Impacts of the Open Banking initiative to the Banking sector in Australia
Introduction
The Banking sector is the most important sector for Australia’s economy. It contributes around $140 billion to GDP over the last year and the sector has been dominated by the “Big 4” major banks (The Treasury A).
Consumer Data Rights (CDR) bill was introduced in the budget 2017 and it was passed by Parliament on 1st of August this year (Kehoe 2019). CDR gives consumers the right to share their banking data and the ability to share them with third parties. The bill will first apply to the banking sector and follow by energy and telecommunication sectors.
Open Banking is a term used for the implementation of CDR in the banking sector (Hamilton 2019). It is referred to the use of Application Programming Interfaces (APIs) exposed by the banks and enables third parties to build applications and services using the APIs. According to Hamilton (2019), the Open Banking initiative comprises of three key elements:
1. Customers are having greater access to and control over their banking data.
2. Banks are being required to share product and customer data with customers and
3. With the consent obtained from the customer, banks being required to share product and customer data with accredited third parties (accredited by the Australian Competition and Consumer Commission (ACCC) ).
The Open Banking initiative is currently in the pilot phase. The four major banks had already shared the product data via API on 1st of July 2019 with the expectation that they will share customer and account details no later than February 2020. All remaining banks will be required to implement Open Banking with a 12-month delay on timelines compared to the major banks (The Treasury B).
This paper discusses factors and current challenges that drive the Open Banking initiative and the opportunities that the initiative will be created. The paper will also discuss the implementation issues and how this initiative will have a profound impact on the Banking sector in Australia.
Factors and Challenges
There are many factors and challenges that drive innovation in the Banking sector. This section will focus on the factors and challenges that led the Government to introduce the Open Banking initiative.
“Closed” data
One of the main challenges is to allow customer has the right to share their financial data with other banks or third parties. Traditionally, the bank is unwilling to share their customer data due to fear that their customer might switch to other banks. However, according to the Lyer (2019), these data should belong to customers, and they should have the right to share their financial data. By allowing customers to have the rights to share their financial data, third parties or Fintech will create innovative financial products that tailor the needs for the customer.
Screen Scaping
The current mechanism to exchange customer data between the bank is unsafe or require a high cost to maintain. Currently, “screen scraping” technology is used to allow customers to share their financial data in other application (Deloitte 2019A). In this scenario, customers will provide their internet banking access to the third party companies and so these companies will then be able to logon into the bank’s internet portal on behalf of the customer. Once they have logged on successfully, they can then “screen scraping” their financial data such transaction details of their accounts. However, this technology is less effective as it takes a long time to scrape large datasets from the screen. The ‘screen scraping’ also depends on the bank’s internal portal. A small change on the internet portal would create an issue for the screen scraping tools that use by the third party companies. It is also less secure as the customers need to provide their logon details to third party companies. Hence, those companies might be able gain access to other protected information for the customers.
Losing Trust
Customers are also losing trust the Bank’s ability to protect their financial data. The findings from Royal Commission and a series of the scandal uncovered AUSTRAC result in decreasing consumer trust to their banks. The recent survey conducted by the Australian Financial Review (Eyers 2018) shown the 29% of customers are less willing to share personal data than they were size month ago. This breakdown of the trust will have a significant impact on the data innovation within the Banking sector as the customer will seek other alternatives (ie. Fintech, nano banks) to manage their financial assets.
Opportunities
This section discusses the opportunities the will be created as part of the Open Banking initiative.
New Digital Products / Services
With customers’ consents, the banks are now required to share their financial data with other third parties. Other companies will be able to leverage the data which are exposed to the banks’ Open APIs and create applications to tailor customers’ needs. For example, a third party can create an app which aggregates customer’s account details from other banks in a single view (Choudhry & Premchand 2018). Also, as mentioned by Omarini (2019), HSBC in UK had also provided an aggerated feature to allow their customers at up to 21 different banks in one place. The data shared by the banks will allow other third parties to provide more innovative offerings and results increase in competition within the Banking sector.
