 2020 Challenge provide a great look at the innovative possibilities of open banking for consumers:

In the savings and investment space, fintech startup MoneyBox provides an easy way for consumers to build savings every day by simply rounding up everyday purchases.
Mortgage fintech Mojo helps young people climb the first rung of the housing ladder by providing expert guidance to help customers shore up their finances and secure a mortgage.
Kalgera alerts caregivers, loved ones, or friends when suspicious activity is detected on monitored bank accounts.

Beyond services designed for consumers, open banking innovation in the UK has benefited small businesses in three key areas:

Access to credit. Many credit-worthy small businesses encounter barriers to financing from incumbent banks. By giving direct access to a small businesses’ transaction data, lenders can go directly to the source and make their own judgments about credit-worthiness.
Cash flow management. Insufficient cash flow can kill small businesses, and the right cash flow tools are essential for a healthy balance sheet. Since the advent of open banking, there are now many tools to help small businesses manage their balance sheets better and even avoid the need for credit.
Financial administration. Small business owners are hungry for tools that will save them even a few hours per week in financial administration, allowing them to focus on running their businesses. UK fintech Coconut is an accounting tool for self-employed people and small businesses to manage expenses, invoices, and tax preparation. There are 5 million self-employed people in the UK, and the market for these services is only growing.

Bringing Open Banking to Canada

We believe the advent of open banking is inevitable. And while political support is currently lacking in Canada, it’s only a matter of time before we arrive at the same conclusion: that consumers should control the data they create and that our financial service sector will need to facilitate this access in order to compete in the future with new entrants which have operated in this modern paradigm for years. The question is — what version of open banking will we implement in Canada, and how do we get there? We can learn some lessons from the development of open banking standards in the UK.

Given the inertia and the concentrated nature of Canada’s financial markets, securing open banking standards in Canada will take advocacy from multiple stakeholders. Open banking policies benefit ordinary people and small businesses. But ordinary people don’t have their own lobbying groups. They aren’t even aware of open banking, and they are certainly not calling their representatives about it. And while open banking benefits consumers, incumbent stakeholders will be resistant to change. When the UK developed its own standards for open banking, consumer advocates had a seat at the table alongside banks and fintechs from the very beginning.

At this inflection point, consumer advocates have the power to shape the narrative around open banking in Canada. The good news is that while people might not know what open banking is, they are interested when presented with use cases. Initiatives like Open Up 2020 are vital to spark innovation and build a groundswell of support. We can expedite open banking’s arrival through more and broader engagement with consumer advocates and associations who represent the very people open banking is designed to help.

In advocating for these policies, we should keep in mind that not all open banking systems are created equal. While the open banking system in the UK is highly regulated, with strong consumer protections, the US has taken a more laissez-faire approach. In Canada, we have our own complications to consider. Unlike the UK, we do not have an equivalent to their Competition and Markets Authority. There are federal and provincial considerations to take into account. But things are moving forward — if slowly.

Earlier this year, the Department of Finance released the results of a study into the benefits and risks of open banking, with the recommendation that Canada move forward with the adoption of open banking standards. Obviously, the COVID-19 pandemic has taken precedence over these concerns, and there are likely to be delays in adoption. Yet in the long term, COVID should expedite the arrival of open banking standards as we accelerate our transition to the digital economy.

In a time of financial instability and increasing data privacy concerns, putting power in the hands of consumers is more important than ever. Through consumer advocacy, we can finally bring open banking to Canada and help Canadians take control of their financial lives for a more prosperous future.

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