Open banking: The data sharing revolution set to save everyday Aussies time and money
Open banking is in the process of revolutionising traditional banking systems across the world and has certainly been making waves down under. This new notion of consumer-centric banking has the potential to seriously change how you handle your personal finances so what better time than now to get a grasp of what it actually is, when it’s likely to be implemented and what open banking means for your future money management.
The current state of banking in Australia
Banking in Australia has certainly seen better days. There has been a growing level of distrust with some of our biggest banks that has been accelerated by headline after headline outlining various examples of misconduct over recent years, including the recent Banking Royal Commission which explored the wrongdoings of our country’s biggest lenders.
The good news is that there's real appetite for change in how banking works in Australia, lead by government and parts of the industry. This includes changes to credit reporting, as well as reforms to data sharing legislation within banking that will make it easier, quicker and simpler for everyday Australians to access the most cost-effective financial products on the market.
Comprehensive credit reporting, the first step
If you’ve kept abreast of the Mozo news coverage, you’ll know that comprehensive credit reporting (CCR) is changing the way lenders assess your credit applications. Under the new legislation, lenders won’t just take into account your credit enquiries and defaults when you apply for a new financial product or line of credit, but will also be forced to take look at information like:
- The date you opened the account
- The date you closed the account
- Credit limit of the account
- Type of credit
- 24 months worth of repayment history
The idea is that, by taking into account a broader subset of data, a lender is now getting a more holistic, well-rounded idea of what you’re like as a borrower and therefore will able to offer you interest rates on credit that you genuinely deserve.
The move to a comprehensive credit reporting system is seen as the first big initial step towards an open banking system in Australia because it puts power back in the hands of consumers who have shown they’re responsible borrowers and the good news is that, it's already becoming a reality in Australia.
What is open banking?
If comprehensive credit reporting is the first step, open banking is the complete marathon, but it’s still all about data - your data, actually. We’re talking transaction records, account balances, credit card usage and repayment history. Right now, under the old school banking system, this data technically belongs to and is collected by banks and financial institutions and only they get to decide who sees it. But, all of that is changing.
Open banking centres on the idea that you deserve to have complete access to the consumer data that is collected by banks and financial institutions. This is important because, with it, you’re better informed to make wiser financial decisions about the providers and products you choose to manage your money with. Essentially, you’ll be able to choose whether you want to share your data with other big banks, smaller lenders and other up-and-coming fintechs so that you can get the best possible deal when it comes to your personal finances.
Open banking has required some legislative change, as well as some ground-breaking technology that will help the new system to get off the ground.
What an open banking system requires is for consumer data to be transferred from one bank to another (or a third party) instantly and in full, at your request. The technology required to do this is called an Application Programming Interface (API) and each bank will be responsible for building their own API. Once that’s done, these data-sharing mechanisms will be able to connect with one another and make up an open banking network that is capable of instantly sending and receiving consumer data.
The good news? This is happening right now because, as of July 2020, open banking is finally here! Comprehensive Data Right (CDR), which is the service created to facilitate data sharing for consumers between financial players, is now live. At least, it is for users of the Big Four banks who will be able to share selected banking information (think credit card, debit card and deposit account data) with ACCC-accredited third parties. This will expand out to other types of product data (home loans and personal loans) and to customers of other banks, credit unions and building societies later in 2020 and into 2021.
How did we get here - Australia’s open banking timeline
You might have only really heard of the term ‘open banking’ over the past six months or so, but it’s an idea that we’ve been curious about in Australia for a few years now. For a full rundown of how we got to this point, check out the timeline below.
- December, 2014: “Hey, customer data is kind of important, we should share it." The Murray Inquiry (Financial System Inquiry) recognises the role data sharing has to play in creating new business, products and services that will improve customer experiences.
- November, 2015: “Yep, customers definitely need access to their own data if they want to find the best deal.” The Harper Review into Competition Policy recommends that the Government find ways to improve individuals’ ability to access their own data so they can make better decisions when it comes to their money.
- October, 2016: “Banks should be sharing data by July 2018.” A Review into the Big Four banks, known as the Coleman Report, strongly recommends that Aussie banks start to share customer data - even going as far as creating a timeline to get the ball rolling.
- May, 2017: “We’ll call it the Comprehensive Right to Data.” Commissioned by the Government, the Productivity Commission’s Data Report, proposes a few reforms around how our economy uses data including a ‘Comprehensive Right to Data’, which will give consumers and small businesses access to their data.
