Open banking is taking a long time to get going. Whilst 1st July was a milestone, in that a “pilot program” was launched with the four major banks (ANZ, CBA, NAB and Westpac) to test the performance, reliability and security of the Open Banking system, the Government issued a media release announcing a revised implementation timeline. Open Banking would now properly commence on 1 February 2020 instead of 1 July 2019. (A handy summary and visual of the revised timeline from Elizabeth Barry at Finder.com can be found here.) It’s not that surprising that the Big 4 are not in a hurry; open banking has the potential to a) increase competition in banking and b) make it a lot easier for customers to switch banks, a double whammy they might not be that keen on….
Banking is going to open….slowly
However, a slow roll out is something we might well expect based on the UK experience. Whilst the promise seems radical, testing and deploying open banking will take time. In the UK there are limited use cases. As Finextra reported in January in ‘Open banking year one’: “despite the UK’s nine biggest current account providers being told to launch their Open Banking initiatives by the 13th January 2018, only four of that group . . .were ready on the due date:.”
The revised Payment Services Directive, aka PSD2, the European equivalent, was also slow; as Banking Tech reports :“The 14 March deadline arrived with a significant percentage failing to comply. A survey of 442 European banks across ten countries found that fewer than six in ten (59%) had completed the work in time.”
Open banking is evolution not revolution
Whilst the dragging of feet by big banks and significant technical challenges are bound to mean it doesn’t happen overnight, there is also likely (based on the UK precedent) to be slow adoption amongst consumers. Research from Splendid Unlimited revealed that while 90% of adults in the UK have used an app or service that uses APIs, only 22% have heard of Open Banking as a concept. When asked to describe open banking in their own words, the top two responses in Splendid’s survey were “banks sharing your information” and “all accounts in one place”. Beyond this, understanding of the rules was hazy. Despite safe data sharing, respondents were also cynical that open banking was more self serving for finance companies than beneficial to customers. However, at Xinja we ARE excited as it DOES have the potential to empower and benefit the customer; as Leda Glyptis from 11:FS puts it:
“But Open Banking is still a big deal. It marks the end of an era and the start of a brave new world. Fortress mentalities have been consigned to the dustbin and now the consumer comes first whether we like it or not. The revolution is here, it’s just slow”
– Dr Leda Glyptis
So what is the big opportunity for customers?
Part of the open data movement: Open banking is the first cab off the rank in the open data movement. And this marks the shift of control of customers’ data from institutions to the customers themselves, and significantly increases the possibilities for customers of benefiting from their own data. As such it is partly an implementation of the Consumer Data Right (CDR) which is what is driving open banking forward, and will have wider implications. Consumers will have an instant right to the banking data held on them and ability to share that with whomever they give consent for access to. The current intent is that this would be reciprocal, so once data access is granted to, for example, Apple, Facebook iSelect then customers should be able to request data from these accredited recipients as well as the banks.
Better credit decisions: Comprehensive Credit Reporting (or CCR) legislation (which came into effect in March 2019) is both a first step and a key benefit of open banking. The open banking infrastructure will allow banks to (easily) look at far more data on a customer in making a credit decision than used previously, which paves the way for fairer decisions and potentially access to credit for those who have been more invisible to traditional credit assessment methods.
Easy switching & moving: Customers will be able to switch to other banks or financial service providers safely and easily, pretty much ‘swiping’ to allow the necessary transfer of data/access to apply for or open a new account. A lot of focus has been on the fact that it will be easy to switch bank accounts, but this is only part of it. It’s more – as Lyndsey Douglas calls it in an excellent summary in Which – ‘Frictionless Funds’; the ability to shift money across and between different accounts and financial vehicles so to much more easily optimise your financial position.
More competition: One of the biggest barriers to competition in banking has been inertia caused by the fact that moving to a new institution is onerous. Obviously, the new portability will remove that barrier, and this benefits customers in several ways. Firstly, less headache if they do want to move. Secondly, they’ll be exposed to alternative offers, products and services from those they’re sharing their data with which might be more favourable than those typically cross sold by their main bank – as Lyndsey Douglas puts it:
“With open banking systems in play, bank A will have to share a customer’s financial data with bank B or financial adviser C at the customer’s request. Giving bank B and financial adviser C the opportunity to offer products and services that may ultimately take business from bank A.”
