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Open banking and rise of fintechs to disrupt big banks' 'rivers of gold'
In the not-too-distant future, applying for a mortgage could involve little more than giving your name, email and property address, and your consent to “share” your banking data.
It is good news for consumers, but a potential profit headache for the big banks. And it's not pie in the sky. Applying for a mortgage with a few clicks could be possible in about five years, thanks to a new data-sharing regime due to launch this year, says James Cameron, a partner at venture capital firm Airtree.
“That completely takes the friction out of applying for a mortgage,” he says.
Open banking could take a significant bite out of bank profits in the long term, some analysts say.Credit: Phil Carrick
Known as open banking, the regime will allow customers to securely share the data held by their bank – such as their past income, expenses and debt repayments – with a competitor bank. Sharing could take place with a few clicks of a button, or more likely taps on a smartphone. The new system was due to start in February, but in the week before Christmas it was pushed back until July due to technical hiccups and the need for security testing.
Banks are the test bunnies for a system known as the "consumer data right", which will eventually be rolled out to other industries such as telecommunications and utilities.
Evans and Partners analyst Matthew Wilson cites open banking as one example of how “the rivers of gold in retail banking” are being disrupted. “We believe, in time, open banking will radically change banking and remove legacy rumps of profit,” Wilson said in a recent note.
This ability of customers to share their data is seen as incredibly powerful because it could change a fundamental force that supports the banks’ high profitability: customer inertia.
For all the hostility towards banks in recent years, most people do not dump their lender for a rival. Critics say this allows banks to direct most of their competitive efforts to winning new business, as opposed to giving existing customers the best deal possible.
Wilson has estimated up to 13 per cent of bank profits are at risk because of what open banking could do to mortgage profits, and that banks could lose up to 15 per cent of their low-cost deposits, such as transaction accounts that pay zero interest.
But just how many customers will want to securely “share” their financial data?
The chief investment officer at Atlas Funds Management, Hugh Dive, does not see a huge wave of people ditching their bank, because the scheme won’t remove the other practical hassles of moving banks, such as the need to rearrange direct debit payments.
“I don’t think this results in wholesale switching,” Dive says.
Senior bankers also say there won't be a flood of customers suddenly trying to switch banks once the new regime starts. They expect more of a slow burn.
At the same time, surveys indicate there are a potentially lucrative group of bank customers ready to explore their options through open banking.
A survey from Deloitte this year suggested the sorts of people who are willing to share their data and switch banks are likely to be well-educated, well-paid and tech-savvy.
“They are likely to be valuable as a group to banks,” says Deloitte’s head of open banking Paul Wiebusch.
It’s a risk of which the bank bosses are all too aware.
Enter the rivals
Commonwealth Bank chief executive Matt Comyn acknowledged the potential boost in competition due to new rivals entering the market at a customer forum in November.
“There will be a lot of transparency and competition. And for all financial institutions it is really important that we are able to be both really competitive as well as hopefully provide a great experience for our customers,” Comyn said.
But where might these prime customers go? And how exactly do you “share” your data, anyway?
Commonwealth Bank chief executive Matt Comyn has acknowledged a likely increase in competition when the open banking system starts. Credit: Dean Lewins
In recent years a suite of “neobanks” and other fintech firms have been lining up to pinch a share of the $27 billion a year in big four bank profits. These rivals view open banking as a way to get a foot in the door with customers by promoting deals and offering financial budgeting services.
The Australian Competition and Consumer Commission (ACCC) has in recent months been testing these companies’ technical systems for handling the open banking regime.
One of the companies involved in the testing is a neobank called 86 400. Its chief information officer Brian Parker says people will initially be able to share only a “fairly limited” set of data, though this will grow over time.
He says sharing your data will be a completely digital process that will mostly be completed via smartphones, and will require a customer to give their consent for their data to be shared.
“Once that consent has been provided, then the person that you’ve given that consent to is able to retrieve your data and use it for the intended purpose,” Parker says.
National Australia Bank’s digital offshoot UBank in December gave a further indication of the likely services provided under open banking, saying by next year it would be able to predict customers' spending behaviour.
'Three to four years from now, I would expect there to be a big shift in the big banks’ ability to attract and retain those customers.'
Airtree's James Cameron
UBank’s chief executive at the time, Lee Hatton, said it was fair to say open banking would put some pressure on banks’ profit margins. “It will increase competition,” Hatton said, adding it was ultimately up to customers to decide on the value they were getting.
How many people are willing to share their data will be an interesting test of the public’s trust in a new wave of digital businesses to manage deeply personal financial information.
Dirk Steller, founder of fintech-focused venture capital firm Seed Space, says open banking won’t spark an exodus, but younger clients who are open to buying services digitally are more likely to take it up.
“Open banking is not going to cause a total flood of customers away from traditional banks,” he says.
Even so, he says open banking will allow businesses to develop better customer experiences, and the extra information may mean some customers can get a loan who previously have been denied.
The bottom line is it will also become easier to switch banks, safer borrowers should be able to get a sharper price more easily, and there will be a host of new services, such as budgeting tools.
Airtree’s Cameron says despite this damage to reputations, there is still “a fair amount of trust” in the incumbent banks in mainstream Australia, but open banking will allow competitors to chip away at these strengths.
“Three to four years from now, I would expect there to be a big shift in the big banks’ ability to attract and retain those customers,” says Cameron, whose fund is invested in fintech rivals including Athena Home Loans and Prospa.
There are, of course, big opportunities for the major banks to exploit the new world of data sharing – and they start from a powerful position of incumbency.
But at a time when profitability is already under pressure on many fronts, open banking looks like yet another challenge to the big four’s dominance.
What is open banking?
- Open banking lets consumers elect to share their financial information between banks and fintechs to get a better deal.
- Sharing full financial details lets challenger banks and fintechs onboard clients much more quickly and calculate risk more accurately, so they can offer more competitive products.
What information will be shared?
- Personal customer information, credit and debit account transaction data, information about balances and eventually mortgage account details.
- The timeline for the first stage of open banking, which includes credit and debit data, was slated for February 2020 but has been revised to July 2020.
- There are strict consent guidelines for when a bank can share information and how fintechs store data and this can only be done at a customer’s request.
Who are the main players?
- The big four banks will be the first financial institutions compelled to share data. Eventually smaller banks will also be required to share data.
- Ten fintechs have been selected by the Australian Competition and Consumer Commission to test the systems involved in the policy, including neobank 86 400.
Meet the Neobanks
Most Australian 'neo-banks' do not have physical branches but instead offer online only savings accounts, foreign exchange accounts or mortgages.
Up Bank: Operates under Bendigo and Adelaide Bank and offers fee-free transaction accounts and accounts with interest up to 2.25 per cent
Volt Bank: The first neobank to receive its banking licence. Currently in Beta mode for savings accounts with interest up to 2.15 per cent.
86 400: Has savings and transaction accounts and offers home loans with rates from 3.09 per cent, negotiated through brokers.
Judo Bank: An SME-focused business challenger bank offering loans, lines of credit, business and personal term deposits.
Xinja: Digital banks accounts and debit cards.
Revolut: UK-based challenger with a focus on spending money across multiple currencies with low fees.
Douugh: Accounts linked to a debit Mastercard, with AI features for tracking spending.
with Emma Koehn