Banks and financial institutions know that the right GIC software is one of the most critical components of a core banking system. It not only provides a trusted foundation for creating and offering a diverse range of deposit products that appeal to a wide range of investors, but its underlying technology can connect financial institutions with key industry partners and ensure compliance, security, and efficiency in GIC operations. This financial software is particularly important today, as more and more Canadians are choosing to move their money and excess savings into the safety and security of GIC investments.

While guaranteed investment certificates (GICs) have long been a staple of both risk-averse investors and investors with a shorter investment time horizon, the recent growing popularity and resurgence of GICs is a financial investment trend that’s being driven by a complex combination of economic factors. These factors include rising interest rates, record-high inflation, market volatility, a unique yield-curve inversion, and ongoing economic uncertainty. As some Canadians are shifting their investments into GICs and term deposits to avoid the volatility of stocks and equity markets, others are simply moving their excess savings into these trusted investment vehicles because they are safe, insured, and provide a guaranteed return on investment. Banks and financial institutions that have already implemented a powerful GIC software solution have been able to effectively respond to the dramatic increase in demand for GICs and fixed-term deposits with minimal effort and resources, and they are capitalizing on the trend by leveraging some key features of GIC software, like powerful automation technology and the ability to optimize interest rates in response to both demand and central bank rate hikes. By leveraging the right GIC software, financial institutions can effortlessly increase sales of fixed-term deposits and ultimately gain access to a secure, stable, and reliable source of funding to support their lending activities. 

While the most basic GIC software solutions can help eliminate time-consuming manual processes and reduce errors associated with data-entry, the best GIC software solutions provide a platform for banks and financial institutions to leverage automation technology, customize products, and raise hundreds of millions of dollars’ worth of GICs and fixed-term deposits in just a matter of months—sometimes even a matter of weeks. Through integrations with financial networks and automation, the best solutions can provide banks and financial institutions with streamlined access to billions of dollars in funding every year.

So, what are the five best GIC software features banks and financial institution leaders should look for when replacing or considering a new GIC or term deposit system?

The best GIC software software systems automate GIC processing, integrate with other core banking systems and industry partners, connect financial institutions with the industry’s vibrant deposit broker network, and provide valuable product customization features that allow banks to tailor GIC product types and create a wide range of GIC investment opportunities for consumers. In addition, they also provide regulatory compliance and reporting features to ensure that financial institutions remain compliant with industry regulatory requirements. 

For banks and financial institutions, here are the five best GIC software features that will help make selling, processing, and managing GICs easier and more efficient: 

• Automated GIC Processing 

• Integration with Existing Core Banking Systems 

• Connection to the GIC and Term Deposit Broker Network 

• GIC Product Customization 

• Regulatory Compliance  

This post will explain what GIC software is, and it will discuss each of these features so you can better understand how they provide a comprehensive technological foundation for banks and financial institutions offering term deposits and GICs to support their lending activities.

What is GIC Software?  

GIC software, sometimes called a GIC system or term deposit system, is a core banking application used by chartered banks, credit unions, and other financial institutions that provides the ability to create, manage, and automate the processing of guaranteed investment certificates or GICs and fixed-term deposit investment products. The financial technology is often integrated as part of a wider core banking system that includes lending and mortgage software, retail banking software, client management technology, as well as credit processing, accounting, general ledger functionality, and reporting. 

GICs and fixed-term deposits are important products for Canadian financial institutions because they can provide a predictable source of funding that can be used to offer mortgages and other lending products. GICs and term deposits also play a critical role in a financial institution’s ability to forecast cashflow and manage liquidity risk. 

While GIC software can be included as part of a larger core banking system, it can also be deployed as a standalone software solution that integrates with a bank or financial institution’s pre-existing systems. 

The 5 Best GIC Software Features

1. Automated GIC Processing 

One of the most valuable features of any GIC software system is automated GIC processing capabilities—that’s its ability to automate and streamline the processing of GICs. This includes the automatic processing of the otherwise time-consuming, manual processes involved with managing these types of investment products, like opening new accounts, processing transactions, renewing expiring deposits, calculating interest rates and agent commissions, and rolling over GICs and deposits that have reached maturity. These systems will handle all of these automated processes, and they will do it in bulk, too, allowing financial institutions to process transactions and manage a large number of GICs and term deposits simultaneously. 

These automated processing features streamline the GIC sales process, while also reducing errors and improving efficiencies by removing the administrative burden of managing these types of investments manually. Automated GIC processing is often the most important feature for banks and financial institutions that are considering a new GIC software solution.   

2. Integration with Existing Core Banking Systems

Since GIC software is an important component of a core banking system, its ability to integrate with a bank or financial institution’s existing core banking systems is often crucial in ensuring that customer data can be shared safely and securely between systems. This integration not only eliminates the potential for delays, errors, and inaccurate data caused by manual data entry, but it can help improve customer service by providing a more complete view of customer’s financial health, allowing banks to view customer deposit product information alongside other core banking products, including retail banking accounts, credit facilities, and mortgage and lending products. Integration with online banking and mobile banking applications will also ensure customers can view and manage their GIC investments at any time. 

3. Connection to the GIC and Term Deposit Broker Network 

Automated GIC processing and core banking integration features are most valuable when financial institutions can attract customer deposits on a massive scale. That’s why one of the best features of a GIC system is its ability connect to Canada’s GIC and term deposit broker network.

By connecting to the GIC and deposit broker network through integrations with third-party systems, like the CANNEX financial network, banks and financial institutions can extend their deposit business to a much larger market and offer nominee name deposit. This not only allows financial institutions to scale their deposit business, but it also helps diversify their funding sources and effectively shifts timely customer relationship management activities to deposit broker professionals that specialize in personalized financial services. 

4. GIC Product Customization

While automation, integration, and the ability to access a large market are some of the most important GIC software features for banks and financial institutions, in order to leverage the true value of these features it’s equally important to ensure that GIC investment products are designed for a wide range of investors. Offering flexibility between things like term lengths and interest rate calculations, GIC product customization allows financial institutions to offer many different types of GICs and term deposits.

Effective GIC product customization features will allow banks to customize term lengths and interest rate calculations to create countless product options ranging from less than one year to ten years. In addition to non-redeemable, redeemable, and cashable deposit product options, GIC product customization features should allow banks and financial institutions to create the following GIC product types: 

• Fixed-rate GICs
• Adjustable-rate GICs
• Step-rate GICs
• Market-linked GICs
• Registered GICs 
• Non-registered GICs
• Foreign Exchange GICs

5. Regulatory Compliance

Features designed to streamline the GIC sales process are valuable for promoting and scaling business for GIC deposits issuers, but chartered banks and financial institutions accepting deposits from the public must also ensure their GIC software includes comprehensive regulatory compliance and security features. 

Data encryption technology, system monitoring and alerting, user access controls, detailed auditing functionality, and customized reporting capabilities can all help financial institutions maintain compliance with industry regulators. 

Since all chartered banks and financial institutions that accept deposits from the public are required to be a member of the Canada Deposit Insurance Corporation (CDIC), a Crown corporation that provides deposit insurance to member institutions, GIC software used by chartered banks and financial institutions must also provide a way to meet the CDIC’s Fast Insurance Determination data and system requirements. This process ensures that in the unlikely event of a bank failure, CDIC can immediately step in and take control of a financial institution’s data. Within hours CDIC must be able to connect to financial institution’s system, access its deposit and liability information, and load it into the CDIC’s payout application. GIC software must include functionality to streamline this process. 

