We have been talking about open banking, or the broader legislative framework that supports it, Consumer Data Right (CDR), for a long time, but it seems like nothing has really happened. Yet it would be a mistake to turn away now. Open banking is moving into a critical phase and what happens in the next couple of years will determine the success of the CDR legislation. Not just in finance (typically referred to as open banking), but also in the broader ‘Open Life’ category, as industries such as energy and telecommunication move under the legislative umbrella.
Eventually, open banking will make it easier for consumers to apply for products, get access to better deals, make the comparison of products easier, and gain greater control over their finances via aggregation services.
This article will highlight what needs to happen in order for open banking to succeed in Australia. If consumers and businesses aren’t able to embrace open banking, the CDR will eventually fail and the balance of power will stay with the banks.
The state of open banking in Australia
Australia’s Big 4 banks are nearing the completion of becoming an accredited data holder (ADH) for all customer banking and product data. The non-major banks are on their way to completing this by early 2022. However, this is just the beginning. It will take some time before consumers and businesses can benefit at scale from having more power over how they share their banking data with third parties, known as accredited data recipients (ADR).
Currently, there aren’t many ADRs for consumers to share their data with. In Australia, there are now 8 ADRs including banks, a personal finance management app, a credit agency, a few CDR platform providers and an accounting software company. More than a hundred other businesses are currently going through the ADR accreditation process, which means we can expect more innovation and alternative product offerings in the market over the next couple of years.
If the UK’s growth of open banking activity is any indication, Australia should expect open banking to mature over the next couple years and then see accelerated growth. Currently, the UK has more than 300 third party providers and more than 3 million consumers using open banking services. The number of API calls has risen from 65 million in 2018 to over 6 billion in 2020. As the UK plans for accelerated growth, the current focus is improving functionality (use cases) and usability (better user interfaces).
What needs to happen to move towards an open banking future?
Start partnering to reduce technological barriers
Becoming an ADR is no small feat; it requires setting up the platform, creating the pipelines to the accredited data holders (via APIs), developing analytical abilities, building use cases, and managing data security. To reduce these technological barriers and improve participation, ACCC now permits accredited intermediaries to collect data on behalf of third party data recipients with consumer consent. This means that part of the open banking infrastructure can now be outsourced. ACCC is also introducing different tiers of accreditation, which will facilitate a wider range of businesses to participate.
Define more compelling use cases
Critical to the move towards open banking is to ensure customers and businesses understand what open banking can do for them - this is where use cases come in. Here are just a few examples of how open banking can provide value:
Faster customer onboarding during an application process for a product or service by requesting consent from a customer to share their data
Easier to compare financial products or services by providing consumers with personalised recommendations based on their shared data.
Changing over automatic debit arrangements when you switch banks can be streamlined by customers sharing their direct debit data with an ADR
Optimise budgeting with insights provided by the ADR (e.g. spending insights, recommendations for better products).
‘Awareness’ and trust via use cases, not marketing
In Australia, open banking is not yet widely known to the general public, and to date there hasn’t been a big public campaign to promote it. Because of this, we need use cases first to help the public understand what open banking means for them and to help it become a natural part of a consumer’s daily financial activities. The key to success is to build trust with consumers and make them comfortable with sharing their data.
Enable ‘write access’ for accredited third parties
An important step to further open banking functionality is to facilitate write access to third parties (as opposed to ‘read only’). Write access means a third party can open, close and transact on behalf of the customer. This is where the New Payments Platform (NPP) comes into play. Write access for third parties will be enabled through the Mandated Payments Service (MPS) in early 2022, and could spark a flurry of innovation in payments services from fintech developers.
So far, only the banks have been mandated to become accredited data holders. To create a more comprehensive picture of a customer’s financial situation, the inclusion of customer data of wealth providers, superannuation, insurance, energy and telecommunications need to be eventually included. The implementation of the CDR in the energy and telecommunications sectors will be next in line.
As we pull out of the COVID induced slump, the time is right to double down on the government’s vision for the competition and consumer choice fuelled by Open Data. The financial services industry needs to lead the charge to enable and indeed demand this acceleration. Large players need to move beyond CDR as a compliance play and discover and invest in the opportunities it enables. Consumer bodies should continue to pressure the government to deliver on the initial promise of the legislation; and to ensure that the environment is supportive of new and innovative business models and indeed new players emerging.
Disclaimer: The statements and opinions expressed in this article are those of the author(s) and do not necessarily reflect the positions of Thoughtworks.