Why open banking could ‘terrify’ brokers

If open banking comes to Canada, this could make it easier for fintechs and banks to offer embedded insurance and it will be hard to stop firms from using open banking data for underwriting purposes, a technology executive predicts.

Open banking can make it easier for a fintech to provide “embedded” insurance – for example where a consumer would buy home insurance or auto insurance at the point they are buying their home or vehicle, said Venkataraman Balasubramanian, chief technology officer at fintech Zafin, in an interview with Canadian Underwriter.

For its part, Cover Genius describes embedded insurance as a scenario in which a consumer gives a bank permission to monitor transactions,  and that client gets a prompt for purchasing protection products based on their purchase history inside of their banking app.

“When these things happen, the broker has to be terrified because suddenly they are no longer the point of contact with the customer, but they become absorbed into a background task” said Balasubramanian.

Zafin provides cloud computing products for banks.

If fintechs and other companies come into the open banking space, they don’t come in to replace what the broker does, Balasubramanian added.

By analogy, Balasubramanian noted that Uber does not provide taxis.

“They made getting from point A to point B a seamless initiative. If my aim is to go shopping, then I am thinking more about making shopping list not the fact that I have to get into a car and drive from here to there. The whole business model for Uber was to make the actual task of going from point A to point B an afterthought.”

The concept of open banking – also known as consumer-directed finance – is the ability to direct your bank to share your individual financial data with a third party, such as a fintech. In August, Canada’s Advisory Committee on Open Banking recommended that the federal government implement the “initial phase” of open banking by January, 2023.

In the initial phase of open banking, the federally-appointed committee recommends third-party service providers get “read only” access to user accounts, with the consumers’ consent.

Canadian Underwriter asked Balasubramanian whether property and casualty brokerages would want to be third-party providers in an open banking situation.

Balasubramanian predicts the third-party service providers (permitted to read banking data) would include both licenced brokers and firms which do not have licences to place insurance.

“Fintechs in general do not like regulation. So even if you look at the banking space, a preponderance of fintechs that are in the banking space are in the lesser regulated areas,” said Balasubramanian.

Balasubramanian was asked if he thinks fintechs in Canada will try to get insurance brokerage licences in open banking context.

“I am not that sure that fintechs will gravitate to the regulated areas initially,” he replied.

“Generally fintechs are averse to getting into a regulated space. They will find the areas of insurance that are less regulated or not regulated and that is where you will see them going first.”

One recommendation from Canada’s advisory committee is that open banking participants should not be allowed to use banking data for underwriting insurance policies. That recommendation applies specifically to the initial scope of open banking. In later phases, the government should not let third parties use open banking data for underwriting without first considering whether there are discriminatory or inequitable outcomes in insurance availability and coverage, the committee says.

But actually stopping firms from using open banking data for underwriting could be easier said than done, Balasubramanian suggested.

“I think these institutions are pretty damn good at finding ways around” restrictions, he said, commenting in general on corporations that are not licensed insurance providers.

“You can have regulations that prevent certain data from getting used. But these institutions can figure out and find a way around it,” said Balasubramanian.

Feature image via iStock.com/FG Trade