Over the last 12 months there have been a lot of changes in the Australian financial sector. Not only is there currently a large-scale investigation taking place, otherwise known as the Banking Royal Commission, but this year also saw the introduction of comprehensive credit reporting (CCR) and the commencement of financial institutions preparing for open banking. But what exactly is open banking and what does it actually mean for consumers?
What is open banking?
The idea behind open banking is to give consumers more control over their own banking data, with the ability to safely share this with banks or authorised third-party institutions (such as accountants, financial planners, comparison sites and finance apps).
The Government will regulate the initiative, with consumers able to withdraw access to their data at any time.
Open banking will open the door to new application programming interfaces (APIs), which means cross collaboration of technologies to provide a more seamless user experience. Think in-app functionalities similar to watching YouTube videos within messages, so ideally different platforms will be able to access the data of financial institutions to provide a more streamlined digital experience.
Open banking is set to commence with the big four banks in Australia following a timeline set by the Government:
- credit and debit card, deposit and transaction accounts– 1 July 2019
- mortgage data – 1 February 2020
- personal loans and other banking data – 1 July 2020
All remaining banks will have an extra 12 months for each phase.
It has been proposed Authorised deposit-taking institutions (ADIs) will be automatically accredited to receive data under open banking, when this has been requested and approved by the customer. In order to be able to receive customer data, other companies will need to pass a risk-based assessment to become accredited, requiring adherence to appropriate security and privacy standards.
Open banking is already in play in the UK and Europe, with other countries, including the US and Singapore, actively taking steps towards implementing the regime.
Potential benefits for the consumer
The theory is open banking will allow for smoother and faster transitions should you choose to switch providers, and may also speed up the comparison process by giving you a clearer view of your financial history and eligibility. For example, say you chose to switch banks – you could request that your transaction history be shared with your new provider so you can access all data in one place rather than referring to your previous account or printed statements. The faster and smoother processing of data has been touted by challengers in the fintech community as also potentially leading to downward pressure on borrowing costs.
The initiative that complements open banking is the new CCR regime. CCR enables credit providers to access more information about the consumer. The idea is that this should help them form a more comprehensive and balanced assessment of applicants’ credit history when determining eligibility for products such as home loans or credit cards. In tandem, CCR and open banking are powerful reforms for consumers.
One of the more exciting opportunities open banking offers is through its encouragement of competition and innovation within the industry. Consumers will likely have a clearer picture of their financial situation and institutions should be able to make faster, more accurate assessments of customers, ideally leading to more tailored options that provide better value.
Essentially, banks will need to unbundle their services and products and recombine them in a more efficient way to prepare for open banking, which opens opportunities for new business models as technology takes centre stage. This is an exciting concept, but it is a large task.
A recent report by Experian found Australians are the least likely in the Asia Pacific region to share their personal data with businesses. It also found 22% of Australian consumers surveyed would refrain from sharing their data in high-risk environments, such as public WiFi networks, compared to 19% across the region. The recent publicised breaches of privacy, such as the Facebook fiasco this year and database hacks (with large platforms such as Equifax and PageUp), have highlighted the dangers involved in sharing our personal information with online platforms and have understandably led to consumers questioning the safety of their data. Data security is no doubt dominating the thinking and planning of both regulators and financial institutions.
The ACCC is developing the rules for open banking and there is still some way to go before the July 2019 launch to clarify who can use the data and for what, who is liable when things go wrong and how fraud can be managed. Precautions also need to be put in place to ensure the consumer remains in control of their own data.
The phased-in introduction of open banking should hopefully enable banks to design a solid system that will benefit customers while protecting their data. Smaller start-ups will also need to be supported by the regulator via their accreditation, having demonstrated their compliance with security and privacy requirements.
Banking is the first sector to approach this new open system, as part of the Government’s ‘consumer data right’, with energy and telecommunications set to follow suit. It is an exciting prospect and should deliver significant consumer benefit. A steady implementation is the best path to delivering that benefit by protecting the right of Australians to maintain complete control over their data in a secure and safe space. And when it comes to innovation in the sector, I expect this shift will lead to many entrepreneurs and start-ups entering the space to provide more options for consumers, which has to be a good thing.About Steve MickenbeckerSteve Mickenbecker is the Group Executive - Financial Services at Australia’s biggest financial comparison site*, Canstar. He has decades of experience in the finance sector, is a wine connoisseur and is passionate about helping consumers make informed decisions with their personal finances.