The Best GIC Software Improves Efficiencies and Is Essential to Banks and Financial Institutions

While every financial institution is different, chartered banks and financial institutions can streamline their GIC and deposit business and gain access to a secure, stable, and reliable source of funding by implementing a term deposit solution that includes these 5 best GIC software features: automated GIC processing, integration with existing core banking systems, the ability to connect to the GIC and term deposit broker network, GIC product customization features, and regulatory compliance functionality. 

These features collectively provide a solid platform for banks to take advantage of valuable automation efficiencies and respond to dramatic increases in product demand, like the recent resurgence of GICs that’s been driven by a complex mix of economic factors, like elevated levels of inflation, central bank rate hikes, and ongoing economic uncertainty.  

Although the right GIC software can provide the ability to quickly respond to unusual or unpredictable increases in demand with minimal resources, it’s also simply a fundamental system that the banking industry has relied on for years. GIC software is essential to banks and financial institutions.  

If you’re interested in learning more about Portfolio+ or how Portfolio+ GIC software can help make your financial institution’s deposit business more efficient, contact us today. 

Sources: 

https://www.bankofcanada.ca/rates/banking-and-financial-statistics/chartered-bank-selected-liabilities-month-end-formerly-c2/ (Retrieved February 17, 2023)

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In fact, data from the country’s central bank indicates that from March 2022 to November 2022 alone, Canadians invested nearly $152 billion into GICs and fixed-term deposits.

While a comeback for this type of investment product might suggest that GICs have been underutilized by investors in recent years, that’s not entirely the case. In fact, GICs have long been a trusted staple of conservative investors and the Canadian banking industry. Even for those investors with a higher risk tolerance that are more attracted to the possibility of higher returns characteristic of stocks and equity investments, GIC investments can provide a valuable way to grow savings and add a certain level of stability to help with balancing out even the most growth-oriented investment portfolio. While they may not have offered the largest returns over the past two decades, GICs have consistently provided a safe and secure investment opportunity for both new and experienced investors. What’s most notable about recent trends, though, is the sudden surge in their popularity. 

According to a recent report by RBC economists, Canada’s wealthiest are continuing to build up their savings amid the economic uncertainty. Among the country’s top 40 percent of income earners, household savings from the first quarter of 2020 to the third quarter of 2022 are up 28 percent, and chartered bank demand deposits appear to be declining as Canadians funnel their cash into GICs and term deposits. 

So, what’s driving the sudden resurgence in GIC investments? Is it just rising interest rates or is there something more to it? Why are more and more wealthier Canadians turning to GICs over other investment opportunities? What caused this substantial increase in savings among Canadians? And what role does financial instability and economic uncertainty play in all this?

Why Are More Canadians Suddenly Turning to GIC Investments?

Why are more and more Canadians shifting cash into GICs investments? The answer might seem obvious, but it’s ultimately the result of a unique and complex economic environment. Let’s start with the more obvious considerations, though. Let’s begin with interest rates. 

Interest rates have risen sharply over the past year, with the Bank of Canada’s policy rate climbing from 0.25 percent to 4.5 percent by January 2023. After eight consecutive rate hikes that began in March 2022, the spike in interest rates arguably plays the most important role in why more and more Canadians are suddenly turning to GIC investments in Canada. It’s simple, right? When it comes to safe investments with high returns in Canada like GICs and term deposits, those higher interest rates translate into a higher return on investment. Not only are these GIC investments guaranteed, but they’re insured by the Canada Deposit Insurance Corporation (CDIC) for up to $100,000, protecting investors from even the most unlikely events like banks runs and financial institution failures. Higher rates and a guaranteed return are attractive features of GICs, particularly for conservative investors, new investors, and those with short-term investment goals. 

As of February 2023, competitive interest rates on 1-year GICs from some Canadian online banks were nearing 5 percent. With zero downside risk, that’s a much more appealing rate for GICs than Canadians have seen in the recent past. While there are many different types of GICs, GICs with a shorter 1-year term were providing higher rates than those with a 3-year term or a 5-year term. This is an unusual situation. Typically, GIC investments with longer terms offer investors higher rates and higher returns. In early 2023, that’s not the case.

This unique situation is due to the inverted yield curve. That’s where shorter-term debt instruments have higher yields than longer-term debt instruments. It’s often considered to be a reliable indicator of a recession. 

But with the consumer-price index (CPI) reaching a 40-year high in mid-2022 and sitting at approximately three times the Bank of Canada’s target rate of 2 percent in January 2023, even the higher-than-usual interest rates on GICs are failing to promise a guaranteed return that keeps up with the rate of inflation. 

It doesn’t take an experienced investor to understand how that’s problematic.

When an investment with a guaranteed return fails to protect the purchasing power of its investor by providing a rate of return that’s below the rate of inflation, it’s clear that interest rates alone are only one part of a more complex equation. The resurgence and the clear substantial increase in the volume of these types of fixed deposits at Canadian chartered banks suggests that there are other important considerations that are driving Canadians to GICs. At the very least, the anticipated return on an investment should at least protect the purchasing power of an investor’s principal. Shouldn’t it?

So, what else is going on here. In addition to higher interest rates, what economic factors are Canadians considering as they flock to GICs?  

Interest Rates, Market Volatility, and Economic Uncertainty Are All Driving the Demand for GIC Investments in Canada

By looking at alternative investment options to GICs and considering the wider economic environment, it becomes quite clear that the spike in GIC investments is more likely the result of higher policy rates paired with consumer confidence and investor sentiment relating to volatile equity markets. 

On June 13, 2022, the S&P 500 officially entered a bear market, finishing the session 20 percent below its January high—a direct result of the Fed, the US central bank, raising rates to combat inflation. That stock market decline wasn’t just isolated to the US, but rather it remains an ongoing economic situation with markets globally in 2023, as central banks around the world grapple with elevated rates in an attempt to contain and control record-high inflation. While hopes of a soft landing—a situation where Canada’s central bank raises interest rates just enough to avoid a recession—are beginning to surface again in Canada, many economists believe the country could experience a mild downturn. 

In addition, the International Monetary Fund is also predicting that one-third of the world economy will be in a recession in 2023. 

With high interest rates weighing on markets, Canadians are also reeling from a housing market correction that has resulted in home prices falling a record 12 percent in 2022. According to the Canadian Real Estate Association, the average home price in Canada fell to $626,318 from its record high of over $816,000 when the market peaked in early 2022 just before the Bank of Canada began raising rates. This loss of value, along with rising mortgage rates, has contributed to a stark decline in consumer confidence, and many Canadians are simply feeling less wealthy. With less confidence in stock market investments and real estate markets, and with inflation continuing to erode purchasing power, investing in short-term GICs is a defensive investment that at least provides investors with a level of certainty and safety in an environment where certainty and safety have become scarce. 

So, if it’s true that elevated interest rates, economic uncertainty, and financial instability all play a collective role in driving Canadians to GICs, doesn’t it make sense to take another step back and look at how the economic uncertainty and financial instability all started? 

