When we think of mortgage competition, we often think of smaller lenders nipping at the big boys’ ankles like angry chihuahuas. That’s happening to a small degree, but there’s something else brewing below the surface that will have an even bigger impact on your future mortgage: open banking.

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Open banking will let bank competitors access your financial data in a few easy, highly secure steps. With a few clicks, you’ll find the best interest rates and move your money to those institutions at lightning speed.

This is a seismic disruption on all sorts of levels — including mortgage lending — and here’s why:

Unlike the U.S., where securitization — i.e., pooling of mortgages and selling them to investors — funds roughly two thirds of mortgages, in Canada, it’s the opposite. Deposits account for about two out of three dollars used to fund mortgages in this country, and the Big Five Banks are dominant in that department. They control 90 per cent of bank deposits.

Anything that threatens their deposit base is a critical risk, and that’s exactly what open banking does. Big Banks’ worst nightmare is their own customers waking up to better options.

Indeed, if consumers can give permission to financial providers to find them better offers and then move money to those institutions instantly, they’re less likely to leave their cash rotting with major banks that underperform competitors on advertised deposit rates.

And people want to bank online. It’s largely why, despite explosive population growth, banks shuttered 215 branches in the last five years, according to Canadian Bankers Association data.

One of the biggest threats to our megabanks comes from high-interest day-to-day banking, where challengers like WealthSimple and small banks like EQ Bank are seeing massive growth. They’re luring customers with rates as high as 3.75 per cent on chequing-like accounts. WealthSimple, for example, has nearly doubled its assets since last year to $50 billion.

“Traditional banks are offering you pennies on their chequing if anything,” says Peter Keung, founder of HighInterestSavings.ca. “Tangerine pays 0.1 per cent, which is only so they can say they pay interest. Now, the willingness to move funds from a big bank to a digital competitor is finally reaching a tipping point.”

This has all sorts of mortgage implications. According to Canadian household survey data, 56 per cent of mortgage borrowers got their loan from the bank that holds their deposits. Lose a customer’s daily chequing account and your odds of getting their mortgage plummet.

Moreover, if deposits walk out the door, banks will be forced to use more wholesale funding, such as mortgage-backed securities, covered bonds, deposit notes, asset-backed commercial paper, and so on, all of which cost drastically more than zero interest deposits. That could eventually narrow the funding gap between big banks and their online mortgage competitors — and that matters, given that funding costs are the number one factor driving loan pricing.

Open banking could also lead to quicker mortgage pre-qualification, applications, and approvals since your data can be shared more easily 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, all within 60 seconds.

Last but not least, open banking portends to reduce fraud by instantly connecting mortgage lenders to unfudgeable financial data.

In short, open banking is a boon to mortgage competition and efficiency.

Now, if we could only get the powers that be in payment processing, banking and regulation to move more quickly. Five years ago, many expected Canada would have open banking by now, but there have been nothing but delays.

“We do not think open banking will be coming in the next couple of years,” RBC Capital Markets banking analyst Darko Mihelic said in a report on Monday. He’s thinking it may take “three to five years.”

Clearly, the establishment is in no rush to move things along, which is about as shocking as finding out banks enjoy profits. But it’s coming, and while the dinosaurs of Canadian banking may not be facing their asteroid moment when it arrives, they’ll at least be forced to try a hell of 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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