The peril and promise of open banking

23rd October 2018

Open banking has the potential to revolutionise the Australian financial landscape – which is to say, the Australian economy as a whole.

By unlocking a veritable treasure trove of bank customer data and placing it in the hands of our technology-driven fintechs, open banking could bring forth all manner of new financial products and processes that could change the way we transact forever.

Application Programming Interfaces (APIs) could give businesses and consumers real-time control of their own financial information, which could then be used as leverage to obtain faster, cheaper and better financial services.

It would also allow borrowers to evaluate credit products from multiple lenders, and switch instantaneously to a better deal. This compares with the 2 per cent of bank customers who currently switch products, even though the vast majority would benefit from doing so.

But are we actually poised to realise this array of potential benefits?

A global revolution has started

Australia is not an early leader in open banking.

The Open Banking Review chairman Scott Farrell recommended that Australia seek to follow the British model where possible.
The Open Banking Review chairman Scott Farrell recommended that Australia seek to follow the British model where possible. Peter Braig

However, this presents us with the unique opportunity to learn from the mistakes, and triumphs, of those who are.

As an example, Britain’s largest nine banks that comprise about 90 per cent of the British market have had open banking operating since the beginning of 2018.

Though it will likely be at least six more months until open banking in Britain passes many of the quality tests of the original concept, it is still widely accepted as the current best-practice model on a global level. In fact, The Open Banking Review chairman, Scott Farrell, even specifically recommended that Australia seek to follow the British model where possible.

Given this, when comparing the current British model with the proposed systems being established now in Australia, there are a number of concerns.

Are we actually following best practice?

Australia’s most notable deviation from the British approach is in implementation.

In Britain, the open banking implementation body is an independent organisation called the OBIE – the Open Banking Implementation Entity. It was set up under government guidelines that aim to create a better deal for consumers and SMEs, and it is funded by a selection of mandated banks.

Compare this to Australia’s implementation body, which is not independent. It is a federal government department called Data61 (an arm of the CSIRO), and so is fully funded by the government.

Though Data61 is a great national asset that provides a world-class research and development function, it’s a very different entity to the purpose-built OBIE.

Can an R&D department provide the full range of skills required to drive this quite specific project?

When I spoke to Imran Gulamhuseinwala OBE, open banking implementation trustee for the British initiative, he said it would have been hard to find all the skills required for the task in a British government research and development department.

“Bringing together all the relevant skills in a dedicated and purposely structured function like the OBIE is the only feasible way to guarantee the successful delivery of an open banking program,” he said.

Will a government-funded initiative drive sufficient banking innovation? Mr Gulamhuseinwala said that unbundling financial services and tackling the high cost of some services for the disadvantaged were among the most significant possible innovations.

So the stakes are high for the average Australian consumer.

Is this the people’s revolution?

The implementation of any new industry standard is rarely a straightforward process. It can be swayed by multiple vested interests with differing levels of power and investment in the issue. For this reason, ensuring adequate representation in discussions by all affected parties is crucial.

In Britain, new entities to organise and represent consumers were established, such as the Financial Data and Technology Association (FDATA).

When I spoke to FDATA’s chairman, Gavin Littlejohn, he said open banking was no trivial task. “It requires close co-ordination, strict conformance to the security profile and the use of common infrastructure to help reduce complexity and cost. The market needs to have a strong and co-ordinated voice to ensure that the implementation focuses on reducing complexity and improving scalability.”

In Australia, neither small business or consumers appear to be as strongly represented in critical discussions on implementation. And so the weight of influence remains firmly in the hands of the banks.

Two possible outcomes

Consequently, I have a genuine concern we may be setting ourselves up for open banking failure and the consequences of this would be enormous.

Digital banking services don’t observe national borders. So, if we get this wrong, it will no longer be a local-bank-versus-fintechs fight; rather, it is more likely to be Australia losing its financial superpower to unstoppable open banking entrants from overseas.

However, if we do make this a success, we could unleash Aussie financial muscle on international markets on a scale never before seen. This could even rival our mining exports.

Open banking is a once-in-a-generation opportunity for Australian financial services. We have to get it right.

So, Prime Minister, when you tell us to not stuff up, believe that we won’t – but you have to make sure we get access to a level playing field first.