Canadians Saved a Lot During the Pandemic, and Some of Those Savings Are Shifting to GIC Investments

The economic uncertainty and financial instability of 2022 and 2023 is ultimately an after-effect of the COVID-19 pandemic. When we consider everything—the higher interest rates, elevated inflation, a cooling real estate market, stock market downturns, as well as IMF and economists’ predictions supported by an unusual yield curve inversion that’s indicative of a recession—all of these economic factors combined are collectively pushing more and more Canadians to the safety and security of GIC investments. 

But all this uncertainty and instability ultimately began with the pandemic.

Government mandated lockdowns, limited consumer spending opportunities, and the vast amount of government stimulus that was injected into the economy to reduce the financial strain on businesses and consumers forced many Canadians to not only work from home, but it forced them to focus on saving. This is where the resurgence in GIC investments is rooted: It begins with an unusual and substantial influx in excess savings among Canadians. 

During the pandemic, Canadians amassed an exceptionally large amount of savings, with major banks estimating that excess savings stashed away over a period of just two years hit approximately $324 billion. 

As government mandates and lockdowns disappeared, and as global economies began to reopen, Canadians began to return to spending. Unfortunately, Bank of Canada’s quantitative easing program throughout the pandemic resulted in more money chasing more goods, which contributed to inflation, which was exacerbated by supply chain constraints, lockdowns in China, and geopolitical tensions, including Russia’s war on Ukraine. One positive outcome was that many Canadians were able to save, and much of that excess savings still remains intact. 

Now, rather than sitting on a growing pile of excess savings, Canadians are sitting on a growing pile of money in GICs. 

From excess savings and higher interest rates to financial instability and economic uncertainty, all of these factors combined are collectively contributing to why more and more Canadians are turning to GIC investments. 

For some Canadians, though, maybe the answer is even simpler than that. For some, maybe it’s interest rates. For others, maybe it’s the record high inflation or a lack of confidence in markets. 

After three years of unpredictability, maybe it’s just nice to have something predictable. After all, it’s human. In an increasingly unpredictable and unsafe world, doesn’t it make sense that more and more Canadians just want something predictable and safe?

Sources: 

https://www.bankofcanada.ca/rates/banking-and-financial-statistics/chartered-bank-selected-liabilities-month-end-formerly-c2/ (Retrieved February 6, 2023)

https://www.theglobeandmail.com/business/article-gic-investing-interest-rates-canadians/  (Retrieved February 6, 2023) 

https://financialpost.com/executive/executive-summary/wealthy-canadians-savings-grow 

(Retrieved February 7, 2023) 

https://financialpost.com/news/economy/imf-chief-kristalina-georgieva-forecasts-tough-year (Retrieved February 9, 2023)

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Your money isn’t available. Yes, that’s right. It probably comes as a bit of a shock. Your banking app is down, too—that’s just a part of this whole thing. You read the message, though, right? I think it says something like, your financial services are not available. Not very helpful, is it? They should have given you more information. It’s not just that the app is down, but your entire bank is closed. Everything you’ve put into your accounts, all of your savings—that nest egg you put away for the basement renovation, and the money you earmarked for the trip to Kelowna to visit your sister and her family—that money is no longer there. What happened to it? Not sure. It’s too early to say, really. But it’s gone. Hey, remember that favorite restaurant of yours, the one with the green spinach fettuccini and those cute little ceramic cups and the back patio that was hidden away from the rest of the city? Remember how it went under and they just kind of closed their doors and left a note on the front window? This is just like that. Sometimes businesses fail, right? Well, sometimes financial institutions fail, too. Unfortunately, yours failed today. Your money is gone.

It’s hard to imagine hearing something like that, isn’t it? Without a doubt, it would be a little unnerving waking up one morning to the news that your financial institution is suddenly insolvent, and your life savings have somehow vanished overnight. But, strangely enough, that’s exactly what happened on June 4, 1996, when 2,600 Canadians woke up to the news that Security Home Mortgage Corporation based out of Calgary, Alberta, had failed. With it, $42 million in deposits and personal savings were up in the air.

So, what exactly happens to your savings when a Canadian bank fails?

What Is Deposit Insurance and How Does It Work?

When you put your money into a financial institution, you kind of expect it to be there when you need it. You don’t expect that your financial institution will lend that money out to so many defaulting borrowers that it drives itself into insolvency. After all, you’re handing your hard-earned cash over to a reputable financial institution—not an unreliable friend with money problems. (I’m looking at you, Jon.)

But despite all of the regulatory controls that help contribute to the stability of the Canadian financial system, bank failures can still happen. In fact, there have been 43 bank failures in Canada since 1970, but, incredibly enough, the majority of affected customers recovered all of their savings during each one of those failures. That’s because every one of those 43 financial institutions was covered by something called deposit insurance.

In Canada, Schedule I and Schedule II banks can accept deposits from the Canadian public, and each one of those institutions is required to be a member of the Canada Deposit Insurance Corporation (CDIC). The CDIC is a Crown corporation that was established by the federal government in 1967 and mandated to provide deposit insurance protection to each one of its member institutions.

It works like this. On the most basic level, banks and financial institutions do two things: They take money in, and they lend money out. In order to make a profit, they must ensure that they charge a higher interest rate on the money they lend out and a lower interest rate on the money they take in. This is called their spread. The model relies on two types of customers: borrower and depositors. The problem with this arrangement is that not all borrowers will pay back the money they’ve borrowed. Some of them will default. If too many of them default, the financial institution becomes insolvent.

On top of that, if a financial institution lends out the majority of its deposits and doesn’t have the money to pay back its depositors it can lead to something called a bank run. A bank run occurs when many clients withdraw all of their deposits and savings from a bank at the same time in fear that the bank may fail. This fear of insolvency can pick up momentum quickly and actually drive a struggling financial institution into insolvency.

Deposit insurance helps combat both of these issues. With a third-party offering to protect depositors’ money in the event of a bank failure, they can rest assured that their money is safe in the event a financial institution falls into insolvency. That promise also helps ensure that depositors won’t take their money out all at once and force a bank run.

What Is CDIC’s Fast Insurance Determination?

In order to ensure depositors get their money back quickly in the unlikely event of a bank failure, the CDIC requires all member financial institutions to adhere to their Fast Insurance Determination (FID) data and system requirements. The FID process ensures that CDIC can immediately step in and take control of a financial institution’s data within hours of a bank failure in order to extract important deposit and liability information. Following a bank failure, that deposit and liability information is loaded into the CDIC’s payout application, which organizes payout information and allows CDIC to make payments of insured deposits to depositors within just a matter of days.

The CDIC and its Fast Insurance Determination process play an important role in ensuring the stability of the financial system in Canada. It protects eligible deposits at each of its member financial institutions to a maximum of $100,000, in each of the following separately insured categories:

• Deposits in one name
• Joint deposits
• Deposits in trust (including RESPs)
• Deposits in TFSAs
• Deposits in RRSPs
• Deposits in RRIFs
• Mortgage tax accounts

Think of it this way. Maybe you’re not comfortable handing your money over to your unreliable friend. But if that unreliable friend had a reliable mom who promised to pay you back in the event that he couldn’t, you’d be a lot more comfortable handing your money over. CDIC is kind of like that reliable mom.

