One of the first events of the new financial year is the launch of Open Banking, which promises to make it much easier to compare financial offers and switch banks. But what is Open Banking, and does it live up to the hype?
What exactly IS Open Banking?
To talk about Open Banking, you first have to talk about the Consumer Data Right (CDR). This project from Australia’s federal government gives everyday Aussies the right to share digital information about themselves with organisations of their choice, to help make more accurate comparisons while minimising paperwork and keeping their personal details secure.
First announced years ago, Open Banking is the first implementation of CDR in Australia. From July 2020, Australians can request their bank share their data for deposit and transaction accounts, as well as credit and debit cards. And from November 2020, Australians will be able to share their data relating to home loans, investment loans, personal loans and joint accounts.
While CDR is initially being introduced in the financial industry as Open Banking, there are plans for it to expand to other industries in the future. This could make it easier to compare and switch energy providers, telecommunications services, and much more.
How does Open Banking work?
Traditionally, to apply for a new savings account, credit card or home loan, you’ll need to fill out a lot of forms, send through copies of your ID, sign a lot of papers, and generally jump through a lot of bureaucratic hoops. While online application forms and electronic signatures have smoothed these processes in recent years, it still involves a lot of hassle. And because the exact cost and value of a financial product may vary depending on your personal financial situation, there’s often a lot of estimates and assumptions involved when comparing different offers.
Under Open Banking, you can choose to make part of your personal financial information available to a new bank. Using the bank’s website or app, you can choose exactly what information you’d like to share, how long you’d like to share it for, and how you consent for it to be used. You can change or withdraw your consent if you choose.
This information lets banks find exactly what they need to make you a competitive offer using real data, without having to make estimates or assumptions, and without having to drown in seas of paperwork. This can make comparing and applying for different financial products much quicker and easier than it was in the past, while also keeping your information secure.
According to the Australian Banking Association (ABA), data you could choose to share with Open Banking includes:
- Personal: information such as phone number, email and address.
- Account: balances
- Product info: rates, fees and features of bank products
- Transaction details: amounts spent
What are the benefits of Open Banking?
Open Banking has the potential to make it much easier to compare financial products and switch to a better deal.
According to the ABA, some of the future benefits of Open Banking could include:
- Signing up more easily for new credit or debit cards
- Getting a loan easier
- Using budgeting tools that let you track and plan your spending
- Switching from one bank to another bank more easily
Instead of comparing many different products to estimate the value they could offer, then filling out forms confirming your identity, income, expenses and much more, you could make part of your banking data available providers, so they have easy access to all the information they need, with no extra effort from you, and you can calculate and compare the exact costs and benefits of their services.
Additionally, rather than applying for financial products that you may not be qualified for, you may be able to ask banks and fintechs for financial products that are tailored to your financial situation.
Rather than using photocopied account statements and credit reports to give the bank a general idea of how you manage your money, you could choose to show the bank your current financial records so they can see for themselves. The bank could then use this information to offer you a personalised deal that could provide more value.
Additionally, because it’s much harder to “enhance” your income or expenses when you give a bank access to your finances, it should be much harder for risky so-called “liar loans” to slip through the net.
What are the risks and drawbacks of Open Banking?
One of the main concerns about Open Banking is the security of the personal information you choose to share with banks and fintechs.
Open Banking is only available to organisations that are accredited with the Australian Competition and Consumer Commission (ACCC) and publicly listed on the CDR website. These organisations are required to use sophisticated information security measures to keep the data you choose to share with them private.
You can choose what data you share with these banks, and how you consent for this data to be used, but you must still trust these organisations to handle this information responsibly and keep your data safe.
Also, because accreditation is required to be part of Open Banking, not a lot of banks are participating in it at this early stage. In fact, on day one, Australia’s big four banks – ANZ, Commonwealth Bank, NAB and Westpac – are listed on CDR as Data Holders, while only Regional Australia Bank and fintech Frollo are listed as Data Recipients. This could mean your options may be limited when you’re looking for financial products through open banking.
However, according to the ACCC, a further 39 providers have already begun the process to become accredited data recipients. And with the next phase of Open Banking due to go live in November 2020, the way Australians search, compare and apply for financial products could be due to change.