By: Amit K. Gupta, Vice President, Sales and Business Development, LTIMindtree Canada

Open banking, or consumer-driven banking, is a financial service model that allows third parties access to banking services through application programming interfaces (APIs). This enables external entities to develop applications and services that can securely and confidently interact with a bank’s system.

Open banking offers numerous benefits to consumers; however, it is crucial to introduce it in a manner that protects consumers’ interests. Over the past several years, the federal government has considered the merits of open banking. In an economic statement, they announced plans to introduce legislation in the 2024 budget to establish an open banking framework and implement a consumer-driven banking framework by 2025.

Open banking has emerged as a game-changer in the financial services industry, empowering customers to share their financial data with third-party providers to access innovative products and services. Moreover, it has transformed the transfer agency (TA) business, which traditionally managed securities transfers through labor-intensive, paper-based processes prone to errors and time-consuming delays.

With the introduction of open banking, investors can now authorize third-party providers to access their financial data, enabling faster, more efficient, and safer securities transfers. This eliminates the need for cumbersome paper-based processes, making it more convenient and quicker. Several transfer agencies have implemented open banking use cases, particularly in Europe, where regulations are more established.

Some of the prominent use cases include:

1. Identify verification: A French transfer agent has partnered with a fintech company to use open banking APIs to verify shareholders’ digital identity.
2. Payments: A UK-based transfer agent has partnered with a fintech company to automate shareholder payments using open banking APIs.
3. Registration: A blockchain technology company has teamed up with a transfer agent to develop a decentralized, shared registry platform that uses open banking APIs for identifying and processing shareholder information.

The benefits of open banking in transfer agencies include improved efficiency due to reduced manual processing, enhanced security through secure APIs for data transmission, and increased transparency, enabling investors to access financial data in real-time.

According to Jana Nagulan, the product owner of Unitrax®, Canada’s leading SaaS-based transfer agency platform in the investment and insurance wealth management industry, there is a growing interest in open banking within the risk and compliance space. The use cases primarily focus on the Proceeds of Crime Act (Money Laundering Act) and the Terrorist Financing Act (the “PCMLTFA”).

Let’s explore these use cases:

1. Validation of banking information: This ensures alignment with the financial institution’s details, such as name, address, and account number provided in the application. This use case focuses on a single app that runs on behalf of all banks, streamlining integration to one API instead of individual one’s per-bank API.
2. Monitoring possible fraud risks: Financial institutions often deal with fraudulent investors and organizations. They share information about such individuals to support ongoing monitoring responsibilities under the PCMLTFA. In the context of open banking, there is a need to monitor possible fraud risks. Trusted parties can collaborate by sharing data on non-published banned individuals.
3. Real-time investor holding details: Partners act as fintech platforms, transmitting real-time investor holding details to advisor tools. This facilitates service provision across product portfolios managed by one or more asset managers. Additionally, data exchange with portfolio rebalancing tools streamlines processes for multiple asset managers, enhancing customer experiences and alleviating their overall workload.

However, it is essential to strike a balance. While open banking APIs offer value, exposing data to third-party fintech introduces risks. The key lies in finding trusted partners who can contribute to the benefit of investors while mitigating risk.

Open banking presents a significant advancement in finance, promising accessibility, efficiency, and security. Its implementation within transfer agencies demonstrates streamlined processes, heightened security, and real-time transparency. Moreover, open banking will assist Canadian financial services organizations enhance efficiencies, bolster security, foster transparency, and facilitate access to innovative services.

Building trusted partnerships is paramount to ensure that benefits outweigh vulnerabilities. Open banking signifies a shift towards empowerment and collaboration, fostering a resilient financial ecosystem. Let’s proceed with vigilance and responsibility, leveraging its potential for the collective benefit of stakeholders and the economic landscape.

References:

1. What is Open Banking or Consumer-Driven Banking, Government of Canada, April 19, 2024, https://www.canada.ca/en/financial-consumer-agency/services/banking/open-banking.html
2. 2023 Fall Economic Statement: Policy Statement on Consumer-Driven Banking, Government of Canada, November 22, 2023, https://www.canada.ca/en/department-finance/programs/financial-sector-policy/open-banking-implementation/2023-fes-policy-statement-consumer-driven-banking.html
3. 4 banking changes to look out for in 2024, and one thing that likely won’t change, Ian Bickis, Financial Post, January 2, 2024, https://financialpost.com/fp-finance/banking/banking-changes-look-for-2024
4. Could it be True? Canada to Introduce Open Banking Legislation, Darcy Ammerman, Robbie Grant, Isabelle Guevara, Robert C. Pat Forgione, McMillan, November 29, 2023, https://mcmillan.ca/insights/could-it-be-true-canada-to-introduce-open-banking-legislation/
5. An API Store to help clients make better use of data, CACEIS, September 27, 2021, https://www.caceis.com/whats-new/news/spotlight/article/an-api-store-to-help-clients-make-better-use-of-data/