That reliable mom that shouldn’t have to do this for you again.

Interest in learning more about GIC’s and Term Deposits?

Portfolio+ provides content for different types of consumer financial products.  If you wish to continue exploring and learning about finances, we encourage you to see our blog section.

For financial institutions and businesses that offer financial products, consider software that allows your business to set up, manage, and maintain your operations.  Our API’s automate your processes and ensures a better customer experience.  Contact our team today to learn more.

Sources:

https://www.cdic.ca/your-coverage/deposit-protection-for-all-life-stages/cdic-articles/bank-failures-in-canada-a-history/

https://www.ratehub.ca/blog/15392/

https://www.cdic.ca/your-coverage/

https://www.cdic.ca/about-us/our-history/history-of-failures/

https://en.wikipedia.org/wiki/Bank_run

The post What Is Deposit Insurance and CDIC’s Fast Insurance Determination? appeared first on Portfolio+.

 It’s OK to admit that maybe there’s a point where your understanding of the banking landscape kinda-sorta-slips-away-from-you. Maybe you know a thing or two about investment banking. Maybe you’re even a bit of a specialist in personal investments at your firm. The kind of person everyone goes to for advice on the best investment strategy for clients under 30 who own their own home in Toronto’s Eastside and somehow have extra money sitting around to invest in common stocks and market-linked investment products with compounding interest. We’re being hypothetical here. The King of the Water Cooler they call you. At any given party, you’re the one person that can confidently list out the pros and cons of all the different types of guaranteed investment certificates, if only they just had parties where people talked about guaranteed investment certificates. In fact, if someone did throw a party like that, it would be you. You sure know a lot about this stuff. But there’s just one area that you’ve never really understood because it’s just too, well, boring—yes, even for someone that gets easily excited about GICs. We’re talking about that area where banking crosses a line and slips into the realm of regulation.

It might feel different over here in the world of financial regulation. The sky seems different somehow, and the people talk in long-winded phrases, saying things that you know could be said in less words. But don’t be intimidated! There are some important concepts over here that you might need to know. After all, federal regulations in the financial industry are specifically designed and implemented to ensure the stability and integrity of the Canadian financial system as a whole. They’re there to foster competition and protect consumers. Along with a strong fiscal management policy, our regulatory environment is often quoted as the prime reason why Canada’s financial system is considered one of the safest in the world. One term that often arises in issues concerning regulation in Canada’s financial industry is the concept of a Schedule I bank.

So, let’s start there. What is a Schedule I Bank? And why is it different from other banks?

What Are the Criteria for a Schedule I Bank?

You probably have a good idea about which Canadian financial institutions might fall under the definition of a Schedule I bank. They’re some of the most common names you see in the industry and include “The Big Five,” a term that references Canada’s five multinational financial conglomerates: Royal Bank of Canada (RBC), Toronto-Dominion Bank (TD), Bank of Nova Scotia (Scotiabank), Bank of Montreal (BMO), and Canadian Imperial Bank of Commerce (CIBC).

You might be surprised to know that Schedule I banks also include some of the Big Five’s subsidiaries and associated brands, including Simplii Financial, a direct banking brand of CIBC, and Tangerine, a subsidiary of Scotiabank.

The Big Five are all considered Schedule I banks, and they all have subsidiaries that are operating outside of Canada. There is one other loosely defined category of Schedule I banks. The banks that fall into this category are often called second-tier banks, which are Canadian-owned institutions that operate exclusively in Canadian domestic markets.

Sometimes called chartered banks, Canada’s Schedule I banks are all regulated under the federal Bank Act and supervised by the Office of the Superintendent of Financial Institutions (OSFI). As of this writing, OSFI currently lists 36 Schedule I banks under its supervision.

So, what it is that makes a bank a Schedule I bank? In order for banks to receive an operating license—or charter—and become a Schedule I bank in Canada, they must meet certain criteria.

A Schedule I bank in Canada:

• Must be a Canadian-owned domestic bank
• Must not be a subsidiary of a foreign bank
• Is allowed to accept deposits from the public

In addition to these criteria, Schedule I banks are also subject to ownership stipulations that are based on an institution’s size or, more accurately, its equity. Let’s cover institution sizes first before exploring ownership restrictions.

Legislation passed in October 2001 categorized Schedule I banks into three different sizes:

• Large (greater than $5 billion in equity)
• Medium ($1 billion to $5billion in equity)
• Small (less than $1 billion in equity)

That’s fairly straightforward. See—I told you not to be intimidated.

So, what about ownership restrictions?

Well, even before the October 2001 legislation, large banks were required to be widely held. At that time, a single shareholder could not hold more than 10 percent of shares. Following the October 2001 legislation, the federal government simply expanded on that requirement “to allow an individual investor to own up to 20 percent of any class of voting shares and 30 percent of any class of non-voting shares of a large bank” (Daniel 9). In addition, the legislation added that medium-sized banks must have a public float of at least 35 percent voting shares, while small banks are not subject to any ownership restrictions (Daniel 9 – 10).

That basically covers it. Schedule I banks are Canadian-owned banks that are either large, medium, or small. Large banks with over $5 billion in equity must not have a single investor own more than 20% of voting shares or 30% of non-voting shares. Medium banks with $1 billion to $5 billion in equity must maintain a public float of at least 35% of voting shares. And small banks with less than $1 billion in equity have no ownership restrictions.

Schedule I Banks Are Large, Medium, and Small Domestic Banks

This may sound like a lot of noise, but the concept of a Schedule I bank is actually fairly straightforward when you strip away all the legislative jargon. We know that Schedule I banks are domestically owned and are authorized to accept deposits. On top of that, they’re either large, medium, or small—that’s not much different than your average latte. The only other consideration is around ownership and voting shares, which is hardly the kind of detail you want to delve into at your next party where everyone is psyched to talk about guaranteed investment certificates and Schedule I banks, anyway. Just stick to the simplest details. After all, that’s how you got the name King of the Water Cooler in the first place.

Contact Portfolio+ and OSFI Early If You’re Thinking About Starting a Bank in Canada

Incorporating a Schedule I bank in Canada is a lengthy process that can take up to 18 months to complete with a three-step phased approach that includes two significant approvals and strict application timeframes. It’s not for everyone. The benefit of incorporating a bank in Canada is that you can accept deposits from the Canadian public, which can provide a financial institution with quick access to funds in the form of nominee name GICs.

If this is something you’re considering, I recommend reaching out to Portfolio+ and OSFI early in the process. Portfolio+ has been through this process numerous times and can help provide guidance around the banking system, interfaces, and technology requirements that OSFI will require from each financial institution.

Contact Portfolio+ today.

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Ok, so maybe it’s not the best name. After all, you wouldn’t call a bicycle a non-skateboard. Just like you wouldn’t call a horse a non-cow or an airplane a non-bird. You see where I’m going here. But sometimes—even despite personal intuition, common sense, and logical rationalization—ridiculous things still happen. (Think presidential tweets or the Walmart yodeling kid’s rise to fame or Storm Area 51—the list goes on.) Still, we generally know it’s never a good idea to name something based on what it’s not.

This brings us to NBFI or better known as non-bank financial institutions. Here we will focus on the question: What is NBFC? What are NBFC examples? What’s their purpose? What are the functions of NBFC? And how do they fall into the traditional banking landscape?