Provide Partnership Opportunities
This initiative also provides the banks to enhance their product offering. The banks can partner with third parties to create and enhance their products and services more easily (Choudhry & Premchand 2018). For example, the bank can enhance their home loan services offering by partnering with property selling website like Domains.com.au. It creates a new channel and a new revenue line. It also allows third parties to access the banks’ data easier using standard Open APIs, which allows faster time to have the new service offer to the market.
Better customer insights
With more customer data are available, the banks can use these additional customer data to enhance the existing processes. As mentioned by Muir (2019), one of the use cases is to leverage the additional customer data dataset to enhance credit scores across the personal, business and home loan applications. The whitepaper from Deloitte (2019B) also discussed to use these additional customer datasets to get a better understanding of the customer behaviour such as better understanding when the customers wish to switch to other banks as well as the providing better pricing and risk models. The banks can now use the additional data to get more insights to improve their customer services as well as simplify the existing processes to meet their customers’ needs.
Improve Fraud detection and compliance
Besides that, the open bank initiative will also improve data quality. According to Deloitte (2018), improving the quality of data means the bank will have more quality data to drive the compliance and regulatory reporting. For example improve customer screening, sanctions and Knowledge Your Customer (KYC) activities to meet the Anti Money Laundering ‘s regulatory requirements by using the Open APIs to retrieve customer’s financial data from other banks (Deloitte 2019B). The banks will have a better understanding of their customers and resulting in driving the quality of their compliance obligations.
Customer-centric products/services
The Open Banking initiative will also allow customers to have a better understanding of what other banks are offered. According to The Treasury (2017), the Government expects that “Such data sharing will improve transparency of product information, and facilitate comparison services that enable a customer to use price data, and data about their own spending and transactions, to choose products that are most appropriate for their personal or business circumstances and facilitate switching from one provider to another.” It will result in an increase in competition within the banking sector.
Implementation Issues
Customer trust
One of the issues is to gain customers’ trust to share their financial data with third parties. The Banking sector is a heavily regulated environment, and the Banking code of practice (ABA 2019) provides a set of guidelines on how to handle customer data in a secure manner. The Open Banking initiative must ensure similar “banking grade” security restrictions applied to the third parties when they have obtained the customer data via Open APIs.
Customer awareness
Besides that, a lack of customer awareness will slow the adaption rate. Using Open Banking UK as an example, after one year introduces Open Banking in UK, 72% of UK adults had never heard of Open Banking (Carey 2019). The Open Banking initiative must invest in educating the customer the benefits of sharing their customer data to ensure the customer is willing to provide their consent to share their data with third parties.
IT infrastructure uplift
Banks must commit to investing their internal systems and infrastructures uplift to support Open Banking initiative. As the data is shared through Open APIs, it represents new attack vector for a hacker (Choudhry & Premchand 2018), and so the banks would need to uplift their systems to ensure they can share the data securely.
Digital Only
Another issue is that customer data available for the Open Banking initiative will be only available through a digital medium. The customers who do not digital applications will be missed out from the initiative.
Impacts on the sector
Open Banking will have a profound impact on the banking sector and potentially change the way how the banking sector work.
With customers’ consents, the banks are required to share customer’s financial data with third parties. The data will allow third parties to create innovative products and services, resulting increase in competition within the Banking sector. The banks can also use these additional shared data to tailor more personalised products and services and hence to improve customer satisfaction.
Besides that, this initiative will also have a significant impact on the existing processes within the banks. As the banks will be able to gather more information about the customer via the Open APIs, these additional dataset can be used to improve the quality of data for their customer and hence driving more compliance such as KYC as well as more accurately to calculate the credit risk scores for a customer who is applying for a loan application.
Conclusion
The rationale behind the Open Banking initiative is to allow customers to take control of their financial data which previously owned by the banks. It increases the competition and generates tremendous opportunities where the third parties or Fintech companies would be able to provide more innovative products. It allows the banks to re-invent the way they add value to their banking products. By allow customers to share their financial data with third parties, they will be able to find the products that suit their needs and make them more easily switch to better products. The data privacy and security, as well as customer education of the Open Banking will be critical factors to determine the adoption of the Open Banking in the next few years.
References
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