NCFA Canada | Mahi Sall | Aug 24, 2022
Thought Leadership Series of Expert interviews and insights related to a made-in-Canada open banking regime
The National Crowdfunding & Fintech Association of Canada (NCFA), true to its mission of providing education, industry stewardship, networking, growth, and funding opportunities for innovative financial technologies and related sectors, is pleased to launch a brand new thought leadership series on Open Banking led by Berlin-based NCFA ambassador and independent expert in Fintech-Bank Partnerships Mahi Sall.
NCFA is proudly contributing this thought leadership series to help shape a system that will bring profound changes in how financial services will be created, distributed, and consumed in Canada over decades to come. Our hope is that Canada’s Open Banking system will improve economic outcomes, improve market efficiencies and competitiveness, and enable consumers to access new and innovative financial services in a way that is secure, efficient, and consumer-centric.
The series is called ‘Canada’s Open Banking Journey’ and aims to aggregate international and domestic perspectives of Open Banking/Finance expert practitioners from around the globe to advance dialogues, key considerations, and explore potential solutions for the development of a made in Canada open banking regime with the following timeline:
- Sep 2018: Canada’s Open Banking journey officially began when the government established a multi-stakeholder Advisory Committee tasked to conduct a review into the merits of Open Banking
- Apr 2021: Advisory committee publishes final recommendations
- Mar 2022: Government appoints Abraham Tachjian – PwC Canada as Canada’s Open Banking lead responsible for convening industry, government and consumers in designing the foundation of the system of Open Banking for a launch in 2023.
- Oct 2023: Phase 1 implementation expected
Interview Begins
“Banks need to change their mindset and start designing services with an API- FIRST approach. Because of their own complexity and all the regulation they have to cope with, banks are not as fast as the market requires it in an Open Banking environment that strives for speed.”
— Carmela Gómez Castelao, Head of Global Open Banking Program & José Luis Navarro Llorens, Global Open Banking Strategy, BBVA
Mahi Sall: Please tell us about yourselves and BBVA.
Carmela Gómez Castelao / José Luis Navarro Llorens: We are Carmela Gómez Castelao & José Luis Navarro Llorens, Head of Global Open Banking Program and Global Open Banking strategy at BBVA respectively.
BBVA is a customer-centric global financial services group founded in 1857. With 715€ b in total assets (Q2, 2022), 85m customers and over 100k employees across more than 25 countries, the Group has a strong leadership position in the Spanish market, an important investment, transactional and capital markets banking business in the U.S, and leading franchises in South America (largest FI in Mexico) and Turkey. Awarded ‘Western Europe’s Best Digital Bank,’ ‘Latin America’s Best Bank for Corporate Responsibility,’ ‘Mexico’s Best Bank’ and ‘Mexico’s Best Investment Bank’ by Euromoney 2022, the institution rests on solid values: Customer comes first, we think big and we are one team. Its responsible banking model aspires to achieve a more inclusive and sustainable society.
Mahi Sall: Common Rules represent a key component of Open Banking System Design, with the premise that they create a level playing field which eliminates the need for bilateral arrangements between Open Banking participants.
What situations would call for bilateral arrangements in an Open Banking environment that thrives on common rules?
Carmela Gómez Castelao / José Luis Navarro Llorens: Bilateral arrangements help to innovate and differentiate the offering from those only abiding by common rules. Common rules are important to get banks and third-party providers (TPPs) engaged with Open Banking and setting the framework for all parties to understand how to participate in the ecosystem. But they don’t favor innovation.
PSD2 in Europe set those common rules, and got banks started with Open Banking. Now most banks are exploring what can be done beyond PSD2 and it’s then when Open Banking is thriving. Regulated Open Banking is restricted to Account Information and Payment Initiation, whereas Open Banking is expanding into loans, insurance, forex, etc. Just by looking at what competitors are doing through bilateral arrangements with TPPs other banks get compelled to innovate and compete.
Mahi Sall: Another key component of Open Banking System Design is the Accreditation Process. Canada’s Advisory Committee on Open Banking recommended to exempt federally regulated banks from the accreditation process, and similar consideration for provincially regulated financial institutions to be discussed.
What major frustration points relative to the accreditation process can be anticipated and how to address them?