-Lyndsey Douglas, Which-50
And thirdly, the increased competition will generate what at Xinja we call ‘the race to the top’. As customers become more exposed to other opportunities and can select them more easily, the banks will have to offer better and better services to keep or acquire customers, raising the bar across the board.
Hyper personalised service: And these improvements are likely to move beyond basic product attributes, such as rates or specific features. Where banks will start to compete more will be around the potential services derived from the customers’ data. And in particular, the view of that data that allows banking and other apps to highlight opportunities for making adjustments – by moving money around or changing to new products – that will incrementally improve a customer’s position. As Samantha Seaton of Moneyhub says in The Financial Times:
“[the changes] will empower . . .consumers . . .to achieve greater financial well being.”
Marketplaces: Going beyond simply aggregation of existing accounts in one place, open banking will also allow the development of ‘marketplaces’ where banks have integrated with multiple services that provide added value to the customer – sometimes at a discounted rate. Again, the customer data can be used to proffer the most relevant service at the most competitive price. Starling Bank in the UK has already developed such a marketplace to the extent of integrating with a pensions (superannuation)app, an online home loan broker, a travel insurance company and investment apps.
So what are the obstacles to open banking?
Apart from the larger banks being reluctant, and consumers unaware, there are a lot of things to work through if Australia is to make open banking successful.
Security concerns: One of the things that will make customers nervous is rising concerns over data security – should they grant access? The irony here is that there is plenty of financial data sharing already happening, in a way that is far less secure than open banking. Many existing fintech apps – that help people with tracking and analysing their spend or provide specific savings or investment facilities for example – do so by asking the customer to effectively handover their online banking login details. However this is managed, encrypted and however momentary the lookup, this is still a far more risky approach than open banking, which is designed precisely to make this data sharing safe. This is something that banks will need to explain clearly to customers if they are to be reassured – that they need to understand whether they are going through an accredited open banking or some other process. Also, the question is, whether the banks will be able to implement the CDR cost effectively, or will ‘screen scraping’ as it’s called persist as a preference because it’s so much cheaper to implement. And if there are data breaches by a third party with whom data has been shared, how will they be managed?
Consent management: Allied to security is consent management. With whom have I shared my data? How do I easily manage that? And how will the banks and other institutions or companies manage consent effectively on their side? Is there a role for third party services, such as data wallets, in the process and to allow customers to keep track? Xinja made a recommendation early on in its submission to the government on open banking that there be a national register or record that consumers can use.
Direct debits: Whilst switching bank accounts will be easy, direct debits WON’T be switched automatically, which is a large part of the headache of moving in the first place. So until there is a re-routing solution in place, this could seriously hamper adoption.
Accreditation: All parties – both the banks and any companies that are recipients of the data – will need to be accredited. This labelling will need to be made loud and clear to build customer confidence, but how can we ensure that both smaller and larger players are treated fairly, and how do we make sure that banks are not disadvantaged vs other fintechs, who have less compliance restrictions when it comes do holding data off shore?
But let’s embrace the data sharing revolution
So, there’s a lot for banks, the government and other companies to do on the supply side, and there’s a lot for consumers to understand on the demand side. However at Xinja we believe these challenges can be overcome and we intend to be part of the solutions. We also believe that safe data sharing opens the door for new innovation that will create new value not available to customers today, with the same safeguards. At Xinja, we spend time thinking: How do we use customer data to add more value back to the customer? Beyond switching, how do we improve access to financial services and other products, that create new value for them? How can we personalise services in their interests? In their comprehensive article on Open Banking, Mozo rightly name it:
“Open banking: The data sharing revolution set to save everyday Aussies time and money” -Mozo
The proof is in the win-win
The value of the data economy is a function of how many people participate in it – how much benefit they see, how easy it is for them to use it. For open banking to succeed banks we will need to build trust and educate customers on the safety of their data — and to prove that by sharing this information it delivers them value.
If we get it right, we can set Australia up for more than just a data sharing economy. Data is the foundation of AI – and the more data we can share, the better the quality and value of our future AI possibilities. The faster we get to a critical mass of data, the faster we’ll be able to make new experiences more available to more people, building their confidence, building the data further, and developing an ever increasing level of value-added services for customers. Like we said – ‘the race to the top’. Let’s go!