Open banking has been regulated or has organically developed in a number of major economies in recent years.
In the UK It was forced upon the nine biggest banks with the promise of increased transparency and competition for customers over a year ago. Today over 100 regulated entities are enrolled in open banking and that number again is in the queue. While transaction volumes are small and many service providers are start-ups, bigger players HSBC, ING, Citibank, Lloyds are active in this new era of mandated customer-centricity.
The development in the US, meanwhile, has occurred more organically through fintechs screen scraping data. While New Zealand, Singapore and Japan, to name a few, have also put in place frameworks for open banking.
Here in Australia, it is set to be phased in from 1 July, with the four major banks obliged to comply and remaining ADIs to follow a year later. This is the first in a series of initiatives to improve consumer rights around the uses of their own data. In this case, customers will determine the sharing of their financial data. Technically speaking, the data is shared via open APIs (application programming interface) to third parties in a machine readable format by the financial institution holding the information. Third parties (brokers, advisers, financial players) need to have or invest in the wherewithal to accept and decipher those API feeds. This is where the innovative early-birds with have an advantage in unlocking the potential of the information on offer.
Yet little is understood about its potential. So what can we expect in July, and in the years to come?
Customer Benefit 1: Control and Choice
Open banking reverses the banks’ stronghold on personal financial information. In the words of Scott Farrell, chairman of the review into it, “Open Banking gives customers a right to direct that the information they already share with their bank be safely shared with others they trust.”
With open banking, the balance of power shifts away from major banks to customers, with opportunities also for innovators (whether its big banks, third parties or start ups) who leverage new found access to personal financial details and use that to build and deliver corresponding financial products to address needs and solve problems.
Practically speaking, banks today have the ability to use insights on existing customers to sell additional higher value financial services such as loans to their existing customer base. But under open banking, customers will have a greater chance to shop around because third parties will be able to use the same customer data as banks to offer competing products.
Customer Benefit 2: Frictionless Funds
Friction and opacity have long been insufferable characteristics of banking. As a result, client “loyalty” (read: inertia) coupled with the cumbersome process of migrating one’s finances, have been contributing factors toward the dominance of the big players.
A future where customers share data held by their banks with other financial institutions or fintechs, and based on the alternative offerings, rates and suitability seamlessly migrate their funds is an intended consequence of this system. This benefit may be some time off in practice, but frictionless portability of term deposits through to mortgages will no doubt soon be demanded by customers.
“Cumbersome processes in qualifying for and opening a new account will hamper achieving the benefits of Open Banking,” said a Review into Open Banking in Australia.
Customer Benefit 3: Centralised Visibility
Australians are likely to have fragmented financial providers across a range of products; home loans, investments, credit cards, superannuation, travel cards, insurances, advice et al may be with an array of companies. Once an aggregation platform is built using the data available in open banking, all products and the related information will be aggregated without a customer having to use a singular service provider for overall visibility.
This potentially creates a more financially aware and empowered society.
“[Open banking] is designed to give customers more control over their information, leading to more choice in their banking and more convenience in managing their money, and resulting in more confidence in the use and value of an asset mostly undiscovered by customers – their data,” the review chairman said.
Customer Benefit 4: Improved Competition
Until now, the share of a customer’s wallet has been easy for incumbents to retain due to the previously mentioned inconvenience of moving assets from one provider to another, in addition to lacking awareness around alternate products in market.
“The opportunity to be offered different products, better products for you, lower prices…” said Scott Farrell.
It has therefore been relatively easy for major players to promote tangential in-house services increasing their share-of-wallet, using their existing client data to inform sales approaches.
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.
Industry Risk 1: Complicated and Clunky I.T.
Open banking is entirely based on APIs and whilst most banks have a patchwork of hundreds of API endpoints internally, their technology infrastructure is highly complex. Many major financial players may not yet have achieved an internal version of an open banking system let alone compatibility across the broader financial industry.
Industry Risk 2: Easy Come Easy Go
On open banking platforms, the customers will have a choice to have their data released to third party firms, who may access this data to offer competing products. Retention and customer communication will be necessary for survival in this new world.
Industry Risk 3: Data Insecurity
In an era where almost weekly data leaks from seemingly reputable companies occur, open banking incites both possibility through improved competition and opportunity and fear of data insecurity for the consumer.
Even with the ACCC building in safeguards, getting the populous to opt in to open banking so a customer’s most sensitive financial data can easily be accessed may be a sticking point.