The commercial banks are undoubtedly the cornerstone of our financial system with millions of people making deposits, applying for loans and transferring money everyday. Yet there seems to be an open secret, unknown to the consumer, that has the potential to revolutionise the way they bank for years to come. This revolution is Open Banking.
The concept that data has value has been widely established with the rise of ‘Big Data.’ Founded upon this idea is Open Banking, built on the principle that a customer’s financial data belongs to the customer and not the bank. Therefore the customer should be in control of who has access to it and the ways this data is used. If they want to use this data to access new products, get better deals and lower interest rates it is their right to do so. This is done through API (Application Program Interface) technology that allows the customer to securely share their transaction data with an authorised and regulated third party. Open Bank holds the promise of making finances more convenient, better tailored and data driven presenting opportunities for innovation and competition.
Implementation Timeline
Since early 2018, the Australian Government has been working with stakeholders in the banking and financial services industry to adopt Open Banking with the Big Four Banks making data available for some key products from July 1 2020 and full implementation by February 1 2022.
Impact on Financial Services
For financial institutions, open banking presents opportunities and also potential for failure if they fail to embrace and adapt as it becomes reality. With the lowering of barriers to entry into financial services, well established players like the Big Four Banks may fall behind the competition very quickly as start-ups and fintechs emerge. This encourages competition and punishes complacency allowing for innovation. For businesses looking to capitalise on open banking to provide a new service, their solutions will need to be tailored to custom user data, adhere to strict regulatory requirements and be a unique utility that consumers are willing to use.
While it seems open banking will present challenges for the big banks, there will be the offsetting benefit of access to larger profit pools. They have the first mover advantage, making data available before other banks and have the potential to take the lead by delivering innovative products that customers didn’t realise they needed. In this process, a key factor that needs to be considered is the ability to build a seamless process that promises security without sacrificing efficiency.
As open banking becomes more prolific in financial services, they have the opportunity to capitalise on advantages by collaborating with Fintechs and third party firms. Developing an understanding of how this will benefit or impact the bank’s current business model, examining the changes to privacy.
How does Open Banking affect you?
Open banking brings many benefits to people such as convenience and control of financial data however with technology such as this, we can not avoid the issue of data privacy and cybersecurity as it will be closely watched by regulators and governments.
Firstly, let’s focus on the benefits. Its core values are convenience, customer transparency and control. Consumers can conduct bank business from the comfort of their home, instead of spending time to visit the bank. Individuals can pool together multiple bank accounts and see all your transactions in one application, this way it can be easy to view your expenses and cash flows. This assists with business for their bookkeeping and budgeting.
Secondly, when third parties need access to your bank statements for proof, for example if you are applying for a home loan and the bank requires you to see your account transactions, with open banking you just give access to your account without any fuss. This process is convenient while giving you complete control over which accounts to share and once this process is completed, you can stop sharing your account details.
Finally, with small and medium businesses, if they want to get loans quickly, lenders can easily see their bank statements and lend money quicker. A common sentiment among SMEs is that the current models offered by financial services are substandard. The increased competition and transparency in the banking industry may provide cheaper, easier solutions for SMEs to take advantage of in the long term.
Privacy Issues
As open banking relies on sharing data and you might prefer to keep your information private. Hence this leads to the question, is my data safe and secure from potential hackers?
All third parties will first need to be verified through proper authorities (the ACCC or OAIC). To be clear, the financial institutions will not automatically have access to your accounts. They only have access if you opt-in and you can decide what information to provide and for how long. Hence you get to control what the third parties are allowed to see and revoking permission is just as easy as giving permission.
Nevertheless, there are still some loopholes when institutions are given access. This problem will always exist and currently exists with how we do banking. It can only be prevented with strict regulations, independent regulators to check if third parties are abiding by the law and not sharing personal data.
Implementation around the world
Australia is not the first country to implement open banking. The EU and UK have been world leaders in this field, implementing systems in early 2018. Early success stories can be seen in banks across EU and UK with one example being HSBC.
In the UK, Head of Open Banking at HSBC, Hetal Popat has commented that “clearest business cases” for open banking has been to use transaction history to underwrite credit products (eg. loans), further adding that “acceptance rates for loans have materially increased.”
However, considering this is almost an overhaul in banking business, the technical challenges and high investment costs are also non-negligible during the transformation. Commonwealth Bank estimates that the average direct cost of implementing Open Banking in the UK was between 150-200 million GBP per institution, running as high as 300 million GBP for some institutions.
It’s worth noting that these figures do not include ongoing costs such as operating expenses as well as the costs to servicing and supporting customers. Allowing for indirect costs, Commonwealth Bank estimates numbers as high as 500 million GBP.
As we can see open banking will have a significant impact on the financial services industry and consumers. It brings control, transparency and convenience to consumers however the impact on financial institutions are ambiguous depending on how popular the usage is and if the data of bank accounts are protected. Furthermore, Australian institutions have the luxury of learning from the UK and EU in terms of how to become compliant, and the phased implementation gives banks more time to react, plan and set budgets accordingly.
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The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.
