With a whimper, Open Banking has arrived in Australia. From today, Australia’s big four banks will begin a pilot program to explore Open Banking’s performance, reliability and security.
For consumers, a mature Open Banking environment will make it possible to switch home loan providers with a few swipes of an app, access account details from several rival banks in one app, and access completely new automated comparison, budgeting and saving tools.
But so far Open Banking schemes have been prone to delay, consumers don’t really know they are happening, and questions remain over large banks’ ability and enthusiasm to open up customers’ data.
Under the new Australian regime, led by the federal government and regulators, banks will be forced to make their customers’ data available to third parties, if the customer so chooses, in a machine-readable way, via APIs.
But banks will also potentially gain access to new data via their rivals and, along with a growing cohort of smaller fintech companies, could use the information to design new services and improve customer experiences.
Open Banking will, according to the government, encourage innovation and spur genuine competition in a financial sector traditionally bereft of it — ultimately benefiting consumers.
Open Banking is also the test case for Australia’s new Consumer Data Right. Although yet to be legislated (the main reason for delay of Open Banking), the CDR will give consumers more access and control of their own data being held by service providers which, the government argues, will empower them to switch providers more easily. After banking, the CDR will be applied to other sectors — including telecommunications, internet, and energy, according to the federal government.
Failure to launch
Australia’s consumer watchdog, the ACCC, will oversee the CDR and the introduction of Open Banking. It has been consulting with industry over the last year on Open Banking along with the CSIRO’s Data61 unit, and has developed legal instruments and draft rules for the scheme.
But the pilot program beginning today actually represents a delay of the new regime which had been slated to begin in earnest from July 1 this year with publicly available data for credit and debit cards, deposit and transaction accounts. The scheme was then planned to be phased in to full completion over the next 12 months with the addition of data on mortgages and remaining products.
The first phase, involving customers’ data, has now essentially been delayed eight months, with the new pilot program taking its place and dealing only with generic product and service data. Under the new timeline, transaction and mortgage data won’t be available until February 2020.
Treasurer Josh Frydenberg quietly announced the setback in the week before Christmas last year, prompting some disappointment from stakeholders. In particular the fintech community, keen to get their hands on financial data — the lifeblood of many of their products and services. Currently many fintechs rely on a less effective, resource-intensive “screen scraping” method to collect financial data.
Incumbents, however, gained valuable extra time to prepare their systems, add additional security measures and potentially work on their own Open Banking-enabled products and services.
The ACCC says the deferral is because the yet to be introduced CDR legislation is a “prerequisite” for Open Banking. And while the regulator has several instruments in place now for Open Banking, it says further lead time is also required to ensure reliability and security.
“In December 2018, when the commencement was deferred, timing on implementations steps including the ACCC’s procurement and build of the register for accredited third parties was becoming very tight and importantly the CDR bill had not been introduced into Parliament,” an ACCC spokesperson told Which-50.
The regulator said it remains confident the CDR regime will be ready for the new February 2020 deadline “but there is still a lot for us to do” and passage of the CDR legislation remains a key step.
The government ran out of time to introduce the legislation when it had initially planned to late last year, in a sitting week that included its controversial encryption laws. The Morrison government is now expected to introduce the legislation in July or August and has warned banks to be ready for the new deadline.
But banks are reportedly requesting even more time, according to the Australian Financial Review, with some even having slowed their preparations in the belief a Labor election victory was assured and CDR legislation would subsequently be redrafted.
Asked whether the big four banks had been proactive in their engagement with the regulator on Open Banking, the ACCC gave the following response:
“The ACCC has been regularly meeting and consulting with relevant parties for the process of developing the Consumer Data Right framework, of which Open Banking is the first step. The banks have played an important role in that process.”
Australia’s biggest banks have all said they welcome Open Banking, but did flag several concerns around undue cost, security, and the technology upgrades it would require when a review was conducted in 2017.
Critics of the banks have argued they are dragging their heels in favour of short-term profits, and to maintain one of their key advantages: a trove of consumer and financial data, holding more agile fintechs at bay for as long as possible.
An Open Banking environment will make it easier to compare providers and switch, a threat to the incumbents’ traditional “stickiness”. Research conducted by UTS in 2016 UTS [pdf] found that only 30 per cent of Australians had changed home loan providers during the previous five years — a market the big four dominates.
But several experts have told Which-50 that Open Banking presents a golden opportunity for incumbents to cement their position, provided they can deliver the new services themselves through whitelabeling, strategic partnerships and in-house development — providing the same services fintechs and neo-banks are clamouring to develop, but under the incumbents’ own brand. They also stand to benefit from the newly free data.
For example, in the UK, where Open Banking has been in full swing for 18 months, HSBC has developed an app allowing customers to see all their accounts in one place, including accounts from rival banks. The incumbent’s app includes expense tracking and budgeting tools, and within a year had 300,000 registered users.
Dr Rob Nicholls, a senior lecturer at the UNSW Business School who has been monitoring Open Banking for several years, says the scheme’s delay in Australia was “inevitable” because of this year’s election and the parliamentary timetable which flowed from it — Parliament held few sittings this hear in the lead up to the election and none since.
“A minority government without control of the upper house was always going to have issues [passing legislation],” Nicholls told Which-50. He says it is too early to say how successful the scheme will be in Australia, but expects it will eventually improve competition and consumer experience.
