Open Banking Explained

As part of the budget announcement on Tuesday the Federal Government announced an Open Banking regime for Australia.  This was expected by those in the Banking industry.  I personally have been attending sessions and helping write responses to various reviews for over eighteen months.  What was announced was in keeping with the Farrell Report that was released earlier in the year.

People outside of the Banking industry, and even some inside it that have been otherwise occupied, don’t really understand what it means.  I’ve been asked a number of times by friends and family what its all about and so I thought I’d write up a summary that explains Open Banking for the people that are likely to be most impacted – everyday Australians.  At the very least I can point people to this post and stop repeating myself.

WHAT IS OPEN BANKING?

Basically, Open Banking means that all the Banks will have to make the data they hold on us as customers available to apps and websites if we specifically allow it.  That last bit is really important.  The idea is that the customer is always in control of their data.

The best analogy of this is how apps access your Facebook account.  Most people have been asked by an app to provide access to their Facebook account to make a post or access contacts.  Under Open Banking an app like PocketBook or Spriggy would be able to ask a customer for their Banking data and, if the customer allows it, the app will be able to get account info or transactions directly from the Bank and use the data in some way that is solving a problem for the customer.

For example, imagine you have accounts with multiple Banks (as most of us do).  To get a full picture of your money you have to log into three or four different Internet Banking apps that all have different capabilities and user interfaces.  Under Open Banking an app could be built that would ask for your permission and then show all of your accounts in one interface regardless of the Bank.

Another important aspect of the announcement is that it is based on the concept of a Consumer Data Right.  This right implies that we, as customers, own our Banking data and the Banks are simply stewards.  It is also an economy wide right so after Banking the Government is flagging that energy providers and telcos will be next.

Right now we’re talking about account information, balances, transactions and interest rates.  In the future we’ll be talking about energy costs and usage histories.

WHAT DOES OPEN BANKING MEAN FOR ME?

In the short term probably nothing.  In the long term it will completely change the way you do Banking.  If Bank data, especially transaction data, can be easily transferred on request then it will  change our world in ways that are hard to imagine.

A simple example would be as follows: I want to rent a house, so I give the real estate agent one time access to my Bank data.  From this they get my name (as confirmed by a Bank), contact details, and a summary of my spending habits without me having to fill in forms or provide pay slips.

Or, I give an app ongoing access to my transaction history and every time I buy something from KFC it sends me a notification telling me think about my health.  “Do you really need those wicked wings?”

Or, I have an app automatically donate a dollar to charity every time I buy a coffee.

There are infinite use cases.  The ones above are fairly benign and useful but, like with all new technologies, it can get a bit creepy sometimes.  The most off the wall idea that I have come across came from a hackathon where two young female engineers proposed the idea of a dating app that uses Open Banking data to attach an assessment of your wealth to your dating profile.  When they presented the idea everyone in the audience laughed and then abruptly went silent as they considered the implications.

If you think about it for a while you realise this could be a big deal for everyone.  It might take a few years but this will have consequences for Australian society as a whole.

WHAT DOES OPEN BANKING MEAN FOR THE BANKS?

Two big things:

  1. A huge compliance bill over the next three years. Westpac has publicly said that compliance will cost them over $200 million. The other major Banks are likely to be in similar situation.

  2. More competition. Lots and lots more competition. Sooo much more competition.

For the Banking Industry this is really analogous to the introduction of the Internet.  Banking rapidly moved online and now we, as customers, are indignant if we have to go to a branch and demand the ability to do all of our Banking on our phones.  The difference is that, whereas the rise of Internet and Mobile Banking was a slow burn over two decades, the changes from Open Banking will likely happen in the next five years.

The extra competition will be especially challenging for the Banks as it won’t come in traditional forms.  The new services that are created will be niche and will target a specific area where margins are high.  They will be small, nimble and focused.  The Banks run into the risk of having to compete on a thousand fronts at the same time which is not something they have had to contend with.

The image of a massive Wooly Mammoth being taken down by a hundred little cave men comes to mind.

WHAT ARE THE RISKS?

This is the big question.  In a simple sense the risk to your money and data is probably low.  The standards that have been flagged to be used are solid and there will be a well funded regulator overseeing the regime.

It is good to note that all participants will have to be accredited so the chance of the Dodgy Brothers setting up a fake app to defraud people is low.  Also, the customer will at all times be in control of how their data is passed around which is good.  Finally, the recommendations prohibit the Banks from selling the data in the Open Banking regime.  This will remove some of the incentives to treat the customer as a product that we see at the big tech companies like Facebook and Google.

It is sobering to think about what has been happening to Facebook lately, however.  The situation with Cambridge Analytica and the resulting furore has arisen from the unintended side effects of just a bit too much openness.  Open Data is a bit like salt.  A little bit is magic but too much and it leaves a bad taste.  This will be a fine line for the ACCC to navigate.

IS IT A GOOD THING?

Yes. I believe that it is.  Open Banking is inherently a good thing because it will create more customer choice and make Banking easier.  The real question is do the risks outweigh the benefit.

On this front, my personal assessment is that the Federal Government has done a really good job.  They have pushed much harder than the Banks wanted but have not pushed so hard that they have created massive risks of side effects that they can’t manage.  They have also waited until other countries like the UK have gone first and then learned from their mistakes.

Its worth noting that whether it is good or bad doesn’t really matter.  Its inevitable and we will need to deal with Open Banking as a society regardless.  Even in countries like the US and China that have made no moves to enforce an Open Banking regime, market forces and customer expectations are making Banks open up anyway.

– James

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