Open Banking represents a real paradigm shift in the ownership and use of customer data. It not only provides significant opportunities for consumers, fintechs, and banks but also represents a precursor to broader data ownership changes beyond just the realm of financial services.
Scott Farrell defines open banking as giving "customers a right to direct that the information they already share with their bank be safely shared with others they trust." Traditionally viewed as an asset of the organization, empowering consumers to be able to easily, and safely, share their data sounds like a really great idea. However, what are the likely consumer implications?
If significant, democratizing changes of the past are anything to go by then consumer uptake will be slow. Indeed, just take a look at the "choice of fund" legislation in superannuation which is almost 15 years old and still sees relatively few workers choose anything but their employer's default fund. Another recent example would be the latest advancement in the Australian banking landscape, the NPP, allowing almost real-time payments is almost unheard of by consumers. Some of Australia’s largest banks haven’t been able to integrate it into their offerings as yet.
As such, short term adoption of Open Banking is likely to be limited but it does put in place a foundation with the potential to deliver significant consumer value well into the future. To appreciate the value of the proposition it’s worth considering the examples of outcomes it could enable for customers.
One of the more interesting points in the Open Banking report was Recommendation 3.3, which states that "... data that results from material enhancement by the application of insights, analysis or transformation by the data holder should not be included in the scope of Open Banking". What that means is any value add or proprietary processing you add as a bank to a customer’s transaction data does not need to be shared. The opportunity present, therefore, is being able to provide additional services on top of the underlying data in unique and compelling ways.
For example, imagine as a bank being able to provide proper categorisation of transactions to help drive financial outcomes for a customer. You could tell a customer they spent $24 on coffee this week, which was $4 over their budget. Or you could provide a kind of financial health check service to ensure they’re using the most optimal product for their situation. Providing value add services increases customer loyalty, and discourages Fintechs from plugging obvious gaps in your offering.
A less obvious benefit of a free-flowing data approach is the ability to use data for acquisition purposes. Imagine that you have a credit card with Bank A, and you’re applying for a new credit card with Bank B. By leveraging the Open Banking platform, Bank B will be able to incorporate the financial transaction data from Bank A as part of its signup process and leverage that data to provide concrete examples of how its product is superior. For example, Bank B could show that "transaction X" would have resulted in "Y" number of reward points. The transaction data could even be used to target the kind of product being applied for, say a "Platinum Card" instead of a "Gold" card. A more advanced version of this approach could leverage the data supplied to customize the product specifically for a customer.
The key to this approach is to demonstrate the value that you can deliver to your potential customer immediately. A flashy brochure-wear website, showing picture after picture of near-identical credit cards is fine, but that doesn’t differentiate your brand; that’s a transactional cost of doing business. Being able to effectively categorize data rapidly, using either fixed or machine-generated rules, could be used to significantly speed up the signup process, reducing the number of dropouts and increasing conversions. Looking at one of the Big Four’s credit card signup forms has 6 sections relating to finances, including a 100-word description of what an expense is; this could be massively simplified with Open Banking data.
There is a serious opportunity in being the bank that embraces the Fintech and Developer community in a meaningful and ongoing way, through both brand exposure, as well as from new customer streams. What this means is investing in developer advocates, relevant API documentation, sample code, and support channels for developers. If developers find it easier to build products using your services and data, and you make the experience compelling for them, they’ll be more likely to continue to use your products, and potentially branch out into using your products in other areas.
Open Banking will dictate a minimum set of standards that will need to be adhered to, but that shouldn't be the target for any bank. Providing additional data points, or even write-based access for some services would be a huge carrot for Fintechs. Imagine, for example, a Fintech company that helps people manage and track their savings goals. If your bank allowed the Fintech company to transfer money between a customer’s various accounts, they could leverage and recommend your bank’s services to its customers. A symbiotic relationship in this case would benefit all parties.
The premise of Open Banking is consumer empowerment, industry invigoration, and driving competition in the banking sector. As such, it is somewhat ironic that, at least in the short term, the biggest beneficiaries of this approach are likely to be Australia’s big four banks.
There is no doubt that they will be burdened with the cost of implementing approaches that facilitate the operation of Open Banking but, in the process, will also empower themselves to take advantage of this in ways that were not historically leveraged. This is a massive opportunity to drive significant engagement with their existing client base and thus reduce churn.
Further, should some innovative fintech startups create value in ways unforeseen by the Australian big four, their sheer market power and financial strength means that they could most probably play the fast follower by replicating the proposition or just acquiring the company. Again, let’s consider the example of peer-to-peer lending, another approach to "opening up" the banking sector, where those platforms that were successful got bought, or invested in, by the big banks.
As an initiative, Open Banking should absolutely be applauded. It creates a foundation that should drive positive changes in banking over the short, medium, and long term. The ultimate success of the initiative should be measured by consumer adoption and the flow of benefits that ensue in opening up consumer data in markets beyond just banking.