Open Banking: An Opportunity for Blockchain
As the Canadian government mulls over open banking (source) and industry leaders begin voicing their support for the initiative (source), it’s time to take a deeper look at open banking and what it means for blockchain and cryptocurrencies.
This article will outline how open banking can help foster the growth of the fintech industry in Atlantic Canada, creating a favourable environment for further blockchain awareness and development.
What is Open Banking?
Open Banking is a proposed framework outlining how and when financial information can be shared in today’s digital economy. Under the existing regime your banking data rests largely with your financial institution, i.e. the bank. If you wish to transfer money between banks or set up a new account with a financial services provider, you must wait for your bank to approve and then share this data on your behalf.
Open banking would end this cumbersome process and give the account holder ownership over his or her financial data. Using application program interfaces (APIs) it creates networks with third party financial service providers. With your consent/authorization you can use your data to find the services that best fit your needs, whether it’s credit cards, personal loans, investments, mortgages, etc. With so many fintech apps available to download on your smartphone today, exciting new financial alternatives will literally be at your fingertips.
If adopted, open banking has the potential to make Canada’s banking sector more competitive. It will force financial institutions to innovate and create better products for the consumer. Depending on Canada’s regulatory approach it could also chip away at the Big Five’s (RBC, Scotiabank, TD, BMO and CIBC) long-held competitive advantage and near-total market share, allowing fintechs to join the fray. Market disruption notwithstanding, open banking at least ensures consumers more choice and control over their own financial affairs.
How does Blockchain fit in?
On the surface it may seem that this seamless flow of financial information poses a heightened security risk to users. But the truth is your data is only as secure as your bank. In 2017, Statistics Canada reported that the banking industry was most likely to be impacted by cyber security incidents. (source) Open banking leaves it up to you to find the most secure and trustworthy arrangement. This in turn puts the pressure on all financial institutions to strive to find the best technology possible.
Since consumers are most satisfied when up-to-date security and privacy protocols are in place, blockchain is poised to play a leading role in this rapidly changing financial ecosystem. With its decentralized transaction ledgers, it promises a more secure way to protect your identity, as well as share or transfer your financial data.
With blockchain technology at their disposal, consumers would not have to take insecure measures to access new digital financial services. For example users sometimes resort to “screen scraping,” in which they share their financial institution account number and password with a smartphone app in order to bypass the bank’s cumbersome waiting/approval period. The problem is this violates customer service agreements and poses serious cyber security risks - risks that can be avoided with blockchain.
All things considered, the Atlantic Canadian blockchain industry stands to benefit from open banking. It will create new avenues for fintech growth across the country. Fintechs using blockchain and cryptocurrency technologies that provide secure and innovative financial services to Canadians will be legitimized. And they will have the potential to lead the charge in the ongoing blockchain revolution.