What Makes an Organization a Non-Bank Financial Institution?

Anything that isn’t a financial institution is technically a non-financial institution. But when we talk about non-financial institutions in the context of the Canadian banking landscape, what organizations are we really referring to?

We’re referring to a group of financial service providers that do not have a full banking license. They still provide financial services and often lending solutions, which is why “non-financial” really isn’t the best way to describe these organizations. Not only is it a poor name—it’s inaccurate.

The main difference between banking and non banking financial institutions is that non-financial institutions are not authorized deposit-taking institutions. This is the important part. It means they can’t accept deposits from the Canadian public. And since they can’t accept those deposits, they can’t offer the typical banking products like chequing or savings accounts, and they can’t offer short-term term deposits or Guaranteed Investment Certificates (GICs) What is a Term Deposit?

Because of this distinction, non-bank financial organizations have to acquire their funds from other sources. As a result, many of them work with investors in order to generate the necessary funds they need to provide loans or other lending products. This approach is the underlying model used for the majority of alternative lenders in Canada. What is Alternative Lending?

What Are Some Examples of Non-Bank Financial Institutions (NBFI’s)?

non banking financial institutions examples (NBFC)

This brings us to another name for something based on what it’s not. The non-bank.

Sometimes referred to as nonbank lenders, these non banking financial institutions are often focused on other industries. In many cases, it’s their success in other industries that provide them with a funding source for their lending products.

Let’s take General Motors. This is a North American automaker. Its core business is manufacturing vehicles and producing cars and trucks for the global market. But General Motors also operates a financial services arm known as General Motors Financial Company. This non-bank provides retail loan and leasing programs to their auto customers through auto dealers, as well as commercial lending solutions to help dealers finance and grow their business.

This isn’t unusual, either. Many successful retail companies and manufacturing companies have launched credit card programs and lending operations in order to offer financing and payment options to their customers, which in turn helps them sell more products.

The Takeaway: Non-Financial Institutions Don’t Take Deposits

There are many creative ways non-financial institutions acquire funds. Many of them use those funds in order to offer alternative lending products or financing solutions. But some non-financial institutions don’t offer lending or payment programs at all. Insurance companies are a perfect example of NFBI/non-financial institutions that don’t offer loans or lending products. Instead, they generate their funding source from premiums that they collect from their customers.

So, if financial instructions and non-financial institutions both offer financial services, then what’s the difference? Well, it all comes down to where the institution gets its funding. The easiest thing to remember is that non-financial institutions don’t take deposits.

And, yes. We did just define non-financial institutions by defining what they don’t do.

Sources:

https://www.bankofcanada.ca/2019/03/non-bank-financial-intermediation-in-canada-an-update/

https://en.wikipedia.org/wiki/Non-bank_financial_institution

https://www.precisionfunding.com.au/understanding-non-bank-lenders-how-they-can-push-your-portfolio-further/

https://www.worldbank.org/en/publication/gfdr/gfdr-2016/background/nonbank-financial-institution

https://www.investopedia.com/terms/n/nonbank-banks.asp

https://www.gmfinancial.ca/en-ca/about.html

The post What Is a Non-Bank Financial Institution? appeared first on Portfolio+.

You’re here for one of two reasons. The first reason: You’re a financial service visionary about to set off an epic journey of establishing Canada’s next Schedule I bank. You’ve come armed with an entirely new banking idea that aligns with the boom of open banking in Canada and blends next-generation technology with personalized banking experiences that tech-savvy Canadians have never seen before. You’ve recognized that the relationship between people and technology has evolved faster than the traditional banking system could adapt, and you see flaws in a system that are starting to look a lot less like flaws and a lot more like opportunities digital banking in Canada.

Maybe your idea is to launch a digital banking app that caters to millennials entering the world of personal investing. Or maybe you’ve uncovered an underserved niche market and have plans to launch a semi-automated mortgage underwriting app for people interested in financing luxury motor coaches or private aircraft. There’s also a chance that you lead a major retail chain that’s thinking of launching a vertically integrated payment program, and you already know the benefits of tapping into the nominee GIC deposit market to gain quick access to an affordable funding source. If you’re here for the first reason, you’re here to learn how to start a bank in Canada.

If you’re here for the other reason, then you’ve accidentally stumbled onto this post after Googling “how to open a bank in Canada” when you really meant to search “how to open a bank account in Canada.”

Either way, you’re about to learn how to open a bank!

Breaking Down OSFI’s Three-Phased Application Process for Opening a Bank in Canada

First of all, you’re in the right place and the wrong place all at the same time. Now let us focus on what do you need to open a bank account in Canada. The process doesn’t start here. Every person or group interested in incorporating a bank or deposit-taking financial institution in Canada will start at the same place and follow the same application process—a three-phased approach that’s administered by the Office of the Superintendent of Financial Institutions (OSFI). That’s the place to start.

OSFI is the federal government’s agency that’s in charge of supervising and regulating all chartered banks in accordance with the Bank Act. More importantly, it’s also the agency that’s responsible for assessing applications for incorporating banks and making recommendations to the Minister of Finance. After receiving a recommendation from OSFI, the Minister of Finance has the ultimate responsibility of approving applications for federally regulated financial institutions (FRFIs) in Canada.

OSFI’s application process is broken up into the following three phases, which the agency has structured in order to provide guidance and feedback throughout the lengthy application process:

• Phase 1: Pre-Application
• Phase 2: Letters Patent
• Phase 3: Order

Phase 1: What is OSFI & What Do You Need for OSFI’s Pre-Application Process?

At this point, you should know that the application will cost somewhere in the area of $33,000. That’s the price for the letters patent of incorporation. If that feels like pocket change right now, then you’re ready to move on! There are also certain criteria you must meet in order to become a Schedule I bank—so make sure you’re eligible first. A Schedule 1 bank must be Canadian-owned. On top of that, there are three categories of Schedule 1 banks with different ownership restrictions that are based on an institution’s equity. OSFI will also require that you have a paid-in capital of at least $5 million. The Minister of Finance may require you to have more.

Are you ready to learn what is OSFI’s? Here we go! OSFI’s application process starts with an interview. Prior to meeting with them in person to discuss your application, you’ll need to prepare a written proposal outlining the reasons why you’re applying to become a bank. OSFI will use this proposal to facilitate and guide your conversation during the interview process. They’ll be looking for details about your business strategy, target markets, ownership structure—even your proposed management team.

If you still want to proceed with your application after the initial interview, OSFI will ask you to submit an information package. This is where things get serious. You’ll need to disclose detailed information about your institution’s ownership, including classes of shares and the percentage of shares held, along with all of your financial statements for the last three years.

OSFI will also want a finely detailed business plan covering the next five years. Your business plan should include information on what financial services you’ll be offering and in which jurisdictions, as well as an analysis of target markets, competitors, and a breakdown of opportunities and challenges and how you’ll address them. You’ll need to outline risk-based capital and leverage ratios along with pro forma financial statements of the next five years—in other words: You don’t have to see the future, but you should have the financial details of how it’ll play out.

