OPINION

Open Banking – Legislation Change

In August this year, the Consumer Data Right (CDR) legislation was passed by the Australian parliament. This is a big milestone as this legislative change is the framework for the open banking regime in Australia to increase competition in the financial services industry.

Regardless of politics, it is commonly agreed across most political parties that competition in banking is imperative, particularly considering the findings of The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

Open banking is one of many initiatives to foster more competition in banking in Australia so that all Australians have access to financial products that are competitive. Now that the law has changed with media coverage that has followed, more Australians are probably wondering what open banking is and what it means for them.

What is Open Banking and Open Data?

The concept of open banking is that as well as owning the cash that sits in your bank account, you own your data stored at that bank too. When you think about it, most Australians bank with four major banks so the coverage of data that each bank has collected on the Australian population is phenomenal. They know all about your savings, your loans, your transaction history, and details about you personally which are used to identify you.

The open banking framework is something that already exists in the European Union as the Payment Systems Directive 2 (PSD2), which is a foundation for an EU single market for payments. The United Kingdom built its open banking framework on top of its PSD2 obligations to go one step further to create a standardised API format.

The approach in Australia is slightly different again and has taken the UK open banking experience to develop the CDR. In Australia, the focus isn’t just on ‘banking’, but the approach is to focus on ‘data’ across many sectors such as banking, telecommunications and energy etc. Open banking is the first cab off the rank due to the banking industry having so much coverage of the Australian population.

While the focus is initially on banking, it paves the way for more competition across many industries such as telco, electricity and gas etc.  So, while the approach to open banking in Australia casts a wider net to cover all data, the concept is the same as the UK.

The Consumer Lending Landscape in Recent Years

We live in a digital age, and it has never been more so than in the world of banking and consumer finance.

In the last five years, the adoption of internet and app-based banking has been phenomenal.

According to a January 2019 Roy Morgan report, around two-thirds of the population now use either mobile banking or internet banking each month, compared to just 22.9% who use a traditional bank branch.

Between 2014 and 2018, despite a growing population, the actual number of people who used a physical bank branch each month slumped from 6.50 million to just 4.73 million.

This shows that banks and non-banks have been very active in moving transactional banking into the digital age.

In 2011, when I launched loans.com.au, the concept of applying for a home loan online was relatively new, but in the last eight years there has been a massive influx of lenders in the online lending space. Banks have quickly followed the technology-focused model and have also adopted some online lending technologies accordingly.

So, with both big banks and non-banks now having a truly digital offering, competition in the lending space has increased. Companies like mine have grown significantly and taken a lot of the prime lending market share away from the banks. By existing, we are taking their prized customers and making them compete, but we are still in early days.

In 2018, we had the Hayne Royal Commission and, without going into the detail of the findings handed down in February 2019, one big takeaway is that there needs to be more competition in banking in Australia.

According to data collected from the Australian Prudential Regulatory Authority (APRA), 9 out of 10 home loans are still held by the biggest banks in Australia with 8 out of 10 home loans held by the four big banks. So, while people are digitally aware, they still aren’t looking for cheaper alternatives when it comes to their home loan.

So why aren’t they switching?

The few surveys that have been done all seem to agree than many people are turned off by the fear that switching will be a big hassle.

In August this year, ASIC released a report about consumer experiences and expectations in getting a home loan and found that by far the strongest factor influencing consumers to stay with a lender they had an existing relationship with was convenience.

A 2016 survey by the University of Technology Sydney, found that 28% of Australians stayed with their existing home loan provider even if it cost them more financially because of the perceived time and effort of switching, and with credit cards the figure was 24%.

It is shocking that 90 per cent of home loans are held by the biggest banks in Australia, and even though non-banks like Firstmac with loans.com.au are winning the war when it comes to competition, it isn’t happening fast enough.

The biggest broker groups in Australia are either owned by the big banks or they are the biggest source of loans for the big banks. That’s why we believe that open banking is a step in the right direction.

How Will Open Banking Change Lending?

In simple terms, if consumers have access to their banking data, it will make it easier for them to share that data with a new lender and switch home loans seamlessly and without friction.

It is for this exact reason that the Morrison Government in a post-Royal Commission world is using open data as one initiative to combat the competition problem in Australia.

When looking at open banking, it is important to understand what shared data points will lead to ‘frictionless credit’ because as a customer of a bank they have a lot of data on you.

Firstly, banks have data that identifies that you are a real person. When you first become a bank customer, you provide details such as your name, date of birth, address and identity document details (i.e. drivers licence, passport, birth certificate etc). Banks use this information to check against government databases to identify that you are a real person who can hold a bank account and apply for credit. This satisfies the financial institution’s “know your client” and “anti-money laundering” procedures.

Another key piece of data that the bank has is all your account data. This includes any deposit accounts, loan accounts and credit card accounts etc. that you hold with the bank. Not only will details of your accounts and balances be stored, but also all transaction data relating to your account. This is important when you apply for credit because it will show all income and expense transactions, so very quickly a new lender will be able to see if you can afford your loan. This is key to satisfy any responsible lending requirements that the new lender needs to satisfy.

Furthermore, the transaction data that a bank has will also show how good you are at meeting your loan commitments. Transaction data on loans and credit cards will demonstrate straight away your history of making your loan repayments on time. If you make your repayments on time, this will give your application for your new loan strength, because it shows that there is little risk of you missing a payment.

Armed with the above data sets, a new lender can quickly absorb the information into their credit systems and make a faster decision on whether they can approve a loan. For the consumer, switching to a cheaper home loan becomes a lot easier.

Open Banking and Fintech Lenders

With the consumer now being the owner of their data and giving permission for new lenders to access their data, it will make the consumer lending landscape even more efficient than it already is. In recent years, the online lending space has taken off as technology gets a lot smarter and lenders develop their own proprietary credit decisioning systems. Automatic decisioning in the loan process is not something new, but with access to customer data via APIs the decisioning process will become a lot quicker.

This change will allow customers to apply for finance and be approved a lot more quickly and will take the hassle out of changing lenders. A streamlined and efficient process will also keep the costs down even more for fintech lenders such as loans.com.au and when costs are reduced, borrowers benefit in the form of lower interest rates.

The home loan is one of the largest expenses for most households in Australia, so lower rates and smaller fees will help them a lot. If interest repayments are lower, it also gives Australians the ability to pay their homes off sooner.

Because fintech lenders are usually more nimble and more adaptable than the big banks, open banking will make switching home loans a lot easier, and increased competition can only help to break down the oligopoly that exists even further to the benefit of all Australian home owners.

In the interests of full disclosure, Savings.com.au and loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.



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