The Open Banking Summit on 26 September focused on what is expected to come in the world of Open Banking in Australia. The event, hosted by Finance Edge, gathered industry professionals to discuss economy-wide interconnections and how to succeed in the new environment for financial services.
There has been a five-fold increase in the number of fintech start-up companies in Australia over the past five years and Australia has not experienced a bonafide recession since 1990-1991. This is fertile ground to take advantage of the opportunities Open Banking presents. The Productivity Commission announced recently that there is ‘enormous untapped potential in Australia’s data’; but there are challenges to consider when implementing Open Banking in Australia – 94% of digitised people don’t read privacy terms and conditions and 95% would like to opt out of services they are linked to. Thus tapping into some of the challenges that still have not been solved when implementing Open Banking – consent, privacy and product saturation.
The journey to Open Banking in Australia has been brief. The interim report on implementation of an Open Banking regime in Australia was released in February 2018. The review, undertaken by Mr Scott Farrell, a partner with King & Wood Malleson (the Farrell Review), provides recommendations on the design of the operating model and regulatory framework for the introduction of Open Banking in Australia. In May the Australian Government accepted the recommendations of the Farrell Review and outlined a phased implementation timetable.
The 2018/2019 Federal Budget has committed $44.6 million over four years to establish a Consumer Data Right (CDR). Banking, whilst the first sector to have to comply, will not be the last. Telecommunications and Healthcare amongst other industries will also need to open up customer data and will need to comply. What also differentiates Australia in the world of Open Banking is that the regulation only specifies the need for read-access to data, at least for the moment.
Source: King & Wood Mallesons
The drive for Open Banking
There are many reasons why individual markets or regions are undertaking Open Banking programs. Australia is by no means the first and will not be the last. Increased competition in the retail banking sector a la the United Kingdom; greater adoption of innovation such as in the European Union and Japan; financial inclusion in Mexico and Kenya or enhanced consumer data rights as in Australia are all among the reasons jurisdictions are journeying down the Open Banking path. The domestic nature of retail banking and a lack of a universally accepted definition of Open Banking has led to many flavours and implementations, with different account types and data sets being in scope. But one thing remains consistent – banks are worried.
Roy Amara, the American researcher and scientist, was quoted during the conference as saying, ‘we overestimate the impact of new technology in the short term but we underestimate it in the long run’. If we imagine, Google opened up their Maps service via open APIs in 2005, which has been revolutionary and transformative. So much so that it has since spurned a whole economy, with the likes of Uber tapping into this service in 2009. Banking API’s have the opportunity to be just as powerful, particularly when combined with Telecommunications and other industry data. This sets Australia apart when delivering Open Banking – it has been thought about in the wider context of data utility rather than just within the confines of banking.
In Europe and Australia Open Banking has been regulatory driven, but elsewhere in APAC territories they are embracing a more voluntary approach. Some attendees at the conference believed that innovation cannot be legislated for and that by strong-arming the industry into delivering Open Banking the true benefits may be more difficult to achieve. Regulators should not be creating more compliance. That being said, most conference attendees agreed that privacy, liability and consent criteria are difficult to achieve by industry alone.
API’s are not the silver bullet
APIs have been around in the banking industry for decades. They are not sexy and they alone are not going to solve the industry’s problems. They are a technical way of exchanging and exposing data. What fundamentally will revolutionise banking is the use of these APIs to transform the user experience.
Fintechs in the past have not been growing the financial services sector. They have been finding ways to filch pre-existing margins. Open Banking through open APIs has the potential to change that. The industry needs to be focused now on new business models, not digitising broken business models. Only then will be really see the benefit of Open Banking. Some attendees felt that PSD2 in Europe is merely just trying to keep the existing banking model, despite regulatory efforts to the contrary.
Standardisation of APIs is seen as beneficial. However, the value of the Consumer Data Right in Australia is that APIs for banking, telecommunications and healthcare will all interoperate, building a rich picture of an individual’s digital footprint. These are industries that traditionally have not worked together. These siloes need to be broken down so that true interoperability can be achieved.
Understanding Trust and the Customer Relationship
Whilst historical customer data may be interesting, the opportunity does not lie here. It lies in whether your customer trusts you and gives you the next piece of data, as this is what organisations can take action on. This is what is necessary to stay relevant. If organisations are genuinely going to compete in this area, they need to transform both in strategy and in style. There is little point in keeping the same strategy but looking cool, to use the UK adage, you’ll be left with ‘all the gear, no idea’.
There is a real challenge in viewing Open Banking through the lens of public good, when it is being delivered by commercial organisations that need to realise the commercial opportunity. But innovation is not difficult, getting individuals to trust and adopt new technology and services is the challenge. Customers deserve their own experience, and not the one necessarily provided by their bank. However, unfettered control by consumers was seen as systemically dangerous. So who is in control of what? This seems a question that remains unanswered. Much like the question, who is liable? These questions need to be answered with confidence if trust is to be had in the system, not just by customers but by the industry as well. Digital identity and consent management are key for the Open Banking model and are at the heart of the customer experience. Social media and technology giants have everything to gain and nothing to lose. They are not regulated but can plug into a highly regulated market. This can lead to asymmetrical competition, as one speaker put it, and this is unlikely to be healthy for the market in the long run. Some felt that a level of reciprocity should be expected of big technology companies, where their data is also supplied into the Open Banking ecosystem.
There were some serious questions raised also about customer education. Some argued that there is no need for education; customers are rarely taught about new payments options, they just use them. However, others believe that in today’s world education is not about financial services but about data. Education should be raised to a higher level and government led.
There are many questions still unanswered and as Australia starts to implement Open Banking no doubt solutions will start to become clear. All agreed, that Open Banking may be ‘clunky’ in the beginning, but this will soon become a thing of the past as organisations really put theory into practice. One speaker commented, the App Store was not part of the original iphone, in the beginning it was just a phone. But a year later consumers had all these new apps at their fingertips. We can only hope that Open Banking brings the same level of customer satisfaction and usability.
Author: Lauren Jones, Editor, InstaPay