Open banking and how it could affect your personal loan application

The Aussie banking industry recently introduced ‘open banking’, a new style of banking that puts customers in control of their data. 

Whether you are on the hunt for a new home loan, personal loan or credit card - or are looking to refinance - open banking should make it simpler to find better deals between banks. 

First, what is open banking? 

Open banking gives Aussie customers control over their banking information. It allows you to ask your current bank to share your data, such as your transaction or savings account information with other banks and lenders whenever you want. 

Ultimately, you are able to say where your data is going instead of your bank controlling it. This makes it easier for you to compare deals between banks and make the switch to more competitive banking products if you want to. 

However, open banking is not in its full form just yet. Here’s a breakdown: 

• From 1 July, 2020 big four customers can advise their banks to share their credit card, debit card, deposit account and transaction account data under Consumer Data Right (CDR). 
  
• From November 2020 Aussie customers can request that banks share their mortgage and personal loan data.  
  
• From February 2021 non big four customers can request to share their product, account and transaction data for home loan products.  
  
• From July 2021 all Aussie banks must provide access to customers’ product, account and transaction data for personal loan and other banking products. 
  

How open banking impacts personal loan applications 

When you approach a personal loan lender outside of your current bank, it is likely that they will want to see more than just your credit report. 

Previously, customers may have been required to provide potential lenders with their banking login details, allowing them to review things like transaction history. 

Mozo money expert, Peter Marshall says this was a concern for many Aussie consumers. He says that open banking is a more secure option.

“I think the biggest benefit [of open banking] is the security issue,” Marshall says. “More and more lenders want to look at your bank account to see your transactions and check that you are getting paid what you say you’re getting paid, and that you don’t have any large regular expenses that you may not have mentioned on your application.”  

He explains that it’s about lenders being able to do better due diligence when it comes to your application without potentially compromising your banking login details.  

Will open banking determine the interest rate I get? 

With the growing popularity of risk-based pricing and personalised interest rates amongst Aussie lenders, open banking provides a clearer picture. 

“Risk-based pricing can be as simple as looking at your credit score but it can also bring in other factors such as your spending habits which would be more apparent through giving someone full access to your transaction history,” Marshall says. 

But these assessments aren’t about lenders naming and shaming you for spending too much online shopping. Rather, it looks at your situation as a whole. 

“It helps the bank make a more informed assessment of your living expenses, more than flagging specific transactions,” Marshall says.  

Digital marketing manager at online personal loan lender Wisr, Audrey Neale says that the company’s risk-based pricing model takes into account multiple factors including credit score.

“Wisr's credit assessment process establishes a credit risk profile for each applicant. The credit risk profile is used to determine which band the applicant is assigned, and which interest rate is offered,” she explains. 

“If you’ve demonstrated good financial behaviour and have a strong credit score it may pay off with a great rate. If you have a lower credit rating and meet our lending criteria, you will still get a fair deal and benefit from no ongoing, early repayment or exit fees.”  

Is open banking safe? 

Essentially, open banking is designed to put you in control of your banking data, so you can select who has access to it and who doesn’t. 

“You always have to opt in, you always have to give very specific permissions, it’s very tightly controlled to minimise the risk of someone ending up with your information when they shouldn’t have it,” Marshall says. 

“There’s only one accredited third party data recipient right now and they've been working on it since the beginning. They’ve done a lot of work to ensure that people can trust it.” 

RELATED ARTICLE: How a risk-based personal loan could benefit you

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