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Open banking ushers in era of greater competition
By John Collett
Competition in the banking sector takes a leap forward today when the "big four" banks start sharing some of their customer data.
The new regime of open banking is meant to clear one of the major obstacles to switching to another credit provider to get a better deal — the inconvenience involved in gathering information, such as transaction histories, to give to a prospective new lender.
You can now elect to share your banking data with prospective new lenders in a process designed to enable you to get a better deal.Credit: Peopleimages
Major banks will make available customer identification data, account data and transactions data — but only if a customer grants express permission for other accredited financial services providers to access it. This makes it easier to manage, compare and switch banking products and services.
Open banking is part of legislation passed by the federal government in 2019 called Consumer Data Right (CDR), which aims to increase competition between major banks, other financial institutions and accredited third parties.
Australia’s banking sector is the first to have the CDR legislation applied to it, but energy and telco providers are expected to follow suit.
Initially, the data sharing is limited to credit cards, debit cards, deposit accounts and transaction accounts.
However, from November 1, the next stage of open banking starts, with the four banks required to share data on mortgages and personal loans, too.
Eventually, smaller banks, credit unions and building societies will share their customer data as well, though they can join open banking earlier if they wish.
One of those smaller players, Regional Australia Bank, has elected to join open banking for personal loans early and will later add other financial services products.
Rob Hale, chief digital officer at Regional Australia Bank, says open banking will make it easier for consumers to shop around for their financial needs.Credit:
The value of open banking was clear from the outset, says Rob Hale, the bank's chief digital officer.
"Customers who have a banking relationship with any of the big four will be able to apply for a personal loan at Regional Australia Bank with far less hassle," Hale says.
"This new ecosystem allows customers to give us permission to do all the heavy lifting for them — ultimately, they will no longer have to source bank statements or justify their expenditure; we can do that for them, with their consent," he says.
Open banking should increase competition and, eventually, make it make easier to switch between the big banks, too.
It is also likely to help foster "risk-based" pricing. This is where a lender, often a fintech, rather than having a single interest rate for everyone who is approved for credit, tailors the rate to an individual.
Rather than paying the interest rate that all those approved for a loan pay, those with very good financial histories and credit records may be offered a particularly competitive rate to reflect the high certainty that the money will be repaid.
The Australian Competition and Consumer Commission (ACCC), which oversees open banking, says it is staging its introduction in part because as it wants to ensure that the process is resilient against cyber-security threats.
Encrypted customer data can only be provided to financial service firms who become accredited data recipients. Along with smaller banks and fintechs, financial product comparison websites and credit bureaus are also expected to join open banking.
Participants must register with the ACCC to ensure that data is shared only between approved participants following strict security protocols.
However, open banking will not necessarily be of benefit to everyone.
Ben King, public affairs manager of comparison site Finder, warns that some consumers who elect to share their data could find themselves worse off.
"If you’ve been regularly dipping into your overdraft or spending a bit too much on eating out, then this will show up in your banking data," King says.
If you share this data with your credit card provider, they might decide to give you a higher interest rate because they are worried that you will be unable to pay your debts each month, he says.