This is your opportunity to show your financial strength, create your case on paper, and provide a detailed plan that’s strong enough to convince the regulator that you’re proposed institution will have a viable chance at success in the marketplace. So, show your cards. OSFI wants to see every detail of your business, from your trading and investment strategy to what information technology environment you’re planning to use. If you’re still reading at this point, this is where we can help you out—many banks have received their charters after proposing a Portfolio+ core banking platform.

If you satisfy OSFI’s pre-application process, you’ll receive a letter from OSFI that highlights the agency’s concerns and expectations.

Phase 2: How Do You Obtain Letters Patent of Incorporation?

If you’ve made it to Phase 2, you’re well on your way to opening a bank. This phase is all about receiving OSFI’s recommendation and obtaining letters patent of incorporation from the Minister of Finance. This phase starts with a simple publication. You must publish your notice, or intention, to apply for letters patent in the Canada Gazette—the official newspaper of the Government of Canada.

Once your notice is published, you’re ready to submit your formal application for letters patent. You’ll have to prepare a second information package that builds on your first and covers specific details about your board of directors and management structure, as well as your risk management framework, operational policies, and regulatory compliance controls. You’ll also need to provide details about your proposed IT framework, software, and any integration with third-party systems. If your business plan includes GICs or deposits, you will be required to be a member of the Canada Deposit Insurance Corporation (CDIC). You won’t have to submit a separate application to CIDC, though—OSFI will inform CDIC about you.

Based on a positive review of the information you provide, OSFI will make its recommendation for letters patent to the Minister of Finance. Your proposed bank is officially a bank when you receive your letters patent—you just can’t begin operations until you receive an Order from OSFI.

Phase 3: How to Obtain an Order for a Chartered Bank

You’re not out of the application process yet. You still need an Order. Once the letters patent are issued by the Minister of Finance, you have one year to receive an Order from OSFI. OSFI is not permitted to make an Order after one year has elapsed. OSFI may request more information during this process, and you should be ready to respond to requests in a timely manner.

The most important aspect of phase three is an onsite review. OSFI will send you a pre-commencement letter and will visit you to assess your operational readiness and ensure that you have all the controls in place that you’ve outlined throughout your application process. You will receive one final letter following the onsite review that captures any final concerns OSFI may have.

You’re almost there! OSFI wants to see meeting minutes for the first Board and shareholders meetings, as well as confirmation of amounts paid for incorporation, and a final letter from you promising that you’ll let OSFI know of any changes to your business plan.

And that’s it! Once you’ve satisfied all of the requirements, OSFI prints your Order and publishes a notice of it in the Canada Gazette. Cut it out and stick it to your fridge! You’re one of the elite few that have met the requirements of a regulator that supervises a financial system that’s considered one of the safest in the world.

View OSFI’s official  Guide for Incorporating Banks and Federally Regulated Trust and Loan Companies.

Up Next:

Sources:

https://www.osfi-bsif.gc.ca/Eng/fi-if/app/aag-gad/Pages/instguide.aspx

https://www.osfi-bsif.gc.ca/Eng/fi-if/app/aag-gad/Pages/sf.aspx

https://business.financialpost.com/news/fp-street/how-to-build-a-bank

The post How Do You Open a Bank in Canada? appeared first on Portfolio+.

White labeling is where companies take third-party manufactured products, throw their own label or brand on it, and market the products as their own. It happens everywhere. You might not know when you encounter a white-label product, but you’re not supposed to know. That’s entirely the point. Sometimes called private-labeling, white-labeling gives brands an opportunity to create entirely new customer experiences without all the work of—well, you know—actually creating new products.

So, what is a white label bank? Well, a white label bank is a Banking as a Service (BaaS) provider that uses a bank’s application programming interfaces (APIs) to build its own white label banking platform financial products over a licensed bank’s existing infrastructure.

Now, there’s a lot of information packed in there. So, let’s take a different approach.

Think of any finished product. Seriously, go for it! It could even be a bank—or a fintech, as we’ll explore shortly—but it could be a line of clothes or beauty products. Really, just about anything. Now, imagine dipping that finished product into a big bucket of white paint. When you pull it out, it’s basically an entirely new product that’s free for you to make it your own! You have complete creative control over how you’re going to influence its existence in the market—once the paint dries, of course. So, you throw a flashy new logo on your product, create some wonderful branded customer experiences, develop an Instagram following and community around it. Maybe you even make socially responsible, ethical decisions that influence the way that product is produced, doing everything in your ability to ensure your new thing—your very own white-labeled Seussian Thneed—reflects your brand’s commitment to a more sustainable world.

Pretty neat stuff.

This is the idea behind white-labeling. You take a complete product, and you brand it to make it your own. You can see how a white-labeled, third-party product quickly becomes your product. Of course, this isn’t entirely literal—you don’t actually dunk anything into a bucket of white paint unless you want to either ruin it or make it white. White labeling is about putting your brand on something and making it better.

That’s what white label banking is all about, too.

White-labeling gives brands the opportunity to explore new revenue avenues, providing complete control over branding and customer experience, while also offering a high level of control over aspects of production, pricing, and profits. For new brands, it offers even more: It gives them a finished product as a starting point to make it their own.

White-labeling is everywhere. It’s especially prevalent in the retail industry, where major retailers often throw—or very carefully place—their own brand onto a product. In many cases, they’ll even reach out to third-party manufacturers for help in creating an entirely new product that they can brand and throw onto their shelves in order to build entirely new customer experiences.

Although white-labeling is a common strategy in retail, it’s only just becoming an increasingly popular strategy in banking, particularly among fintech and neobanks. In fact, there’s an open banking model that enables white label banking called Banking as a Service (BaaS), and it’s the technology stack where white-label banks and neobanks are made.

White Label Banking is Also Called Banking as a Service (BaaS)

Banking as a Service—or BaaS—is the trendiest new term used for white-label financing/banking. The two terms aren’t synonymous, but they’re pretty close. You see, white-label banking has been around for a while now, but the BaaS model makes it even more relevant today, as the industry edges its way into open banking and a future of consumer-directed finance here in Canada. You can think of BaaS as a kind of pre-packaged, white-label banking framework. The basic BaaS model allows brands to build innovative financial services solutions into their own customer experiences using modern API-driven platforms.

Ultimately, BaaS is a model for creating white label banks.

Designed as a three-layered technology stack, the typical BaaS stack involves three players: regulated banks, fintechs, and brands. Regulated banks act as the foundation of a BaaS solution, providing the banking license, and handling all the regulatory and legal obstacles. Fintechs service providers occupy the middle layer of the stack and handle the as-a-service component. And brands occupy the top layer of the stack, controlling things like the customer experience, the branding, and often the user interface and digital experiences.

In this model, brands are considered the white-label-er, so to speak. But with white-label banks, those top two layers of the BaaS stack are usually controlled entirely by the middle player: the fintech.

Neobanks Are Fully Digital, White-Label Banks that Occupy the Top Two Layers of a Banking as a Service (BaaS) Stack

Although white label fintech typically provide the as-a-service middle layer, they will sometimes occupy the top two layers of the BaaS technology stack. Partnering only with a licensed bank that handles the legal and regulatory legwork, these fintechs provide the as-a-service financial products while also owning the brand and customer experience. These important white label fintech players are typically known as neobanks.

Neobanks are 100% white-label banks.

