Article written by: Luke Topfer
How do you think the open availability of personal financial data would affect personal and retail finances?
Open banking will be introduced in the UK and Europe from 13 January 2018. The change will require all retail financial institutions, including banks and building societies, to provide open access of their customer’s personal financial data to regulated third parties that request it.
The Australian Government announced in its 2017-18 budget that it too intends to introduce an open banking regime in Australia following a review that is currently being undertaken. The review will make recommendations regarding a number of items, including the model for the operation of open banking, the regulatory framework, and the scope of the banking data to be shared in the Australian context (full terms of reference for the review can be accessed here
This movement towards open banking in Australia is set to start a new and uncertain wave of innovation and competition in the world of personal and SME finance, and should pave the way for a host of new fintech start-ups and third-party banking options.
What is open banking?
Right now, in Australia, the banking data of individuals is securely held by whichever banking institution first recorded the data. Banking data is valuable to the banking institutions because it can be used to extract information which can lead to better financial products and services for customers. The collection and analysis of your banking data is the reason why your primary banking institution probably appears to offer more favourable credit and loan terms than competing banks – the banking data stored about you enables that institution to offer you better financial products than institutions that do not have access to your banking data.
Recently law-makers have realised that your personal banking data is not the property of banking institutions. It belongs to the individual, and the individual should be able to use and share that information. Open banking requires all banking institutions to share banking data with regulated third parties on request.
What does it mean for personal banking?
Open banking will re-shape how banks will deliver value in their financial products. With open banking, the value offered by your banking institution will not derive from its ability to leverage your data into a financial product that is better than generic offerings of the competition, but from its ability to offer financial products that are genuinely better than what the competition is prepared to offer on a level playing field.
An example of open banking currently being trialled in Australia can already be seen in Macquarie Bank’s move to capture a greater market-share in the home loan and credit card market against the Big Four. Through its use of Application Programming Interfaces (APIs), third-party companies can gain access to the Macquarie Bank system and use the data for the purposes of their own financial product offerings. This may including accounting software, personal finance tools, third-party investment tools, and a range of product offerings that may not have even been conceived of yet.
It is difficult to say with any certainty what the market will do in Australia once open banking is introduced. Undertaking some banking activities through regulated third-party applications is likely to become a reality, but the extent of the penetration of third-parties into the banking arena will depend on the appetite of those third-parties to undertake banking activities in the context of the Australian market, which has historically been somewhat anti-competitive. Could you some day soon be doing all of your personal banking through Facebook? Yes, potentially, if Facebook became a regulated company for the purposes of Australian open banking and developed an appealing financial product. However, it is more likely that open banking will benefit consumers more through the development of new personal banking applications which offer a better User Experience and User Interface (UX and UI).
Privacy, cost and liability
The benefits of open banking are clear. Increases in competition and product offerings will benefit consumers. However, there are concerns about the implications that open banking could have for personal privacy, and for the ability of consumers to recover losses in the event that banking data that is shared causes damage to the individual. Furthermore, sharing banking data will not be free for banks, and banks may seek to pass this cost on to the consumers.
These have all been key topics in a number of submissions in response to the Review into Open Banking in Australia – Issues Paper. The consultation process for the Review has now concluded, but the submissions have highlighted that these points will need to be addressed within the regulatory framework of Australia’s open banking regime. The submissions to the Treasury regarding the Issues Paper can be downloaded here
It is likely that existing regulators such as the ACCC and Office of the Australian Information Commissioner will have a role in managing data privacy and the cost to consumers of data sharing. It is also likely that liability for damages will pass to each new party who receives banking data. However, the specifics around what powers the existing regulators will have and how open banking will be regulated generally are not yet developed.
It is possible that open banking will lower the degree of security that individuals have over their banking data, and increase the probability that a breach will occur with each new recipient who uses the data to deliver their own unique product. However, adequate security protocols and a well-developed regulatory regime should reduce this risk to an acceptable level.
As a firm with a finger on the pulse of the tech start-up world, we are very interested to see how the Australian open banking regime develops. We will keep you updated as more information becomes available.
If you would like to know more about open banking in Australia, contact a one of our Communications, Media and Technology lawyers on 1300 565 846.