Open banking is coming, and it could save you money
Open banking is being
phased in from July 2019, making it easier for you to switch banks and get a
better deal. It could even result in fintechs being a more viable option for
you over a traditional bank.
But what is open
banking exactly, how much control will it give you over your own data, and what
are banks doing about potential privacy issues?
What is open
banking?
You might not be
familiar with the terms 'open data' or 'open banking'. They relate to another
concept most Australians might not have heard of – the Consumer Data Right.
The issue of who owns
a consumer's data – the consumer or the organisation that collected it – has
long been a legal grey area. In early 2017 the Productivity Commission released
a report recommending the federal government introduce a Consumer Data Right
(CDR) to "improve consumer control over the data which businesses hold
about consumers' use of their products and services".
The CDR gives
Australians the right to move their data around, making it easier to access
your data – such as the financial information your bank has on you – and share
this with other businesses. This open data environment is expected to ramp up
competition and allow consumers to negotiate better deals and save money.
Australia's banking
sector will be the first application of the CDR. But where open data is
accessible to anyone, open banking only lets businesses access your data once
you've authorised it. Open banking is being phased in from 1 July 2019, with
the energy and telecommunications sectors likely to follow.
Will open banking save me money?
While the inner
workings of open banking may seem dull to some, the real-world consequences are
anything but. When launching the report he commissioned, then-Treasurer Scott
Morrison said, "Open banking will revolutionise the financial services
sector, completely transforming the way Australians interact with the banking
system by giving consumers the right to share their data with other banks,
other institutions and innovative fintechs, and get themselves a better deal.
"Granting
third-party access to your data will allow rival providers to offer competitive
deals, products that are tailored to your needs, and enhanced services that
meet the customers where they are at. Banks won't be able to afford to take
customers for granted, and lock other competitors out."
Let's break those
comments down and look at the upsides of open banking.
Open banking could
make it easier to switch banks
It's no coincidence
that the CDR is first being applied to the banking sector, with the energy and
telecommunications sectors next on the list. As we've long argued, banks (and
energy and telecommunication companies) have been able to make big profits while
providing poor service to consumers.
Granted, consumers
have the option of switching banks. But they rarely do this as it's a
time-consuming inconvenience. And given that banks constitute a "cosy"
oligopoly, according to ACCC chair Rod Sims, there's little reason to expect
that one big bank will treat its customers better than its competitors.
The move to an
open-data environment won't make switching banks completely frictionless. But
as Morrison notes, "This disruption to the major bank stronghold on data
will make the process of switching between banks less painful and help overcome
the 'hassle factor' that sees customers stay with their current bank even when
there are better deals."
Open banking could
help you get a better deal
Of course, switching
banks only makes sense if there's a better deal on offer. This is where the
open banking rubber hits the road.
Let's say you're
shopping around for a credit card, mortgage or small business loan. Currently,
any financial institution you're not a customer of has to make judgements about
the likelihood of you repaying your debt on limited data (typically your credit
score and whatever information it can easily gather about your income and
outgoings). This data may impact the terms offered. But it's often the case
that consumers are offered off-the-shelf financial products, such as credit
cards, with set terms on a take-it-or-leave-it basis.
Once open banking is
introduced, you can authorise any accredited entity to access comprehensive
data from your current bank. If this data indicates, for example, that you're
conscientious about living within your means and paying your bills, it's more
likely you'll be offered a better deal (e.g. a lower interest rate) on your
credit card, mortgage or small business loan. However, while data driven
pricing might work well for some it is likely to see some people, particularly
those who are already vulnerable, paying more. Success also relies on data
transparency which isn't guaranteed.
In the UK, where the
open banking revolution is already well underway, consumers can upload their
personal financial data to banks, comparison websites, apps and fintechs. This
makes it straightforward to compare what different financial institutions have
to offer, then get a loan or credit card approved on the basis of the supplied
data.
What open banking
will mean for fintechs
Open banking is
designed in part to remove the 'informational advantage' the big banks have
over disruptive fintech start-ups.
Let's consider the
example of credit cards, to illustrate how open banking could have a profound
impact on many Australians' finances.
