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Robert McLister: Open banking is a boon for mortgage competition and efficiency
Published on November 15, 2024 • Last updated 15 hours ago • 4 minutes reading time
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A “Sold” sign outside a home in the York neighborhood of Toronto, Ontario. Photo by Cole Burston/Bloomberg
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When we think of mortgage competition, we often think of smaller lenders nipping at the big boys' feet like angry chihuahuas. This is happening to a small extent, but there is something else brewing beneath the surface that will have an even bigger impact on your future mortgage: open banking.
With Open Banking, bank competitors can access your financial data in just a few simple and highly secure steps. With just a few clicks you can find the best interest rates and transfer your money to these institutions in a flash.
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This is a seismic disruption on every possible level – including mortgage lending – and here's why:
Unlike in the US, where around two-thirds of mortgages are financed through securitization – the bundling of mortgages and selling them to investors – the opposite is the case in Canada. About two out of every three dollars used to fund mortgages in this country comes from deposits, and the Big Five banks are dominant in this area. They control 90 percent of bank deposits.
Anything that puts their deposit base at risk is a critical risk, and that's exactly what Open Banking does. The big banks' worst nightmare is that their own customers discover better options.
If consumers can give financial services providers permission to find better deals for them and then immediately transfer money to those institutions, they will be less likely to let their cash rot at big banks that perform worse than their competitors on advertised deposit rates .
And people want to bank online. According to the Canadian Bankers Association, this is largely why banks have closed 215 branches in the last five years despite explosive population growth.
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One of the biggest threats Added to our megabanks is the high-yield day-to-day business, where challengers like WealthSimple and small banks like EQ Bank are seeing massive growth. They attract customers with interest rates of up to 3.75 percent on current accounts. WealthSimple, for example, has nearly doubled its assets since last year to $50 billion.
“Traditional banks are more likely to offer you pennies on their checks,” says Peter Keung, founder of HighInterestSavings.ca. “Tangerine pays 0.1 percent, which is just so they can say they are paying interest. Now the willingness to shift funds from a major bank to a digital competitor is finally reaching a tipping point.”
This has all sorts of implications for the mortgage. According to a Canadian household survey, 56 percent of mortgage borrowers received their loan from the bank that held their deposits. If you lose a customer's daily checking account, your chances of getting a mortgage decrease.
In addition, as deposits disappear, banks will be forced to use more wholesale financing such as mortgage-backed securities, covered bonds, certificates of deposit, asset-backed commercial paper, etc., all of which cost significantly more than zero interest deposits. This could ultimately narrow the funding gap between major banks and their online mortgage competitors – and importantly, Given that the cost of finance is the most important factor in loan pricing.
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Open banking could also lead to faster mortgage prequalification, application and approval as your data can be more easily shared between financial institutions. Imagine opening an app on your phone, asking Siri if you qualify for a mortgage, answering a few quick questions, having the app instantly check your financial history, and then getting a spoken answer back within 60 seconds.
Last but not least, open banking helps reduce fraud by giving mortgage lenders instant access to immutable financial data.
In short, open banking is a boon for mortgage competition and efficiency.
If only we could advance payment, banking and regulatory powers more quickly. Five years ago, many expected that Canada would have open banking by now, but there have only been delays.
“We don’t believe there will be open banking in the next few years,” Darko Mihelic, banking analyst at RBC Capital Markets, said in a report on Monday. He believes it could take “three to five years.”
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The establishment is clearly in no hurry to move things forward, which is about as shocking as finding out that banks are making profits. But it's coming, and while the dinosaurs of Canadian banking may not have their asteroid moment when it does, they will at least be forced to work a lot harder for your business.
Robert McLister is a mortgage strategist, interest rate analyst and editor of MortgageLogic.news. You can follow him on X at @RobMcLister.
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