Last month, the United Kingdom released the highly anticipated final report of its year-long review into open banking. Its recommendations include, among other things, developing and adopting common data standards across the industry, opening up more channels between established banks and financial technology start-ups, and creating regulations for new technologies on a pilot-project basis. The report sets out a vision of the industry’s digital future that puts the United Kingdom at the global forefront of financial innovation.
Canada also has an open banking review in progress. It started back in February of 2018. It’s still ongoing, with no timeline for a final report. Canada’s slow pace has been challenging for fintech founders (including me) and our investors. Financial technology is a high-value sector that is evolving fast. Partnering with fintechs can help banks accelerate digital transformation initiatives in areas like customer experience and payments, leading to better financial outcomes for individuals and small businesses.
According to the PWC 2020 MoneyTree Canada Report, Canadian fintechs raised a total of $776 million in venture capital in 2019, with more than 80 companies raising over $1 million. All these young firms operate in an extensively regulated sector dominated by well-established institutions. We need guidance to move forward. Watching the U.K. leapfrog us in its review process has only added to our frustration.
Most North American banks are not comfortable with the concept of open banking. They tend to treat customer data like a trade secret. They fear that, if regulators forced them to make it more easily shareable, fintechs would be able to figure out their formula for success.
I think this view misunderstands two things – the nature of financial data, and the source of new competition. And these misunderstandings are blinding Canada’s banking sector to the tremendous opportunity it has to join the U.K. as a leader in financial tech.
Let’s start with the data. Financial data belongs to the customers who generate it, not the institutions that collect it. That’s what the current regulatory framework says, and the entire purpose of open banking reform is to turn that principle into better business practice. That’s why there’s always an emphasis on standardized data, because it protects customers’ ability to bank with whomever they want, whenever they want.
That is an understandably disconcerting proposition for banks, but it shouldn’t be, because they have a competitive advantage no technology company can match – trust. People already trust their bank with their financial assets. In an open-banking environment, their bank is the one they’ll trust with their data assets. Done properly, open banking will only strengthen, not erode, that relationship.
Which brings us to the second misunderstanding and that is the source of new competition. Financial techs are not a threat. As an entrepreneur, I think financial data is an under-used asset and I am full of ideas about how to make that data work better for customers, by turning it into better products and services and customer experiences. But the last thing I want to do is to turn my start-up into a bank. Most fintechs just want to be the banks’ partners, working together to develop ways to leverage financial data for their customers’ benefit.
On the other hand, the companies that do want to compete directly with banks are the big tech firms. They recognize the value of financial data and see it as their next avenue for growth. In recent years they have been busy building new ways to access it, whether through internal marketplaces or digital wallets. In a way, they have traditional banking surrounded and are gaining access to the data whether the sector wants it or not.
For example, later this year, Google will begin offering chequing accounts in the U.S. in partnership with multiple banks, including Citi, but it’s an uneven partnership. For one, Google owns the customer relationships. More importantly, Google understands what traditional banks such as Citi do not: that the transaction data is the most valuable part of the deal, more valuable even than the dollars-and-cents balances in its customers’ accounts.
That is the real threat to banks and open banking is the best way to counter it. The traditional financial sector needs to recognize that, in a digital society, data rival money itself as a foundational building block of wealth. And everyone – big banks and big tech along with government – needs to recognize that those data assets belong to customers.
Once they do, we can start to build an open-banking environment that serves their interests first. That system, once built, will play to banks’ reputational strength, allowing them to become the trusted stewards of our data assets just as they have been for our financial assets: protecting them, keeping them secure and helping customers generate value from them.
But if the sector continues to drag its feet, it can expect more encroachment from big tech. That’s why it’s time for the sector and its government partners to complete Canada’s open banking review and move forward with reform. Open banking isn’t a threat. It’s banking’s best possible future.