Carmela Gómez Castelao / José Luis Navarro Llorens: We think it’s positive to have an Open Banking framework yet we’d prefer that all non-bank TPPs go through a formal authorization process.
- On the positive side, it simplifies the identification and interaction with third parties, ensures minimum levels of technical and operational capabilities of the TPPs and in general clarifies the responsibilities of the ecosystem participants.
This would also reduce the potential data asymmetries between non-bank third parties holding non-financial information that can be combined with the information accessed through the Open Banking Framework.
- On the negative side, asking all TPPs to have a license limits the possibility of bilateral agreements with them for developing innovative and exclusive services.
See: Go Beyond ROI With Return on Experience in Banking
Mahi Sall: The third key component of Open Banking System Design are Technical Specifications & Standards with two approaches currently dominating the landscape: single standard approach (e.g. UK, Australia) and multiple standards (e.g. US, EU). Canada’s Advisory Committee left both approaches open for exploration.
Can you speak to the advantages and shortcomings of these approaches?
Carmela Gómez Castelao / José Luis Navarro Llorens: We understand that multiple standards if compatible are not a big issue, but it is preferable to have a single approach for consistency in facing the potential TPPs and for freeing the participants from having to decide the best standard to follow. We recommend using international standards and not developing new ones.
Mahi Sall: In the early days of Open Banking some European banks provided in addition to APIs a Modified Customer Interface (MCI) as alternative means for third party providers (TPPs) to get access to customer data. Would you foresee the need for Canadian banks to deploy fallback options to existing APIs?
Carmela Gómez Castelao / José Luis Navarro Llorens: The simplest fallback option we found was to use embedded URLs pointing to customized landing pages, a stepping stone to allow the business in between the APIs to be ready. Not only as a fallback option but also as an anticipated measure until the API is ready, helping the end customer become familiar with the embedded world.
Mahi Sall: What are some of the lessons you’ve learned in terms of Open Banking test designs and implementation.
Carmela Gómez Castelao / José Luis Navarro Llorens:
- Test thoroughly all cases and not only the happy path ones. Often in the test periods there are restrictions on customers or allowable transaction amounts that won’t allow all issues to appear until going fully in production.
- Integration between banks and its partners needs to be technically light and easy enough to be executed without much technical background. Support from the bank is a must to ensure the best user experience when integrating APIs.
Mahi Sall: Financial inclusion is high on Canada’s Open Banking agenda. Please share examples where Open Banking failed to deliver on this metric. What are some of the key lessons learned that Canada could benefit from?
Carmela Gómez Castelao / José Luis Navarro Llorens: Usually, banks starting to offer Open Banking services have invested quite a lot of money to build platforms, reshape their legacy systems, build offerings, etc. and they become burdened by that cost, which results in prioritizing the higher yielding business cases. Although financial inclusion is one of the cases that can be achieved naturally through Open banking their business models are modest and difficult to prioritize over the rest. That can be solved through rewards or advantages given to those banks offering financial inclusion.
Mahi Sall: Chief among the factors affecting the take-off of Open Banking is low adoption by consumers. What could Canada do differently than other jurisdictions in order to pre-empt this risk?
Carmela Gómez Castelao / José Luis Navarro Llorens: Consumers are not familiar with Open Banking, yet they are keen to use it once they understand the benefits obtained through it. Low adoption is normal considering the lack of information about how Open Banking works and what if offers. For boosting adoption, it requires capital to promote Open Banking through the first use cases while focusing on customer benefits and the security of the data shared. It is also very important to have enough use cases on the market to meet a surge in demand, and a sustainable and fair business model that makes using the Open Banking framework attractive.
Mahi Sall: Drawing upon your observations, what are some of the quick wins in terms of Open Banking use cases that banks and fintechs should prioritize rolling out?
Carmela Gómez Castelao / José Luis Navarro Llorens: Simple use cases that don’t require too complex preparation from banks and fintechs, such as simulators for loans or insurances, enquiry for FX rates, account balances, and transactions. Leaving more complex transactions for later stages.
B2B use cases i.e. provide APIs for corporate clients to perform activities formerly solved by web services e.g. payments, treasury management etc. are faster and simpler to implement than B2B2B or B2B2C ones (aka having a third leg), thus should be prioritized.
See: Fintech Reports and Research
Mahi Sall: What role does talent play in developing a thriving Open Banking system?
