Open banking and rise of fintechs to disrupt big banks’ ‘rivers of gold’
In the not-too-distant future, applying for a mortgage could involve little more than giving your name, email and property address, and your consent to “share” your banking data.
It is good news for consumers, but a potential profit headache for the big banks. And it’s not pie in the sky. Applying for a mortgage with a few clicks could be possible in about five years, thanks to a new data-sharing regime due to launch this year, says James Cameron, a partner at venture capital firm Airtree.
“That completely takes the friction out of applying for a mortgage,” he says.
Known as open banking, the regime will allow customers to securely share the data held by their bank – such as their past income, expenses and debt repayments – with a competitor bank. Sharing could take place with a few clicks of a button, or more likely taps on a smartphone. The new system was due to start in February, but in the week before Christmas it was pushed back until July due to technical hiccups and the need for security testing.
Banks are the test bunnies for a system known as the “consumer data right”, which will eventually be rolled out to other industries such as telecommunications and utilities.
Evans and Partners analyst Matthew Wilson cites open banking as one example of how “the rivers of gold in retail banking” are being disrupted. “We believe, in time, open banking will radically change banking and remove legacy rumps of profit,” Wilson said in a recent note.
This ability of customers to share their data is seen as incredibly powerful because it could change a fundamental force that supports the banks’ high profitability: customer inertia.
For all the hostility towards banks in recent years, most people do not dump their lender for a rival. Critics say this allows banks to direct most of their competitive efforts to winning new business, as opposed to giving existing customers the best deal possible.
Wilson has estimated up to 13 per cent of bank profits are at risk because of what open banking could do to mortgage profits, and that banks could lose up to 15 per cent of their low-cost deposits, such as transaction accounts that pay zero interest.
But just how many customers will want to securely “share” their financial data?
The chief investment officer at Atlas Funds Management, Hugh Dive, does not see a huge wave of people ditching their bank, because the scheme won’t remove the other practical hassles of moving banks, such as the need to rearrange direct debit payments.
“I don’t think this results in wholesale switching,” Dive says.
Senior bankers also say there won’t be a flood of customers suddenly trying to switch banks once the new regime starts. They expect more of a slow burn.
At the same time, surveys indicate there are a potentially lucrative group of bank customers ready to explore their options through open banking.
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