The Open Banking Revolution in Financial Services
Banks are among the most powerful organisations in the world. They control enormous amounts of data and most of it is highly sensitive. Part of the mandate in recent years for banks is that they must keep their client data secure. People and organisations rely on the banks to protect them from any malicious attacks on their money, the banks control this data.
This paper will explore a revolution in banking that flies in the face of the current ideas of banking data. Open Banking is designed to allow customers to easily port their banking data from one financial institution to another. This is done via an Application Programming Interface (API). This means that banks are now expected to keep customer data secure but also give access to anyone that the customer allows to have access via the API.
Open banking is about who controls a person’s data and how it is used, the right of a person to give their data to an organisation of their choosing, to influence the services that person can access.
Opening Banking
Governments around the world have recognised that banks have a stranglehold over their customer data. Banks are in the position to maintain control of the banking relationship and have no incentive to do right by the customer. Particularly with small customers, once they are a customer, the banks no longer need to do anything to keep that customer’s business.
Open banking is set to change this relationship.
Many countries are currently working within their own financial systems to make this happen. Europe and the UK already have systems in place that are starting to work.
Here in Australia we are still at the beginning of this revolution.
The concept of Open Banking relates to another new concept, the Consumer Data Right. This is the right of customers to control their data rather than it being controlled by the organisation that holds the data.
The Consumer Data Right Bill (CDR), passed into Australian Law on 1st August 2019. According to the ACCC, 2018, initially it covers only the largest 4 banks in Australia, eventually it will cover all financial institutions, then energy suppliers and telecommunications entities.
Bowen’s, 2018 definition of the CDR says it “gives Australians the right to move their data around, making it easier to access your data — such as the financial information your bank has on you — and share this with other businesses. This open data environment is expected to ramp up competition and allow consumers to negotiate better deals and save money.”
No longer will banks be allowed to silo the data within their institution. The power over the data is being handed back to consumers. This will give them not only better buying power with their data, it will also mean that the banks will have to recognise that they have a role to play in servicing customers better, even the smallest customer.
How Open Banking will be achieved
Open Banking is achieved by the banks allowing standardised Application Programming Interface (API) access to the data. A standard way to access the data means that one software program can be written that can access data from any participating institution rather than having a different software program for each institution.
Once the APIs are in place a customer will be able to go to a website or app and allow another business to have access to their banking information. They will be able to aggregate all their financial data in one place to give both the customer and the businesses they choose a full financial picture.
According to the Review into Opening Banking by the Australian Treasury in 2017, Open Banking “is designed to give customers more control over their information, leading to more choice in their banking and more convenience in managing their money, and resulting in more confidence in the use and value of an asset mostly undiscovered by customers — their data”.
Opportunities
The future of banking should look very different to the current regime, as new players and products enter the market because of their ability to easily access customer data.
Open banking has the potential to create more data-intensive financial products and allow consumers to more easily shop around for better deals. As an example, if the customer can give an institution, say a credit card company, a full view of how well they pay their bills on time, then the customer could negotiate a better rate.
Another example could be a price comparison website that is constantly monitoring a person’s bank transactions to see if better deals are available. For example it will see how much a person has paid for electricity in the past year and can calculate if there is a cheaper price on offer in the area. It could also be looking at other metrics like interest rates on credit cards. When combined with non-financial data such as your energy or mobile phone usage, banking data becomes a means to bench mark the cost to one person compared to another.
Open Banking should also help people with what are known as “thin” credit histories, this means there is not much information about how they pay their debts. As Broadsky and Oakes, 2017 noted “Sharing of limited data on “thin file” consumers can help to advance financial inclusion goals, pooling limited information to arrive at more precise risk-scoring and credit underwriting decisions”
Once customers realise the power that lies in their banking data they will start to not only take up new kinds of financial products but also demand better treatment from their current bank. In turn, banks will be in a better position to meet those demands. With greater availability of data, banks can use data science modelling techniques such as machine learning for greater accuracy in credit risk models. These developments should result in cheaper banking and financial products for customers.
There is a huge amount of optimism that Open Banking will also revolutionise the “unbanked” populations around the world. Many people in poorer nations do not have access to traditional banks. They do, however, have access in many cases to mobile phones. The advent of open banking will encourage innovative financial products that will help these people to be included in the financial landscape.
A new kind of Bank created for Open Banking
Open Banking has already encouraged the creation of a new kind of bank, a “neo bank”. Neo banks are generally small online banks that have no physical presence. The strength is their size, they are able to be cheaper and more responsive because they are not weighed down by massive infrastructure and legacy systems.
By virtue of their size and their technology Neo Banks are well placed to respond to customer demand and innovation in the industry.