Neobanks maintain a digital-only presence focused on highly specialized financial services and customer-centric experiences without all the overhead of physical branches through white label banking platform. They create their own bank brand, connect to a licensed bank using APIs, and develop their own financial products and customer experiences.

In simpler terms, they take a bank, dip it in a bucket of white paint, and make the banking experience better.

Is White Labeling, You Know, Dishonest?

Now, wait just a minute! Isn’t this white-label banking thing just branded trickery? No, not at all!

At least, you shouldn’t think of it that way. Banks aside, think of all the steps involved with manufacturing any product. Components of any given product are often made by different manufacturers in different locations around the world. Think of any given supply chain required to make a branded thing: It’s only the end brand that gets to control that thing’s place in the market. A neobank doesn’t see a licensed bank as a finished product. In fact, many of them just want to avoid the arduous process of becoming a chartered bank. This is really just an alternative. They see a white-label bank as a better starting point for creating the innovative, branchless banking experiences they’re envisioning.

In a way, white-labeling kind of happens with everything. And in financial services, white-label banks or white label digital banks aren’t trying to replicate the traditional banking model. If anything, it’s usually the opposite.

They’re trying to change it. They’re trying to make it better.

And BaaS is their bucket of white paint.

Sources:

https://www.businessinsider.com/private-white-label-banking#:~:text=White%20label%20banking%20is%20another,financial%20products%20with%20existing%20infrastructure (Retrieved October 21, 2020)

https://info.11fs.com/hubfs/Banking%20as%20a%20Service_reimagining%20financial%20services%20with%20modular%20banking.pdf (Retrieved September 25, 2020)

The post What is a White Label Bank? appeared first on Portfolio+.

What comes to mind when you hear the words cloud banking? Now, depending on your perspective, your initial thoughts might be quite different. As a consumer, it’s hard not to immediately conjure up images of happy people walking around on fluffy, white cotton terrain somewhere in the sky, making the same kind of point-of-sale purchases, e-transfers, and RRSP contributions that we make down here on Earth. (As if even in our fantasies we’re still burdened with managing our retirement savings and understanding contribution limits). Those imaginative thoughts about cloud banking, although a little whimsical, are kind of relevant, though. They capture one of the most important elements about the concept of the cloud services for banks and what we mean when we talk about cloud computing and cloud core banking: End consumers don’t need to think about how it all works.  

The cloud is simply a metaphor for a complex technological online network of hardware and software that allows organizations to deliver applications, databases, servers, data storage services, and computing power over the Internet. The term was initially coined by either a Compaq executive or a technologist back in 1996 (the jury’s still out) and was later introduced to the masses on August 9, 2006, when former Google CEO, Eric Schmidt, presented the term to conference attendees in San Jose, California. The amorphous, metaphorical cloud is intended to keep end users and consumers free from the minute details of the online network it represents—details like where data is physically stored, what kind of server it’s stored on, and how the data is transferred, protected, accessed, and managed. 

Since Google’s initial public declaration and definition of the cloud back in 2006, we’ve quickly come to adopt it and accept it as an everyday term in our technology lexicon that means our digital assets aren’t here—on a physical computer—but they’re somewhere else. We store our photos in the cloud. We access our music on the cloud. We live our social lives on the cloud. And we don’t pay much attention to the cloud itself or how those important pieces of our digital lives are stored or managed. They’re just our photos and our music and our social lives. Someone else can worry about the cloud and how it all works.

In a way, it’s perfect. It ultimately gives us the ability to forget about the complexities of the technology that makes it all possible, and instead, we can focus on the things that are most important to us.  

So, what if we did the same for banks? 

Cloud for banking is a deployment and delivery model that allows banks and financial institutions to manage core banking systems and applications in the cloud while leveraging on-demand access to increased computing power and resources to deliver core banking services and financial services online which is where the term cloud banking services comes in. 

Similar to cloud computing, cloud core banking offers the ability to let someone else worry about the cloud—about the physical infrastructure and the complex technological network and provisioning of hardware and software—so banks and financial institutions can focus on what’s most important to them: Providing consumers with exceptional financial services and personal banking experiences. 

Cloud Banking Will Help Financial Institutions Meet the Increasing Demands and Expectations of the Evolving Banking Consumer

Let’s start with consumers. When it comes to cloud banking safety, consumers want to know that their financial information and data is secure without knowing the details of a bank’s physical IT infrastructure. What’s important is that our banking services simply work when we need them to work. Whether a consumer’s bank is on the cloud or not makes no difference to the consumer—for now, anyway—since, as consumers, we’re generally already oblivious to how our financial data is stored and how it travels. Average consumers are not aware of the precise geographic location of data centers or the expansive networks, switches, and underlying technology and resources that make modern digital banking possible. To the average consumer, that infrastructure is already a kind of cloud. 

What do bank consumers care about? Consumers primarily care about their money—they want to know it’s safe, secure, and available. That’s been the primary consumer expectation in banking for a very long time, but those expectations are rapidly changing and evolving as more and more tech-savvy consumers, along with a maturing millennial demographic, are looking for better ways to manage their finances. Consumers are beginning to understand that more is possible, and it’s not difficult to see how data-driven banking applications and services can provide more insight into finances simply by leveraging everyday transaction data. As consumers become more aware of the innovation introduced by emerging fintechs and neobanks entering the market, they’re becoming more critical of the services they receive from their traditional banking providers. As a result, consumers are increasingly demanding exceptional digital banking experiences with more personalized—but, ironically, less personal and more digital—financial services. 

For financial services professionals and decision-makers, it’s a different story. 

Cloud Banking Provides Financial Services Decision-Makers with a Complex Mix of Risk and Opportunity

Financial services industry professionals faced with both the business operations and technological challenges of working in the highly regulated Canadian financial services industry have a very clear understanding of the differences between banking-on-a-(literal)-cloud and cloud banking—although, at times, both of those concepts may feel like pure fantasy. 

For financial services executives and decision-makers tasked with managing some of the largest financial institutions in Canada, the term cloud banking likely conjures up immediate concerns about compliance, consumer privacy, as well as a perceived increased risk and the potential for a data breach. After all, if you’re responsible for safeguarding your financial institution’s data, then wouldn’t it feel safer to have that data in your control, on a server you own and can physically touch, rather than in an intangible, metaphorical cloud? 

It’s one thing to store our photos on the cloud. It’s another thing to store the private financial details of hundreds of thousands of customers on the cloud.

On top of that, our closed legacy banking systems and our traditional physical infrastructure have been a pervasive, unwavering staple of the industry for so long. They’re elements that have contributed to the stability and collective trust that we have in the Canadian financial system as a whole. Do we want to shift to cloud banking to fix something that’s not broken? 

The problem is that technological obsolescence isn’t about broken technology. Our banking systems aren’t broken. Obsolescence happens when a newer, better solution replaces an older solution. The result is that the old technology, although functional, is no longer wanted.

Those same financial executives might have other initial thoughts about cloud banking, too. One’s that are more optimistic. That’s because it’s not hard to see the opportunities cloud banking offers and the promise of improving virtually all areas of a financial institution’s business operations, including improvements in cost efficiency, innovation, testing, speed, scalability, agility, and ultimately the simple ability to focus on improving those same digital banking and personalized financial services that consumers demand. With increased consumer expectations around a better banking experience driven by innovative fintech, neobanks, and challenger banks, cloud banking is quickly becoming an industry requirement to compete, operate, and participate in the future of banking and consumer-directed finance. 

