Data revolution to transform four pillars model

You’re browsing through Facebook when a message pops up, asking if you’d like to check whether you’re getting a decent interest rate on your savings.

Curious, you tap the screen to find out more.

It asks you to provide a bit more information about your financial goals – you’re saving for a deposit on a house and hope to buy in about two years.

You are then asked to give consent to securely share some key bits of financial information online: your income over the last six months, and your spending over this period.

Within seconds, the app has a recommendation: it’s found a bank account and term deposit that will pay hundreds of dollars more a year in interest than your existing account, helping (a little) with the savings plan.

This type of scenario may sound far-fetched, but is the sort of thing bank executives are thinking about when scanning the competitive landscape.

Governments around the world, including Australia, are pushing banks to open up some of the most valuable vaults they have: those storing customer data.

Through “open banking”, policymakers want to allow consumers to securely and easily share their financial data with trusted parties such as banks, financial technology firms, or potentially tech giants like Facebook.

The United Kingdom and Europe are already going down this path, and Treasurer Scott Morrison has ordered a review into open banking, to be provided by the end of this year.

ANZ Bank’s chief data officer, Emma Gray, sketches scenarios similar to the one above as “simplistic” examples of what might take place in an “open banking” regime.

Typical of the major banks, Gray argues for a gradual approach to open banking.She says initially the data shared should be limited to simple financial products, such as savings accounts, to see what is most useful to consumers.

“When applying for loans or credit cards, consumers will no longer need to worry about sending in their last bank statements or payslips.” – Damir Cuca, Basiq

“Opening things up without listening to what consumers really want, I think it’s a waste of people’s time and money, when we need to be focusing on doing a better job for them,” Gray says.

Yet when taken further, open banking could have big impacts on all sorts of products, including the $1.6 trillion in mortgage debt.

In a world when customers’ trust in banks has eroded, supporters argue such a move would force banks to better serve our interests, including by competing more sharply on price.

Yet there are also obvious risks. The recent breach of US credit bureau Equifax, in which a cyber attack affected the financial data of up to 143 million Americans, illustrates the serious privacy and security issues.

Westpac chief Brian Hartzer told this month’s banking inquiry his 75-year-old mother had been caught up in the incident. Though Westpac supported moving towards open banking, he added the security risks were “very, very real” and not to be brushed aside.

“These are not hypothetical concerns. These are concerns that every single Australian should worry about,” Hartzer said.

Bankers such as Hartzer have a clear vested interest in limiting the sharing of the valuable data they hold, of course. The banks’ tight control of customer data – something many customers would expect – also acts as a barrier to potential competitors.

More banks realise however this situation is likely to change, and this is forcing them to rethink how they compete with technology-based firms eyeing their profits.

Savings for those who share

Treasury’s review of open banking, being led by King & Wood Mallesons partner Scott Farrell, was overshadowed by the furore surrounding the bank tax when it was unveiled in this year’s budget.

However, the eventual impact of this change could be just as significant as the tax, if not more so.

One of the biggest changes promised by open banking is it would “empower” consumers to more effectively shop around for better or cheaper financial services.

In the longer term, banking is viewed as a testing ground for the broader policy of “open data” in which all sorts of businesses – insurers, electricity companies, retailers – must also give consumers access to their personal information.

For banks and consumers, such a change matters because customers are notoriously “sticky” when it comes to financial services.

Switching banks is a hassle. Even working out whether you are getting a good deal from your bank can be complicated, especially if you have a bundle of products such as a transaction account, home loan and credit card.

The Reserve Bank and the Australian Securities and Investments Commission both say they “strongly” support open banking because it helps to deal with this consumer inertia.

If customers were more willing to shop around, the argument is that banks would have to compete more fiercely, through sharper interest rates, lower fees, and better service.

“In the financial services industry, open data has the potential to promote competition and efficiency through new and improved services, increased price transparency and better-informed decision making,” the Reserve Bank says in its submission to Treasury’s review.

What specifically would customers see as a result? The RBA nominates three big changes.

There would be services that facilitate switching between banks, by telling customers how much they would gain by dumping their bank for a rival.

There would be a proliferation of apps that give you a better idea about your financial position, offering help with budgeting, or predicting how much money you may have in the future.

And, further down the track, automated payment services, where you could give permission to a business to arrange payments from your account, such as switching your utility bill to the cheapest provider.

Financial technology or “fintech” businesses are also working on all sorts of changes that could be rolled out more broadly by banks.

Basiq, a start-up partly owned by Westpac and National Australia Bank, already provides fintechs with secure access to some of the data on consumers held by banks.

Its founder, Damir Cuca​, says open data could also allow banks to give on-the-spot approval for customers who want a loan, because customers could opt to share their transaction history.

“When applying for loans or credit cards, consumers will no longer need to worry about sending in their last bank statements or payslips,” Cuca says.

Lenders might also provide personalised interest rates, he says. They would do this by looking at your digital financial history to form a judgment on your spending habits, ability to save, and even how “impulsive” you are with money.

There is also an argument that greater sharing of data could improve peoples’ understanding of their finances, and prevent people from borrowing more than they should.

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Source: Data revolution to transform four pillars model – The Sydney Morning Herald