How will open banking create innovation and competition in the financial sector?

Open banking is a system that allows customers to instruct their financial institutions to share their information with third parties if they so desire. The best way to grasp this is through an example. Many people have several banking relationships. Perhaps a checking account at one or two banks, a Tax-Free Savings Account (TFSA) elsewhere, a Retirement Savings Plan (RSP) elsewhere, a mortgage, etc.
Assume you want to get a good financial picture of where you stand. If you're anything like me, you'll spend your Sunday afternoon downloading Excel files and attempting to crunch the numbers. Now imagine an open banking-enabled solution in which an app assists a consumer in tapping into every single one of their banking relationships, pulling that data out, and providing them with a healthy financial snapshot of where they stand regarding their spending, savings, and overall financial planning. In essence, you could imagine a coordinated relationship with various financial institutions. Customers would then have more freedom to establish banking relationships with various parties and make informed decisions that benefit them. One of the benefits of open banking is that it encourages more innovation and competition in the financial sector. When you have a system in place that allows for the transfer of consumer data between parties, it opens up a world of possibilities for financial services. Furthermore, open banking has the potential to kill the goose that lays the golden eggs. In other words, open banking could increase competition, increase pricing transparency, reduce friction around switching costs, and ultimately result in significant downward pressure on fee-based revenue, which will benefit customers.

But, as with everything else, there is always another side to the medal. Many people may be concerned that if they can connect with multiple institutions simultaneously, there will be a risk factor associated with data sharing. One way of preventing data theft is to ensure that nobody in an open banking system can access the data except approved entities. Financial institutions have set up an accreditation process, meaning they vet third parties who want access to financial data held by banks. Some vetting requirements are related to privacy and cybersecurity to ensure that consumer is protected when they exercise their choice to share the data. It's done in a secure way that maintains confidence in a system and fosters innovation.

Although open banking is a relatively new concept in the financial sector, there are numerous success stories, with the United Kingdom leading the way. The UK open banking system has been operational for some time, and the UK does an excellent job of reporting system performance. In 2018, the UK's Competition and Markets Authority (CMA) mandated that the nine largest banks in the UK must open up their data to third parties by January 2018. Since then, the adoption of open banking in the UK has been steadily increasing, with more and more financial institutions and fintech firms offering open banking-based products and services. If the UK continues on this path, the figures will be really impressive. There was a slow acceleration initially, but as consumers became more comfortable with the potential of open banking, it just took off.