Alignment of Stars in the Financial Ecosystem
Openness but connectedness!
As the Canadian market is paving the way for open finance and the players in the ecosystem are putting in place the building blocks for the industry step by step, it becomes more apparent that the collaboration efforts to create a shared vision for the financial wealth of consumers and small businesses would be valuable in Canada. Perhaps this is connecting dots between individual efforts by various participants in the industry and aligning on common timelines to create a holistic roadmap for enabling open finance and beyond. The major initiatives in Canada which need to be considered for establishing open finance would be further enhancing industry standards and timelines in place for interoperability, liberalization of consumer financial data by supporting the industry through education, aligning with the payments modernization initiatives and aligning with the Central Bank’s digital currency efforts. The success of all of these rely on governance as an industry.
Let’s review a few of the initiatives and explore what could be the next steps to connect the dots by highlighting challenges in each area.
The first step to openness … industry-wide standards are here, but timeliness are not
First of all, we now have CIO Council as one of the industry bodies publishing CAN/CIOSC 110-1:2022, Open Finance – Part 1: Customer Experience Standards on November 22, 2022. This Standard specifies minimum requirements for planning, designing, developing, implementing, maintaining, and improving the customer experience surrounding access to customer banking, transactions, and other financial data from bank and non-bank institutions. This is a great step for the market to create openness, however there lacks a common agreement or a date to adopt these standards.
Challenges might exist around the ability to adopt each of the standards, the time it will take to implement them, and how the governance structure will support the standards in the future. An impact assessment that highlights how new advancement in technology will affect stakeholders and the financial cost to implementation on an on-going basis to stay current with the trends may be a way forward. Regulatory oversight is often an answer, but this requires collective agreement of the market on what should be included and how it will be monitored. A first step could be the introduction of metrics to measure how effective the standards implemented are on business goals such as innovation, fraud prevention and customer awareness. Again, governance is key to managing these metrics and expectations around them if standards continue to evolve across the various expert areas in the financial industry. For example, this is not the only standard for consideration and there are many in the horizon: as shown in Figure 1, CAN/CIOSC 103-1: 2020 | Digital Trust & Identity – Part 1 & Part 2, CAN/CIOSC 103-3: Digital Trust & Identity – Part 3 – Digital Credentials, CAN/CIOSC 103-4: Digital Trust & Identity – Part 4 – Digital Wallets and The Pan-Canadian Trust Framework ™ (PCTF), just to name a few standards which will be other building blocks of the open finance ecosystem.
Figure 1.0 Major Industry Standards and timelines for implementation
Liberalization of consumer financial data
Next is the liberalization of consumer financial data which currently resides in financial institutions. Today, our banking information is protected by the banks or institutions where we transact. Now thanks to technical developments, one’s financial data may be shared based on bi-laterals and proprietary formats between the banks and Fintechs. This is still developing in some countries such as Canada. The essence of an open financial network ecosystem necessitates APIs which not only read consumer data but also write back to enable secure and permissioned free flow of data within the ecosystem for the financial health of the consumers and small businesses.
Australia is enabling free flow of data through Consumer Data Right
One of the leading markets which has enabled and regulated the free flow of consumer data is Australia. Australia’s Consumer Data Right gives more control to the consumers over their data and enables the consumers to share their data with those accredited institutions to access and choose from a variety of products and services in the market. The Consumer Data Right in Australia has already been rolled out to the banking and energy sectors, with telecommunications to follow as the third sector. Today, The Australian Competition and Consumer Commission (ACCC) manages the accreditation process. The future looks more powerful for consumers and small businesses as the CDR roll-out grows. This initiative not only defines the standards and regulations, but also includes development of the accreditation services for those service providers in line with the standards.
Bringing speed to the payments through Payments Modernization
With the modernization of our payments systems in Canada, we are on the brink of enabling further innovation. With functionality such as Real Time Rails and data attributes accessible through standards such as ISO20022 it shifts the focus to how data is presented and how fast a transaction can be completed. Many countries around the world are already progressing on both fronts, and AI has become a further enhancer. For example, a highly discussed use case is now around the ability to connect financial software to a core banking relationship, and then further share information that is insightful, transactable, and actionable into the software. While the two systems can be connected today, the enhancements in the future focus on the type of data and speed of payments. Data that is mapped to ISO20022 can provide more intelligent automation to a business workflow, namely moving inventory, invoicing, and having the description on the transactions to accurately record payments. Those payments would go directly from the supplier to the business instantaneously. Today, in Canada, we do not have the capability to both read and write this information and we await the financial industry’s readiness to implement the RTRs for quicker payment processes.
Enabling consumers to identify themselves digitally…
With all these frameworks in place, and the foundational building blocks of our digital financial future, the biggest question becomes identity. Alongside the collaboration around Open Finance is the efforts around Digital Identity. This becomes important to all parties involved in a transaction. How a consumer is able to both identify themselves digitally, feel secure in that identity and control their information becomes a critical element to the puzzle of open finance. AML begins to come into the picture at this point. All paths from the customers must provide an ability to verify the individual to process transactions. If you add an overall partner chain into the mix, you now have a consumer transaction that needs to be validated by a business, a Fintech and a financial institution. What is the easiest and quickest way of accomplishing this without impact to the consumer i.e. sharing of credentials to various multiple parties - digital identity and open finance frameworks combined.
Figure 2.0 Transfer of Investments - Consumer Journey in open finance ecosystem
Creating a seamless consumer journey in a timely manner
The question becomes what the priority is and why is open finance important to our economy, and the consumer. From a consumer’s perspective everything we work through as an industry is invisible. They really don’t need to know about open banking, open finance or how enriched payments data is processed. What they want to know is when they go to their favorite teller and what to know if their RRSP has been transferred, did it happen and how much. They then would like to share that information with their trusted financial advisor or accountant, but it isn’t shared automatically and that means they need paperwork alongside more time in their busy days to transfer the information manually. We discuss the risks of screen scraping in context with open banking, but we forget that another major data risk is the sharing of personal information over email. Many consumers resort to this medium to save time – their time. Therefore, the extension of open banking to open finance and, finally, to consumer directed data within a consumer’s journey becomes important. As items such as read/write are addressed, then updates can be sent and maintained across different organizations. Those organizations can begin to bring automation into their workflows, ultimately saving their customers time but also limiting the amount of non-secure data access points such as screen scraping and emails.
Figure 3.0 Major foundational blocks of the open finance ecosystem
When we review all that’s happening in the banking system and payments ecosystem, the challenge becomes how do we align these initiatives on a timeline to minimize cost and time to build the open finance ecosystem by the participants and to maximize the benefits to the Canadian consumers and small businesses. Under the lens of current implementations of open banking across the globe or the previous successful market-wide deployments of telecom, EMV and contactless, governance is seen as the key success factor in the delivery of ecosystems collectively as an industry. On the other hand, we have seen successful technology deployments in mass and accepted as the standard only with goodwill. Given the size and complexity of the work which needs to be done, establishing a governance model, which includes elements of industry change management, will enable and speed up the implementation as well as creating the trust in the industry to invest for the future if Canada truly wants to enable open finance. The governance will ensure that open banking would be enabled in a timely manner and orchestrate the efforts for the future as well including open finance network.
Written by: Michelle Winsor, CEO and Founder with Guest Author: Nur Oztin Kurak, CEO Kibele Academy.