“I think that we need to see the effects of the roll out before looking for improvements. I am sure that the initial offering will not be perfect.”
Indeed, Australia is not alone in its shaky beginning to Open Banking. In the UK, where Open Banking has been in place for 18 months, incumbents struggled to be ready in time. While four of the UK’s largest banks were ready, the competition watchdog publicly chided five others for failing to meet the implementation deadline.
“While we are aware that the Open Banking programme has ambitious and challenging timescales, it is disappointing that some banks have needed more time to deliver some important new Open Banking functionality to their customers,” The Competition and Markets Authority said.
The CMA says the scheme is gaining momentum in the UK. The local fintech community is also bullish about the early impact on competition and innovation. However, research suggests uptake and awareness is still low.
A survey of 2000 UK consumers in January found that, one year in, only one in four people had heard of Open Banking, and only one in five of those people said they knew what it entailed. Just nine per cent of consumers were actually using an Open Banking service, according to the poll.
Nichols says even if Australia has a similarly slow adoption rate initially, banks will still have to respond to Open Banking.
“It is … likely that the customers who are early adopters are valuable to the incumbent banks. As a consequence, even if the adoption rate is low, the competitive response is likely to be significant.”
That is the policy intent of CDR, Nichols says, and will lead to better consumer outcomes.
“At a minimum, I would expect banks to consider the internal question ‘what if the top one per cent of customers by net revenue used Open Banking to switch?’. An appropriate response would be to improve existing products and services to minimise switch.
“This is a good consumer outcome and a good outcome for the bank in terms of minimising retention and acquisition costs.”
Waiting in the wings
The UK experience has shown Open Banking needs support and promotion if it is to be fully leveraged, according to Rebecca Schot-Guppy, General Manager of FinTech Australia.
Schot-Guppy told Which-50 a healthy maturity rate is key if consumers are to enjoy more competition, transparency, and a greater understanding of their financial position.
“The rollout of Open Banking and the Consumer Data Right has been a slow process. Since being announced in August last year, it’s been delayed, debated and politicised. [But] there’s no one group that’s responsible for this, as it’s a policy that impacts a vast amount of stakeholders.
“However, we are happy that despite all of the debate on the issue, Open Banking is finally being piloted with an expected rollout of February next year.”
The delay means some Australian fintechs are left with little more to do than wait, Schot-Guppy says, with business models built on an Open Banking ecosystem and the data that comes with it. When Open Banking does arrive in full she said she’s confident it will lead to more growth and innovation.
“We expect fintechs will create new products and services off the back of it. Many have policies and practices in place to support it and we expect a lot more to leverage the data available to them as a result of the program.”
According to Nichols, If incumbent banks are proactive on Open Banking and are serious about customer experience by identifying and addressing the poor value products which leads to customers looking elsewhere, many fintechs may never get a real chance.
“If the current big banks respond by improving their value propositions, then there will be little room for intermediaries,” Nichols says.
“However, if they do not, there is likely to be switching to smaller financial institutions and this switching will be facilitated by fintech and bigtech players arbitraging incumbent complacency. However, I think that the Hayne Royal Commission has fundamentally changed the customer focus of the larger banks and Open Banking provides an opportunity for them to demonstrate this change.”
How are the big four preparing?
Which-50 contacted each of Australia’s big four banks and asked them what they had done to prepare. Apart from NAB, which did not respond to the questions, all of the major banks said they had been working closely with regulators and developing the necessary technology.
“We have worked hard with regulators and other industry participants to ensure the Consumer Data Right regime will be successful, particularly in building consumer trust and confidence around the use and exchange of their data,” said the Commonwealth Bank of Australia’s General Manager Digital Banking, Kate Crous.
“For consumers, data-driven innovation enabled by the CDR will deliver new services, increase transparency and provide more choice among financial products. When the telecommunications and energy sectors are brought into the CDR regime, the possibilities are so much greater for consumers to optimise the way they spend and save.”
Crous gave the example of a mature CDR scheme allowing companies to help consumers analyse energy consumption data and recommend ways to reduce cost like solar panels. She said the same company could then “seamlessly” help finance the purchase.
“For us, it will provide an opportunity to continue to innovate, and focus on improving the financial wellbeing of our customers through digital channels.”
An ANZ spokesperson said the bank has “dedicated substantial resources to develop an offering that complies with all the relevant rules and technical standards”.
The spokesperson said when the regime matures customers could expect “swifter loan applications and digital experiences linking together accounts from a number of banking providers”.
Westpac said its development teams had been working on functionality to report on product information via APIs, which is required from today. The bank said under a more developed scheme customers can expect improved access and management tools and it expects Open Banking to stimulate innovation and competition in the sector.
“With greater transparency and more personalised services, consumers will have more ways to find, compare and choose products that are best suited to their individual needs,” a Westpac spokeswoman said.
“Realising the benefits of Open Banking will depend on the level of confidence that customers have in the platform, and the readiness of businesses to grasp the opportunities and innovations it creates.”
While the banks have legitimate concerns about security, trust and technology, they have also had ample notice on Open Banking, including a bonus eight months to prepare for the most important part of the roll out: consumer data.
Other jurisdictions have shown Open Banking creates plenty of opportunities for all players. Who takes those opportunities in Australia remains to be seen.