Under closed model banking, each financial institution retains and controls the information it collects about its customers. If you want to switch banking institutions, it’s costly, difficult and time-consuming to access/consolidate your financial data.
On the 1st of July 2019, the Government rolled out regulatory reforms to establish a ‘Consumer Data Right’, known as ‘open banking’. These reforms allow for greater control and free access to the data that banks and financial institutions hold. Mortgage information will be available by the 1st of February 2020 and personal loans/all other banking data from the 1st of July 2020.
The Big Four banks – Commonwealth Bank, NAB, ANZ and Westpac – are now required to allow customers to access their own data and enable the sharing of this data to a third party. You have the option to direct your data via an application programming interface (API) to other financial institutions, such as Fintechs and other banks, who you can give access to look at your financial data in real-time. The information available for sharing includes; transaction history, credit card data, spending and deposit history. Also, small businesses now have access to all of their financial data, transactions & loan applications.
What’s the impact of open banking?
Open banking creates more competition in the banking sector. This is due to consumers having access to their data, making it easier to swap banks. Access to this information is useful to prove your creditworthiness and make the admin process more efficient.
As it rolls out through Australia, banking will ultimately become more transparent, giving you a more extensive choice of products and lowering the costs of applying for finance.
It will also encourage new product development and the emergence of disruptive digitised players, i.e. Fintechs, who will be able to compete at a broader level. Fintechs are online financial lenders, who provide quick and easy loans without the rigorous compliance and infrastructure banks are required to maintain.
Tech innovations will arise, such as the development of apps, to better manage multiple bank accounts for businesses. Accounting will also become more streamlined and efficient for small businesses using accounting software apps (MYOB, XERO, etc.) with this increased accessibility.
We can expect a similar adoption of open banking in Australia as happened in the UK, a slow burn, rather than a bang. Fintechs will grow in popularity and will likely become major players in business finance. Global credit rating agency Moodys suggested it could intensify competition between lenders and result in lower interest rates. We should see banks themselves offer better deals for customers, more personalised service and a broader diversity of products available.
With open banking, there is a greater need to protect sensitive or vulnerable transactional data, so we must make sure we have the appropriate security controls in place from the start to generate customer confidence in the system. However, transparent and open banking is now accepted as the best way forward for customers and tech innovation.