Carmela Gómez Castelao / José Luis Navarro Llorens: Talent is always required. Although the biggest factors for the Open Banking system to succeed are:
- To have buy-in from financial and non financial institutions.
- Create an attractive environment for both providers and receivers of Open Banking.
Mahi Sall: What are some of Open Banking’s major incidents and how to risk manage them?
Carmela Gómez Castelao / José Luis Navarro Llorens: The Major problems of Open Banking are related to controlling Fraud and Risk. We suffered from prescriptor fraud in a case of checkout lending that forced us to cancel the service. Open Banking means a change in paradigm on how to use banking services (as they are provided outside of the banking environment) and inherently comes with risks such as:
- Identification of the customers, which in most cases won´t be bank customers but third party users. PEPs (Politically Exposed Persons), blacklists, and fraud are potential risks as APIs require online checks – Strong Customer Authentication (SCA) required.
- Due Diligence and monitoring process needed to watch and verify that the APIs are being used correctly by the third parties, as the bank has ultimate liability of the offerings.
Mahi Sall: Speak about Open Banking limitations and the most common misconceptions people have about it?
Carmela Gómez Castelao / José Luis Navarro Llorens: Open banking should be fast for connecting and adapting to market trends. But for banks that are highly regulated the process to go live or make changes is still slow and tedious; they can’t keep up with the speed of the market.
Mahi Sall: What does Open Banking mean to banks and fintechs, and how does it affect the relationship between the two?
Carmela Gómez Castelao / José Luis Navarro Llorens: It’s an opportunity for all stakeholders. Open Banking redefines the models of interaction among several players, banks, fintechs and third parties. Thanks to APIs and the services being exposed, banks and fintechs can compete or collaborate in the offering to third parties. We have seen several examples where the bank leverages the technology provided by a fintech company for offering a specific service, instead of building the capacity internally.
Mahi Sall: How could banks and TPPs best prepare for Open Banking and extract the most value out of it?
Carmela Gómez Castelao / José Luis Navarro Llorens: Prepare themselves to work into an ecosystem model i.e. being able to co-create solutions that benefit the end-customers, facilitating the financial transactions embedded into their daily ‘journeys’. Bear in mind that what customers ultimately want is to achieve a goal, either buying an item, a trip, a car or a house. They don’t look forward to paying or requesting a loan, if not as a means of achieving their personal target. Banks and TPPs need to achieve a seamless integration between financial services and a customer’s journey. It’s only then when embedded finance will be accepted as an added value service for the customers.
Mahi Sall: Given the very tight schedule of Canada’s Open Banking roadmap, where do you think the balance must be struck to meet deadlines without significant trade-offs?
Carmela Gómez Castelao / José Luis Navarro Llorens: As stated previously, start by completing simple use cases first and create the habit of Open Banking in society before looking for higher achievements.
Mahi Sall: What must be thought of and accounted for at this early stage of Open Banking in Canada in order to ensure compatibility and interoperability at regional/international level?
Carmela Gómez Castelao / José Luis Navarro Llorens: In our experience the issue with international standards is that other countries may have a different approach to the treatment of Open Banking (how to treat TPPs, etc.). For us, a service agreement with a company in Spain may not extend directly to Mexico because they have stricter regulations and a narrower concept of TPPs (requiring them to be regulated as financial agents). Open Banking itself is technically compatible but may not be compatible from a regulatory perspective.
Mahi Sall: Any final thoughts?
Carmela Gómez Castelao / José Luis Navarro Llorens: How about monetization of APIs?
“Monetization of APIs is required to encourage banks and TPPs to invest in Open Banking. Regulated APIs don’t help differentiation and are difficult to monetize.”
Monetization is key for banks to invest in Open Banking. Banks cannot monetize regulatory APIs easily. However banks can monetize non-regulatory APIs (although not always directly) depending on the third party and the agreement. Monetization can be direct revenue (pay per call, fees per subscription or platform use, and integration fees) or indirect revenue (data acquisition, cross-sell, marketing or underlying service from the bank). In some cases and for large customer bases, the third party monetizes the use of APIs through models such as fee per customer acquired by the bank or revenue sharing.
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Mahi Sall is an Ambassador of the National Crowdfunding & Fintech Association of Canada “NCFA”, and an Expert on Fintech-Bank Partnerships. He is based in Berlin, Germany.
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada’s Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
