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Open Banking and the currency of consumer trust
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Key takeaways
- In line with similar regulations in the EU and UK, Australia is embracing the open data movement.
- For banks, this will change the ecosystem that they play in, both in the short and long term.
- There is an opportunity for banks to reimagine their future and ensure minimal disruption, and the ground work must be laid now.
Banks are entering a period of significant change in their industry.
Consumer expectations have evolved dramatically in the last decade and customer service limited to branch banking hours is no longer acceptable or instep with their dynamic needs. Fintech is on the rise, accelerating the avenues for customers to have their desires met and disrupting the status quo. The Royal Commission into Misconduct into the Banking, Superannuation and Financial Services Industry is adding a layer of scrutiny over the entire sector.
In addition, the Australian Government has announced the introduction of a Consumer Data Right (CDR), which will be applied first to the banking sector. This legislation paves the way for Open Banking in Australia, allowing consumers to access the data held about them by businesses, and to transfer this data between accredited third parties.
But what exactly is Open Banking?
Open what?
Open Banking refers to the ability to access customer data held by banks. While the term is different in various regions and countries, in Australia it refers to the application of the CDR allowing for customers to access and share or transfer the data held on them by banks with third parties, such as other banks or fintechs.
Essentially, their customer data is ‘opened’ (with permission) to other companies. Data is accessed securely, through common standards of technology, such as APIs, or application programming interfaces, which are pieces of code that do individual tasks and plug into all manner of websites and apps. For instance, an API may allow one bank to ‘plug in’ or embed the balance of a customer’s bank account with another bank. This is similar technology to how a YouTube video or PayPal payment can be embedded into another brand’s website.
While it sounds simple, Open Banking will encourage competition and consumer choice, allowing customers to access new products and services – such as comparison tools to find the most appropriate deals or product, budgeting calculators or platforms where to see all a person’s financial data in one place.
How did we get here?
Growing from the larger open movement that has led to open source projects such as software, creative commons permissions, Wikipedia, and open datasets, the philosophy behind all is that transparency and the sharing of information benefits the common good, and only from this can we advance collaboratively.
In Europe, Open Banking has come about from two pieces of legislation. The Second Payments System Directive, or PSD2, requires banks to open up their data and comes into full effect from August 2019. Second, the General Data Protection Regulation (GDPR), which began in May 2018, gives consumers rights when it comes to their data, such as accessing it, the uses it can be put to and the right for it to be ‘forgotten’.
In the United Kingdom, Open Banking has been instituted by Competition and Markets Authority (CMA) to create competition in the banking industry – to lead to better services and experiences for consumers.
In Australia’s case, the aim of Open Banking legislation is to improve consumer choice, product transparency and the flow of information to create new, better tailored products.1
What does it mean for banks?
Understandably, the open banking movement will have a significant impact on Australian banks accustomed to data opacity for their competitive edge. Therefore, banks are faced with a decision: do they wait and see how changes play out, or do they go all in and embrace the opportunities that it creates with ardor?
We at PwC believe that Open Banking is more than just a compliance requirement: it will transform the industry. The changes required will be more than simply readying the technology for compliance. Moreover, history has shown that technological change is the easiest part of transformation. It is everything else – cooperation, agreement of standards and aspects of the social infrastructure – that is difficult to navigate and takes time. It’s also been shown that waiting until the last minute increases the cost, risk and disruption of change – just ask the UK and EU.
But on the flip side, a hasty approach is not advisable either, and so we believe banks should adopt a ‘walk-run-fly’ approach. Here, banks envision and work towards a future that gives ‘more’ than the requirements asked of them. Given that many banks are already working on innovation and customer experience initiatives, this should be an opportunity to align. Those efforts should be combined with Open Banking projects to direct the future vision of the institution.
In the short term, this means working towards compliance (with a margin of safety) and keeping ahead of minimum requirements. Readying the digital and data engines, strengthening security and governance mechanisms and clarifying opportunities for growth are all key priorities. This acceleration should come alongside a continuance of prior initiatives around customer experience, digitisation, productivity and growth.
Such a measured approach will ensure that surprises are kept to a minimum as regulations come into effect and requirements (not to mention customer expectations) change.
Why Open Banking?
From PwC’s perspective, Open Banking is no surprise. It’s a raison d’être, and the effects of its implementation to the banking ecosystem, are in line with the direction that we have seen experience and technology evolving in other sectors. Transparency is expected by customers, as is greater choice and the personalisation of products, but these can and will lead to innovation, opportunity and healthy competition.
While it will change the way the financial sector works, there is time for banks to view and prepare for it as an opportunity for growth and the right to play in new fields of business. When embraced, it will give banks the moment to take stock of where they want their future to lie, and reinvent themselves for relevance.
In our next article on Open Banking we will look at some of the models and products that banks should be examining for future success.
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References
- https://treasury.gov.au/consumer-data-right/
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