- November, 2017: “Okay, let’s do this thing!” After years of reporting and reviewing, the Government finally give the green light to introduce the Consumer Data Right across energy, telecommunications and of course, banking. Scott Farrell, a partner at multinational law firm, King & Wood Mallesons, will make a bunch of recommendations around how to get this thing going - open banking is on its way!
- February, 2018: “This is what open banking should look like for us.” After three months of hard work, Scott Farrell delivers a 158 page report into open banking making a range of recommendations about the legislation, regulation, and security involved in open banking as well as calling on submissions from the players (banks, consumer bodies, fintechs) that are likely to be involved in the new banking scheme.
- August, 2019: "Let's make this legal." Federal parliament gives the review and open banking the green light by legislating the changes needed for open banking to happen.
- July, 2020: "We can share our data now! Well, some of us." On July 1, Consumer Data Right (CDR) goes live for major bank customers and accredited data recipients. However, data sharing is limited to certain prodcuts for the time being.
The benefits of an open banking system
With the big four banks soon forced to hand over consumer data, Australia is well on the way to adopting an open banking system in Australia, but what are the benefits you can expect as a consumer?
Personalised finance products
One of the biggest consumer benefits that will accompany the open banking movement is the personalisation of your finance products. A small (but ever-growing) group of lenders, like peer-to-peer lender RateSetter, have been early adopters of comprehensive credit reporting practices and already offer personalised interest rates and loans to their customers, but this will become an even more prolific practice once an open banking network is up-and-running. While CCR practices will certainly apply to home loan, personal loan or credit card applications in the near future - meaning you’re able to nab more competitive interest rates if you’ve been a good borrower in the past - open banking could even extend personalised financial products extend to things like your everyday bank or savings accounts.
Easier to apply, switch and save
Switching between providers might save you a helluva lot of money, but the time and tedium surrounding the process often puts banking consumers off. Open banking APIs will soon streamline the application and switching process, however, so that you can instantly share your data, find out the rate or product on offer with another lender and potentially switch providers, all at the touch of a button and in a matter of mere minutes.
Increased competition between providers
In order to keep customers who are not just willing but able to easily access the best value financial products on the market, banks will need to consistently work to offer customers the best deals. This increased competition will likely lead to lower rates or more innovative products, which is a big win for the everyday Australian.
And it isn’t just the big banks that will be offering these deals. One of the other major benefits of an open banking system is a host of smaller, up-and-coming lenders and financial providers will now be able to compete and diversify the Australian banking scene. With access to consumer data, smaller players will have a greater capacity to assess borrowing risk and offer its products to more and more customers. Among these players are neobanks, like Xinja, who will be able to really take advantage of the new, more open banking system.
It won’t just be new banking providers who can benefit from an open banking system, either. There has been a host of speculation surrounding API-powered third parties that could help enhance consumer banking experiences in Australia, like budget tracking apps or banking aggregators. In fact we’re already seeing consumers share their data with fintechs like Sydney-based money management app Frollo. Frollo is actually the first accredited fintech 'data recipient' under Consumer Data Right, and we've used them to provide a run through which shows just how easy it is for consumers to share their data.
FAQs about open banking in Australia
When will open banking be available to me?
If you're a customer of a major bank you can already start sharing your data with third parties as of July 1, 2020. CDR will roll out completely to include all other non-major banks, building societies and credit unions from July, 2022.
Do I have to share my financial data?
While the open banking system will make sharing consumer data really easy, you don’t necessarily have to share it with anyone.
Who will have access to my data?
To start with, your consumer data will live with the bank or financial institution that is collecting it. After that, it’ll be accessible by whomever you give permission to see it which could include another bank, competitor or budding fintech - the choice is yours.
What data is being shared, exactly?
The list of data that the Review into Open Banking has recommended is quite extensive and includes data from savings accounts, bank accounts, term deposits, cheque accounts, debit card accounts, transactions accounts, credit card accounts, mortgages, business finances, personal loans and overdrafts.
What if I have a negative credit history?
Credit reporting already exists in Australia which means a lender can already see your negative repayment history and open banking won’t change that. The good news is that comprehensive credit reporting will soon mean that a bank now has to consider your entire credit history, that’s all the good and all the bad, when approving your applications for new products.
Will my consumer data be safe?
The safeguards that will be in place in an open banking scheme are yet to be outlined explicitly. What we do know though, is that all parties handling the data will be subjected to the Australian Privacy Act and that a Data Standards Body will be set up to determine safeguards that will facilitate for the safe sharing of data which could include mechanisms like multi-factor authentication.
Where else is open banking used?
Australia isn’t the only country embracing open banking, Europe has too!