PWC and the Open Banking Institute, 2019 found that in the UK, where open banking has been in place since January 2018 there has been an increase in the applications for banking licenses to take advantage of this new landscape.
Why Open Banking could fail
Banking Technology
Whilst Open banking is a revolution in the way people will deal with banks, there are some very significant barriers to it’s success. The first of these is the bank themselves. Larger banks are generally old institutions, most of them began well before the modern age of information technology, their information technology structures have often been cobbled together based on present needs rather than future plans. Deloitte 2019 pointed out the “hodgepodge of systems, platforms, software, and tools — much of it legacy infrastructure — as a key challenge for bank CIOs”
In many instances they have old systems that do not talk to one another internally let alone allow the API calls necessary to facilitate Open Banking. This lack of cohesive technology means that there is a lot of work to be done internally for the banks to get themselves into a position where Open Banking is even possible.
Data Security
The second main barrier to the success of Open Banking is data security. Banks are supposed to keep data secure, their whole design is to not let anyone into the data, they are now being asked to change this.
In an interview one banker remarked to Wright, 2018 “Our bank has spent 200 years making it impossible for anybody from outside the bank to access the money of our customers,” says Andreaser. “We have put in all sorts of security measures to make that impossible, and now we have to give access to third parties-which means we have to change a lot of things to allow our security mechanisms to access this data for third parties.”
Another issue is that by having all of a customer’s data in one place you are giving hackers a single point of entry to gain all of that data. It has been suggested that it could be possible to set up a website that looked like a legitimate financial institution that could gain access to the Open Banking API specifically for the purpose of hacking the data.
Customer Apathy
A further barrier to the success of Open Banking is customer apathy. According to Wright, 2018 a recent survey found that 92% of consumers were unaware of Open Banking. The innovations that will come from the Open Banking will only happen if the volume of customers can justify the expense of development.
The experience in the UK, where Open Banking has been a reality since January 2018, in the 18 months since this data has been available very little has been done with it. This illustrates another issue with open banking, the general public are not aware of this innovation and it has not been adequately explained to them why it is good and how they can use it to their advantage.
Bank Attitudes
It is also not in any Bank’s best interests to open their data up, as it is likely that they will lose customers who will be more easily able to switch providers. The banks will have more competition and they will have to justify their fees and service levels against what the smaller more nimble newcomers will be able to offer. PWC,2019 found that banks are in danger of becoming “undifferentiated utilities with lower returns” in this new era.
Conclusion
The heart of Open Banking is a much wider issue, that of Data Rights and who owns a person’s data. People are beginning to understand the power they have in their data and that it is valuable to organisations. Open Banking has the potential to show the wider population how powerful they can be when they control their data.
There are many barriers to the uptake of open banking, technology, data security and customer apathy to name a few. The long-term benefits to the banking and finance landscape in terms of greater innovation, cheaper financial products and greater access to credit far outweigh any short-term pain.
The example of properly controlled Data Rights that Open Banking can show us as a society will have greater implications than just the banking and finance industry. Once we understand personalisation of products, with a low barrier to entry for new players, there is scope for innovation that we cannot even conceive today.
References
Bowen, 2018, Open banking is coming and it could save you money, https://www.choice.com.au/money/banking/everyday-banking/articles/open-banking-to-give-consumers-control-of-their-data
Australian Competition and Consumer Commission, 2018, Consumer Data Right Rules outline, https://www.accc.gov.au/system/files/CDR-Rules-Outline-corrected-version-Jan-2019.pdf
Australian Treasury, 2018 Review into Open Banking in Australia https://treasury.gov.au/review/review-into-open-banking-in-australia
Brodsky, L. and Oakes, L., 2017. Data sharing and open banking. McKinsey & Company.
Deloitte Consulting LLP, 2019. Banking Industry Outlook https://www2.deloitte.com/global/en/pages/financial-services/articles/gx-banking-industry-outlook.html
PWC, 2019. The Future of Banking is Open https://www.pwc.co.uk/industries/financial-services/insights/seize-open-banking-opportunity.html
Wright, G., 2018. Global Finance; New York Vol. 32, Iss. 7, (Jul/Aug 2018): 32,34. Open Banking’s Stealth Debut
Zachariadis, M. and Ozcan, P., 2017. The API economy and digital transformation in financial services: The case of open banking.
Menon, A.D., 2018. Future of Banking. Powerpoint presentation
Wong, L 2019. Switching banks is less painful than you think https://www.abc.net.au/life/how-to-switch-banks/10007610
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Eyers, J. 2018, Open banking forces rethink, Australian Financial Review, Nov 11, 2018.
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