How open banking will reshape lending

by Madison Utley01 Jul 2019

In what has been described as a “seismic shift,” today marks the beginning of the transition from a closed banking system where each financial institution keeps and controls its customers’ information, to an open model in which consumers have control of their data and can share it with any institution they choose.

Over the next two years, a phased implementation of open banking will be carried out, with the majors leading the way. 

According to two authorities on the matter, open banking will not only “take the friction out of banking,” but will lead to the rise of a whole new class of products and services as it restructures competition in the financial sector.

Responsible lending

Open banking will directly address many of the concerns around responsible lending, a topic that has dominated the industry space, with ASIC announcing plans to update its responsible lending guidelines just last week.   

“This is one of the big issues in Australia from the royal commission. For responsible lending, you need to be able to verify income and expenditure. Open banking enables you to do that because you can go through and see the transaction data, and see exactly where money is actually being spent,” said Stuart Stoyan, founder and CEO of MoneyPlace and member of the Federal Treasurer’s Fintech Advisory Group.

This true verification is crucial as even the best-intentioned borrower often struggles to remember and recount their expenses with full accuracy.  

Stoyan continued, “Consumer advocates will argue, ‘There will be a cohort of people that are going to become unlendable because you’ve got all their information. What do we do about that?’

“Well, that’s what it means to be a responsible lender. If somebody is in a position where they should not get a loan, and the data shows that, then they shouldn’t get a loan.”

However, the risk-based pricing that seems likely to arise as a result of the new environment also has the potential to bring more customers into serviceability. 

“While higher-risk customers will potentially pay a higher price, the benefit could be that they get access to finance that they would otherwise not have been able to access," said Paul Wiebusch, Deloitte Australia’s open data lead partner.

Better customer outcomes

The sharing of data will also likely push organisations to identify and address currently unmet needs that are made more apparent through the new system.

“Open banking pivots the basis of competition from a product-based mindset and focus, to a customer mindset and focus. When a broader range of banking organisations have access to data, it facilitates opportunity for new ideas around product and services that can be created to deliver value to consumers,” said Wiebusch.

Additionally, financial institutions will begin to share their product information as well. 

“That enables organisations, price comparison websites, or other third parties, to get standardised information to improve their ability to make comparisons between the banks easier to understand,” said Wiebusch.

This will assist borrowers in finding the product or service that best meets the needs of their unique set of circumstances.

Stoyan explained, “If I think about myself, there is an optimal mortgage for me, an optimal credit card, an optimal personal loan, optimal auto loan – but I have to manage that myself. Open banking puts your data out there to enable somebody to use an algorithm to figure out what the best product is for you. That gives increased transparency. It leads to happy consumers, because they’re empowered.

“Data being available, accessible, and digestible makes advice focus more on value-added as opposed to just helping you navigate the myriad of options that are available,” he said.

Further, open banking will make financial advice more accessible, as the easier processing of data and ensuing decrease in necessary manpower means that insight will be made available even on lower value products or investments that might not otherwise have been deemed worthy of attention.

Customer adoption

According to Wiebusch, Australians still possess an unshakeable trust in banks to keep their money and their information safe, despite the royal commission and spike in negative sentiment towards the financial services industry. 

“If you’re wanting customers to share information with you, trust becomes an important component of that. But 'trust' is used very broadly as a term. We talk about people not trusting banks. But, in fact, it’s much more nuanced than that,” he explained.

“What’s been damaged is reputational trust. People have queried ‘Do banks have my best interest at heart?’ but I don’t think it has fundamentally damaged people’s prudential or informational trust in banks, particularly the majors.”

However, despite this core trust, consumers still seem to be wary of taking advantage of the many benefits made available to them through open banking.

“One of the biggest inhibitors to open banking is customer adoption,” said Stoyan, who went on to say that 60% of those surveyed would consider utilising open banking, while 40% refused outright. 

Brokers could be integral in helping their clients understand the opportunities presented through taking control of their own data. 

“There’s always going to be a group of customers that need somebody to help them understand affordability and the terms and conditions they should sign up to. A mortgage broker who has their customer’s best interest at heart has a positive role there,” said Wiebusch.

However, ultimately, the open banking specialist feels that the banks themselves will need to generate the shift in consumer mindset.

He explained, “The key element that will drive the take up of open banking in Australia is the ability of organisations to deliver value to the consumer [as a result of their data], and to be able to communicate the value that they are creating in a way that is convincing to consumers and brings them on board.”