Open banking could give insurers better data for credit scoring, suggests an official with the organization that handles clearing and settlement for banks in Canada.
“I think we will see more accurate underwriting and more accurate credit scoring,” Andrew McFarlane, Payments Canada’s executive director of modernization, said in a recent interview. This is because an insurance company can get a “more holistic view” of consumer clients if it has those clients’ consent to view their banking data.
For example, if an insurer can view a consumer’s banking transactions, that insurer could glean better insights into a consumer’s credit-worthiness than it could draw from a credit scoring vendor, suggested McFarlane.
He was speaking to Canadian Underwriter on the topic of “open banking,” in which, broadly speaking, consumers could consent to sharing their banking information with third parties.
“There is no question that open banking is going to be implemented quickly in Canada,” McFarlane said. “I do not think it is really a question of if. It is a question of when and how.”
Payments Canada, the brand name of the Canadian Payments Association, which has more than a dozen roles under its federal mandate, including clearing cheques, debit card purchases, direct deposits and pre-authorized debits. Payments Canada is recommending that open banking “start small” by giving third parties access to existing information in banks’ web portals if the consumers allow it.
About a year ago, a federal government-appointed Advisory Committee on Open Banking recommended that the federal finance department publish a white paper on what it calls “consumer-directed finance.” The idea is to come up with a framework for consultation. Last year, the committee recommended that Canada bring in “consumer-directed finance” to help consumers benefit from a broader range of financial products and services.
The committee uses the term “consumer directed finance” instead of open banking because that makes it clear that the consumer is going to be at the “forefront” of decisions, said Don Klingspon, director of financial services at Microsoft Canada, during a webinar this past December titled Insurance in the Digital Age- The Future of Agents and Brokers.
Consumer-directed finance could give fintechs more access to consumer financial transaction data. Fintechs could then use that data to develop products more tailored to consumer needs and preferences, the Advisory Committee on Open Banking said in 2020.
The committee warned that sensitive financial information needs to remain secure, private and in the control of the consumer. There are concerns that an increased number of participants dealing with financial information could increase the risk of cyber-attacks and data breaches.
Consumers are doing business with more than one bank, McFarlane told Canadian Underwriter in an interview Jan. 15. With open banking, they could have all of their banking data in once place.
So it is important to control who can get the data, McFarlane said. The parties who access the data would need to be registered and accredited. How exactly those third parties are accredited would be up to the federal government, said McFarlane.