At a time when cash
rates are close to zero, even the low-rate
credit cards on offer in Australia charge 9–14% interest and rates of
15–21% aren't uncommon. While there are many credit cards available, around 80%
of the market is controlled by the major banks.
The banks argue they
need to charge high interest rates because credit cards are unsecured lending
(i.e. there's no collateral offered) and a proportion of credit-card users
don't repay their debts.
But what if fintechs
could efficiently access a consumer's financial data? They could then easily
determine if that consumer was a good credit risk. If so, they could,
theoretically at least, offer that consumer credit at a much lower cost than
the big players, while still making a healthy profit. (Admittedly, Australian
fintechs have thus far concentrated on providing lending and payment platforms,
but fintechs in other countries are starting to disrupt consumer lending.)
Fintechs such as ZipPay and Afterpay are
already providing shoppers with low-cost credit (as long as the required
repayments are made) to make retail purchases. However, consumer advocates –
including CHOICE – are warning people about the debt traps that these products
can pose. Aside from these products, there are also growing numbers of
peer-to-peer-lending fintechs such as RateSetter and SocietyOne that
are looking to cut out the banker middleman and connect people who need a loan
with people with spare funds. Prospa is
giving small businesses short-term loans of up to $250,000 after completing a
brief online application. Both existing and future fintechs will benefit hugely
from the level playing field an open-data regime facilitates.
Of course, the
services fintechs offer have their pros and cons, just like the ones offered by
established lenders. Peer-to-peer lending, for example, has run into
predictable problems in places such as the UK and China, with lenders
defaulting on loans and platforms shutting down before investors could get
their money out.
How much control do I have over my data?
Open banking is based
on four key principles, the first of which is, "It should be for the
consumer, be about the consumer, and be seen from the consumer's
perspective". (The other three principles are to encourage competition,
create opportunities and be efficient and fair.)
This means that unless
you provide explicit consent, your bank can't share your data with any other
business. But you can direct your bank to share your data with any organisation
or business you nominate, even if it's a direct competitor of your current
bank.
As things currently
stand, there are likely to be two caveats. First, only accredited businesses
will be able to receive (or share) your data, though you can download your data
and share it with a non-accredited entity such as your accountant. Second,
while your bank has to share your 'raw' data, it doesn't have to share any
insights and analysis it has gleaned from this data (though it may choose to do
so).
Will open banking compromise data protection
and privacy?
As Australians'
financial data starts flying around cyberspace in larger volumes, there will
inevitably be more scope for breaches, frauds and scams. But banks have always
invested heavily in cybersecurity, and the government bodies charged with
overseeing the introduction of open banking are alert to potential issues. In
the UK, open banking has been in place since January with no major issues. That
said, relatively few Brits have embraced it so far, limiting the opportunities
for malicious acts.
Reducing the risk
of data breaches
Some of the
risk-mitigating initiatives that have been or soon will be introduced are:
- The introduction of transfer, security and
data standards via a newly created Data Standards Body. (Declaration of
interest: CHOICE's Head of New Things, Viveka Weiley, is on the Data
Standards Body Advisory Committee.)
- The provision of "significant
resourcing" to this Data Standards Body, along with the Australian
Competition and Consumer Commission (ACCC) and Office of the Australian
Information Commissioner (OAIC). This funding will "ensure a high
level of privacy and information security protections".
- The requirement that all entities that
receive and send data be accredited. The ACCC and OAIC will set the
accreditation criteria, which will include privacy and information
security requirements.
- Data will likely be shared using an
Application Programming Interface (API). APIs are championed by experts as
the most efficient and secure way to share data with third parties.
The open banking
changes won't be complete until mid-2021. According to research undertaken by
Accenture, Australians are wary of sharing their financial data with third
parties.
Given the way they're
being introduced and the low levels of public awareness, it's unlikely the open
banking reforms will have an immediate 'big bang' impact in mid-2019. However,
over time, open banking could shift the balance of power from banks to their
customers. As Westpac CEO Brian Hartzer says, "It gives customers more
control as to who is providing services and to compare products and make sure
they are happy with the choices they make. More availability of information
will help drive efficiency and innovation."