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Open banking

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It’s being heralded as the biggest change to banking since the advent of the Internet. Pundits claim it will give power to the people by enabling them to digitally access and securely share their bank transaction data. This will empower customers to seek out better and cheaper financial products.

Open banking has the potential to revolutionise the way we manage our money. It will force banks to open their customer data to third-parties - via secure data sharing mechanisms called APIs. This will provide consumers with more choice on how they transact, save, borrow, lend and invest their money.

An API - Application Processing Interface - is a piece of software that allows different computer systems to connect. In the case of open banking, APIs will provide a standardised way for banks to store their data so that licensed third-parties can access it. Think of it like a single filing system for everyone to use. APIs will enable third-party developers to build helpful services and tools that customers can utilize.

Last year, the UK government announced its support for open banking. This followed a 2016 report prepared by the government’s Competition and Markets Authority which concluded that “…older and larger banks do not have to compete hard enough for customers’ business, and smaller and newer banks find it difficult to grow. This means that many people are paying more than they should and are not benefiting from new services”.

The Competition and Markets Authority recommended that all UK banks be required to implement open banking by early 2018, saying that it:

will enable personal customers and small businesses to share their data securely with other banks and with third-parties, enabling them to manage their accounts with multiple providers through a single digital ‘app’, to take more control of their funds (for example to avoid overdraft charges and manage cash flow) and to compare products on the basis of their own requirements.

Australian lawmakers have been closely watching UK developments. In the May budget, Federal Treasurer, Scott Morrison, foreshadowed that the government would commission a review into the best way to set up an open banking regime in Australia. Announcing the review in July, Treasurer Morrison said:

Greater consumer access to their own banking data and data on banking products will allow consumers to seek out products that better suit their circumstances, saving them money and allowing them to better achieve their financial goals. It will also create further opportunities for innovative business models to drive greater competition in banking and contribute to productivity growth.

If the Australian government gets its way, financial data will soon become a commodity owned and managed by customers and not their financial institution. The government is calling for a customer’s transaction history, account balances, credit card usage and mortgage repayments to be made available to competitors via APIs by July 2018.

Like many ideas to emerge in the digital era - where there is a constant struggle between realism and evangelism - open banking has its doubters and believers. Attempts to shake up competition in consumer banking are to be applauded. But the Australian Bankers’ Association is right in expressing concerns about customer security and privacy.

Interestingly, in the UK, nine in ten consumers surveyed feel uncomfortable with the idea of third-parties accessing their financial data. Similarly, “lack of trust” was one of the key issues identified by the Australia’s Productivity Commission in its final report on banking data availability and use, which was released in May.

From my own experience in the financial services sector, I know that it is notoriously difficult to persuade customers to switch banking providers. In the UK, the government has mandated that financial institutions make switching easier. Yet in a 2016 report, the UK’s Competition and Markets Authority lamented that “…only 3% of personal and 4% of business customers switch to a different bank in any year”.

So, is open banking the next big thing in banking? Will it really provide consumers with a digital cure to “switching inertia”? Or will it be yet another example (like Bitcoin, Google Glass, Apple watch, etc.) of technology over-promising and under-delivering?

At the end of the day, these questions can only be answered by consumers. We’ll have to wait and see what happens when open banking is open for business. Some predict that the digital disruption caused by open banking will lead to the death of retail banking. My guess is that hype will again surpass reality, which is why I am not jumping on the open banking bandwagon just yet.

The global research and advisory firm, Gartner, has developed a graphic called The Hype Cycle. It has been used by the firm since 1995 to show the common pattern of over-enthusiasm, disillusionment and eventual realism that accompanies each new technology and innovation.

My assessment is that open banking is in the “over-enthusiasm” stage right now. As always, I will adopt a watching brief as there is rarely a need to be first to market with new technology. It will be interesting to see whether Australian financial institutions merely comply with the new regulation or actively embrace and promote the open banking concept.

 

Regards
Paul J. Thomas, CEO

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CEO Paul Thomas