As Canadian regulators look to other jurisdictions that have adopted open banking frameworks that emphasize consumer data rights, the Canadian industry is already quietly shifting toward a new paradigm where banking systems, partners, and service providers are all connected through APIs. Agility is only going to become more important as regulation promotes and enables change, and cloud banking promises that flexibility.

Maybe cloud banking has been a choice, an option, until now—one of many line items in a bank’s strategy focused on digital transformation. 

But cloud banking is quickly becoming a baseline requirement for the future of open banking and consumer-directed finance.

Why Are Cloud Banking Services the Next Logical Step for Banks and Canadian Financial Institutions? 

Cloud banking provides the opportunity to meet growing demands and evolving consumer expectations by removing some of the technological challenges that banks face with their own infrastructure and hardware. The banking cloud or cloud banking platform also allows banks to gain immediate access to additional servers and computing power on-demand, so they can focus on instant scaling when the institution experiences things like unexpected high-volume activity. 

That ability to simply turn on and off access to additional cloud computing banking resources improves an institution’s ability to conduct rapid testing and explore entirely new product development initiatives—two core elements that have the potential to drive financial innovation. After all, if a new development initiative fails, banks can simply remove their provisioned on-demand resources and move on to the next initiative with much less consideration for the upfront capital spent on physical servers and hardware.  

Along with cost efficiency and the flexibility to scale on-demand, cloud in banking is the next logical step for banks and Canadian financial institutions simply because of what it promises—banks can focus on their core businesses instead of managing their hardware. As banks and financial institutions migrate to the cloud, they’ll also be in a better position to engage with the ecosystem that will undoubtedly emerge from the recommendations and regulations that will drive consumer-directed finance in Canada.

The cloud itself is a metaphor, a vague comparison between two things that are nothing alike. Most banks aren’t in the business of investing in metaphors. But the thing about metaphors is that someone invested time in them. Someone pieced together the complex intricacies and minute details that gave it meaning and simply made it work. When it comes to metaphors, you don’t need to know how it was formed from complex combinations of 26 individual letters that made up sentences that communicated ideas. Sure, you could—but that’s probably a waste of your time. 

You simply need to know that someone else took care of the hard stuff so you could focus on the rest of the story.

Sources: 

https://www.technologyreview.com/2011/10/31/257406/who-coined-cloud-computing (Retrieved April 20, 2021)

https://www.bbvaresearch.com/wp-content/uploads/2016/04/Cloud_Banking_or_Banking_in_the_Clouds1.pdf (Retrieved April 22, 2021)

https://nvlpubs.nist.gov/nistpubs/Legacy/SP/nistspecialpublication800-145.pdf (Retrieved April 22, 2021)

https://www.google.com/press/podium/ses2006.html (Retrieved April 22, 2021)

The post Cloud Banking | What Is Cloud Banking? appeared first on Portfolio+.

I do a bit of grade one work these days. It’s not that much, really. A little more than usual, though. Actually, I really shouldn’t take any real credit for it because I can’t say with any level of confidence that I personally do the work—my daughter takes care of it. I mostly just see it when it’s already finished, looking it over to ensure she’s on track. But still, it’s safe to say grade one course work is sprinkled in there throughout my day along with research on material like consumer-directed finance and Banking as a Service (BaaS).

This is just the way things are for many parents living and working in Ontario at the moment. Schools are closed and classrooms have shifted exclusively to online learning for the time being, as the province tightens restrictions due to an increase in COVID-19 cases. As a result, I get a rare opportunity to redo grade one in some small way by checking my daughter’s work, overhearing lectures and songs about numbers, uploading documents, and freshening up my own skills matching two-dimensional illustrations with words that have a short “A” sound—you know: train, lamp, fan.

While I’m writing about fintech and the emergence of neobanks, I might get called into another room to snap a photo of a snowman—one with squiggly brown crayon eyebrows meant to depict the dried leaves of the hydrangeas that my daughter pulled from our front garden on the weekend and shoved into a real snowman we built together. I upload her story and illustration to Google Classroom for her teacher to review, and then I get back to my work. In a way, I’m an executive assistant to my six-year-old. I’m also her tech support when Google Classroom stops working. And I’m a colleague that’s always there to help out when she needs some clarification.

“Dad, is this picture supposed to be a light or a lamp?”

“I think it’s supposed to be a lamp.”

For the most part, our work remains separate. But not this week. This week her work has influenced mine a little more than usual, as I watch her try to spot the subtle differences between two very similar images.

What’s the Difference between Open Banking and Banking as a Service (BaaS)?

If you’re not paying close attention, it’s easy to miss the details. That notion is especially true when it comes to fintech and our industry at the moment. Take a close look while we explain the two. Whether you’re hearing virtual discussions on how banks will monetize open banking or reading how a leading payment processing platform is launching Banking as a Service (BaaS) for merchants, one thing is clear: Everyone seems to be talking about application programming interfaces (APIs) and the role this technology plays in helping banks, fintechs, and brands build new platforms and innovative banking experiences.

When the industry talks about the technology that’s driving open banking, it’s talking about APIs. When the industry talks about the technology that allows brands to connect with existing banking infrastructure to offer integrated Banking as a Service (BaaS) consumer experiences outside of the traditional banking channel, it’s also talking about APIs. So, if open banking is all about APIs and Banking as a Service is all about APIs, then what exactly is the difference between the two, can someone explain? Why does it feel like we’re talking about the same thing here? Is this the same picture?

Even when we get down to the details—when we begin to identify how APIs are used in each situation—it can feel a bit like trying to spot the differences between two otherwise similar images.

Here are the main differences between Open banking and Banking As A Service (BaaS).

BaaS is a financial service model that falls under the umbrella of open banking. It’s a strategy for how some banks, fintechs, and brands can collaborate to provide integrated banking experiences to consumers. With BaaS, third parties use APIs to access the functionality through a bank’s existing infrastructure to deliver seamless financial service experiences online through modern API-driven platforms. That’s an important point: Banking as a services platforms uses APIs to access functionality.

Open banking is the framework that makes BaaS possible. It provides the rules on how third parties can securely access and process consumer financial data. With the intention of putting consumers in control of their data, it’s often driven by regulation, such as the Canadian federal government’s phased approach to consumer-directed finance here in Canada, the PSD2 in the European Union, and the Open Banking Initiative in the UK. Open banking is about encouraging competition in the financial services landscape, giving consumers control of their data, and allowing people to share their data and information securely.

The main difference between open banking and BaaS centers around how APIs are used: BaaS uses APIs to access banking functionality, whereas open banking uses APIs to access consumer data. If they look the same, it’s because they’re made of the same elements.

“Dad, is this flower different from that flower?”

“I don’t know. Let’s count the petals.”

Sources: https://www.bbva.com/ndb/en/article/how-does-banking-as-a-service-differ-from-open-banking/ (Retrieved January 13, 2021)

https://www.investopedia.com/terms/o/open-banking.asp (Retrieved January 14, 2021)

https://www.fintechfutures.com/2020/12/stripe-launches-baas-type-service-for-merchants-with-top-us-banks (Retrieved January 14, 2021)

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