Open Banking and Payments Modernization:

The Potential to Transform Customer Interactions Across Multiple Industries

BY EDWIN ISTED

Two powerful changes are simultaneously impacting the Canadian payments market. The first is the introduction of open banking. The second is the Bank of Canada (BoC) payments modernization roadmap.

Open banking provides new legislative frameworks for Canadian financial institutions and the customers they serve. The BoC provides the roadmap, and the technology and operationalization is carried out by Payments Canada in partnership with other financial services industry players.

Serving customers better

These updates will do far more than transform payment processing in this country. They’ll give businesses of all kinds the opportunity to serve their customers better. Open banking and BoC payments modernization open the field to more players to offer innovative services that help customers manage their financial lives.

A key feature of open banking is the control it gives customers over their financial information. Under the new model, customers choose when and with whom they’d like to share their financial data. As these changes are implemented, therefore, it’s essential for financial services organizations to gain and maintain customer trust.

Financial products have traditionally been offered primarily by larger financial institutions. Now traditional banks are being joined by an array of technology and software companies that offer specialized financial products and services through apps and other digital tools. The umbrella term is financial technology companies — or “fintechs” — but we’re now seeing the emergence of insurtechs (for insurance), wealthtechs (for wealth management), paytechs (for payment processing), as well as apps for budgeting, saving, and more.

With more products and services designed to help customers save, budget, invest and share their wealth, organizations will be able to deliver significant value to customers, enhance the customer journey, and deepen their relationships.

Serving customers more securely

Crucially, these new frameworks will let customers access and use these products in a secure way.

In the current situation, when customers choose to share their financial data with entities other than their own banks, these entities may use what’s known as “screen scraping” workarounds to access the data. With screen scraping, customers share their usernames and passwords with financial apps in order to use the services on offer.

Some of the concerns around screen scraping include the risk of unauthorized transactions, fraud, and other data issues. While customers are usually protected by their primary banks in such incidents, they may lose those protections and bear full liability if they voluntarily share their usernames and passwords with third-party fintechs.

Open banking and the RTR aim to rectify that situation. Once they’re implemented, customers will be able to grant and revoke data access rights to third-party providers in near real-time, while retaining the protection of their primary banks, and keeping their usernames and passwords private. Initially, the customer will be able to safely authorize (and deauthorize) accredited participants (including fintechs, banks and other financial services players) to access limited account information — such as credit card balances. Over time, accredited participants, at the discretion of the customer, will also be able to access richer data such as credit ratings, mortgage data, and investments.

Third-party fintechs will be bound by open banking legislation and required to meet certain accreditation requirements. They’ll also need to observe technical specifications to ensure the security of financial data transfers. A centralized register of all accredited parties will be kept, as will a record, updated in real-time, of customer authorizations of these third parties.

Most open banking frameworks let customers authorize third parties to initiate transactions on certain accounts in certain conditions. For instance, a customer might want to share their bank account details with a wealth tech platform that centralizes information about all their investments and assets and provides a full picture of their net worth.

In this and other open banking scenarios, customers will benefit from having a safer mechanism for sharing only the financial information needed by a particular fintech company or app to provide the service in question. In open banking, this process can typically be safely repeated by customers for as many financial apps as they wish to use.

While open banking is expected to take effect in Canada sometime this year, once the legislative frameworks are set out, the expectation is that customers will be able to authorize secure, private transactions in such a way that their trust in Canada’s financial system is not only reinforced but enhanced.

A Roadmap for improving customer interactions

The second aspect of the Canadian financial system that is undergoing a major change is the Canadian payments market. The government is introducing a broad set of initiatives called the Bank of Canada (BoC) payments modernization roadmap.

Most notably, the BoC roadmap includes real-time payment rails and introduces other enhancements to domestic payment arrangements.

Canada’s Real-Time Rail (RTR) is a domestic payment arrangement that facilitates the irrevocable movement of funds between verified bank accounts. The RTR is designed to move significantly larger sums faster, more efficiently, and more securely than is possible with other available transfer mechanisms that currently form part of Canada’s banking system. With the RTR, payments between Canadian bank account holders will happen in real-time. Another enhancement is that transactions will be packaged with comprehensive financial data, including, for instance, remittance information, payee and payor addresses, as well as end-to-end payment identifiers. In the future, non-banks will be able to initiate transactions if they are authorized by the customer to do so.

Open banking, coupled with BoC payments modernization initiatives, provides opportunities for organizations across industries to design and offer unique products and services to bolster and enhance customer relationships. Examples of this include improved financial decisions making, expanded payment choices, better borrowing, increased savings and investments, and increased opportunity to switch between providers.

The new frameworks empower organizations to design and manage the entire customer interaction process in a consistent way, and back up all phases of the interaction with rich supporting data. These changes let organizations create customer journeys that are intuitive, smart, and seamless.

More insights and downstream benefits

Better data, faster transactions, consistent settlement, and higher security will enhance the customer experience. Those benefits, in turn, have the potential to furnish downstream operational and financial efficiencies for organizations and their business and retail clientele.

Industry players that recognize the value of a transformed financial ecosystem that allows them to align their value proposition with an end-to-end customer journey will gain deeper insight into every single customer interaction. Organizations will be able to offer tailored payments if the customer has allowed the third party to understand what payment products the customer has available to them (i.e., direct account, debit card, credit card, etc.).

EDWIN ISTED is a senior manager and payments co-lead at KPMG in Canada