What is open banking and what does it mean for borrowers?

The way Australians do banking will change in a few short months when customer data that was once jealously guarded by banks is shared between financial institutions.

Open banking is set to begin in February next year, allowing customers’ financial information to be shared between banks and other companies, as long as customers give their consent.

Banks will be able to use this data to provide products and services better tailored to customer’s circumstances, whether that’s a new credit card or home loan, or an app to help customers manage their money. 

It also means any bank or company you choose to share your data with will be able to see your spending habits in minute detail.

It’s all a result of the Consumer Data Right bill passed in August, which requires the big four banks to start sharing data next February, with other banks following suit in July.

The move brings Australian into line with – and in some ways goes further than – several other countries already using open banking.

But despite the significant implications of open banking, a recent Accenture survey found only 20 per cent of Australians were aware of the concept, let alone what it means for consumers.

What data will be shared by the banks?

Data will be shared in two phases. All consumer, account and transaction data for credit and debit cards, deposit accounts, and transaction accounts from the big four banks will be shared from February 2020, with smaller banks to follow in February 2021. 

Mortgage and offset data will follow in phase two in July 2020, with smaller banks following in July 2021.

Open banking is just the latest in a suite of recent changes resulting in increased data sharing between financial institutions.

Since July 1, comprehensive credit reporting means banks have been required to share positive credit events, such as regular payment histories and what types of credit people use. 

Previously only negative credit interactions such as missed payments and bankruptcies were shared.

What are the benefits of open banking?

Open banking will give home buyers, home owners and investors better access to financial products and services, according to Deloitte open banking and open data lead partner Paul Wiebusch.

“The opportunities for each of those groups are similar,” he said. “All of them can share personal information about their financial position with another organisation to allow them to assess credit risk better or come up with a product offering that better suits their financial arrangement.”

Wiebusch said overseas examples showed the success of open banking would be dependent on how much customers trust banks.

“In the UK it only applied to nine banks, it only applied to transaction accounts, and to begin with, there weren’t any consumer experience standards,” he said. 

“Australia has learnt from the UK experience. It has API standards, consumer experience standards; it also applies to all banking products. It’s much more comprehensive in its applications [compared] to the UK open banking.”

For those looking to refinance, open banking will take the pain out of switching,  according to Alex Trott, banking lead at Accenture Australia and New Zealand. Borrowers will be able to keep tabs on their home loan with one bank while tracking their other accounts with other banks.

“They may even be able to lock in a more competitive deal based on this data, with banks offering better interest rates for sharing this data,” he said.

“Once the consumer has decided upon the product, switching between banks could also be drastically improved, reducing the time and administration involved as the data would be automatically shared between providers.”

What are the risks and downsides of open banking?

A Finder survey earlier this year found less than 20 per cent of Australians had a high level of trust in their banks, suggesting not everyone may be keen on sharing their data.

Despite this, Finder open banking specialist Ben King said the move is set to make it easier for borrowers to apply for and secure a loan.

“There’ll be a whole part of the process where you don’t have to provide income data, home loan data; you can just plug your banking data in,” he said. 

King said the changes would speed up the application process. “We’ll see more automated approvals and declines,” he said.

While consumers will still have the power to control who their data is shared with, there are downsides to open banking, King said,

“Full access to your financial data makes it easier for the lender to identify frivolous or stupid things in your data.”

What are the future applications of open banking?

Open banking could also yield apps that draw data from multiple banks, allowing borrowers visibility of account balances and transactions across different institutions. This has been a critical outcome of open banking in the UK.

Swedish fintech company Tink is one business that has its eyes set on the Australian market. Its product tracks users’ financial data across all banking and financial platforms to provide people with a complete snapshot of their financial health.

Another newcomer from the UK, Crowd2Fund, is a peer-to-business lending platform which aims to use open banking to share data between lender and customers and create an algorithmic lending platform.

Trott said open banking could streamline the process of applying for a loan and even buying a home, Trott said.

“The home buying experience is an often painful, multi-party process involving lenders, real estate agents, solicitors, utility providers, cleaners and removalists, in which the customer is forced to act as facilitator and project manager,” he said. 

“Open banking could enable, through open API framework, a universal platform bringing all of these disparate elements together, and safely and securely sharing the information between those involved.”