For customers, controlling data and being able to port it between companies promises to make it easier to get a better deal. It could open credit to those previously denied it. More competition could reduce borrowing rates.
But open banking is also a double-edged sword for customers because it may increase the cost of getting a loan or credit card for some, as banks adopt risk-based pricing. And as sensitive financial data moves around the start-up community, the regime, if it’s not designed properly, could increase the risk of cyber attacks on personal information.
“The consumer data right will allow consumers to give a true account of themselves, through a data lens,” says Danny Gilligan, co-founder of Reinventure Group, the venture capital fund of Westpac.
“Concepts like income and expense verification, identity and affordability are about to get a whole new upgrade. On the whole this will create a materially better system: think in terms of responsible lending. But it won’t be without its challenges and risks.
“One of the challenges under the CDR will be the potential emergence of data discrimination.”
As they faced their royal commission grilling this year, banks were also put on notice about the growing importance of ethical use of data, after Facebook was brought down to earth following revelations Cambridge Analytica had data-mined 50 million users without permission to boost votes for Donald Trump.
Data security is a growing concern as high-profile cyber attacks on corporations from Equifax to Hilton expose customer information to criminals.
The major banks support open banking, but there’s a growing realisation that much effort will need to be invested to ensure customers have confidence about security, privacy and use.
Treasurer Josh Frydenberg said on Friday the government would push back the start date for open banking by eight months and considered “the security and privacy of consumers’ data paramount”. Product information and IT systems will need to be ready by July 2019. Card, transaction and mortgage data will be made available by February 2020.
“We have highlighted the sensitivity of consumers’ transaction data and the importance of it being held securely and for clear periods and purposes,” says the chief data officer at ANZ Bank, Emma Gray. “I think everyone, including the agencies and consumer groups, recognises this issue and the rules will drive a lot of the security around consumer data.”
Developing and enforcing the consumer data right rules falls on the Australian Competition and Consumer Commission. On Friday, the ACCC published a ‘rules outline’ for the new right, which it said would offer certainty to allow potential participants to invest in new IT systems.
Banks are also working on their own codes of ethics, conduct and use.
Under open banking, banks won’t be able to access relevant data without specific consent, but the form of the system is still to be designed. To get the full value from the regime, banks may want customers to provide wide authority to allow for ongoing monitoring of financial health.
And although the consumer data right will be accompanied by new privacy principles, it is not a fundamental privacy reform like the European Union’s GDPR laws, which established 20 data-protection rights for all individuals and businesses across the economy.
Consumer groups have fundamental concerns with the design of the regime. After the bill to introduce the right missed the parliamentary deadline amid a mad end-of-year rush in Canberra, Labor is expected to push for amendments when it re-appears next year.
The Financial Rights Legal Centre is worried about open banking leading to “profiling for profit” and price discrimination. “Those experiencing financial hardship are often very profitable to companies and therefore most vulnerable to exploitation, predatory practices, potentially biased and discriminatory algorithms,” the centre told Treasury. And it expects fintechs that don’t meet the ACCC’s standards to continue informally accessing data via a “screen scraping” process, creating a two-tiered system.
There are also questions about banks’ capability to implement open banking effectively, and about disruption to come from the likes of Google and Amazon, which, as the law is currently drafted, may be able to use banking data without having to share any of their own in return.
Banks have had access to streams of transaction data for their own customers for many years but haven’t invested in systems allowing it to be interrogated. Ignorance has been bliss. Banks have also struggled to create a single customer view because their technology systems have been built in “silos” around particular products.
“Banks are starting to realise the enormity of the challenge,” says Alex Trott, Accenture’s banking lead in Australia and New Zealand. “They will have to pull apart the spaghetti in their technology systems to create a single version of the customer, understood by the whole bank.
“This is the big difference between the banks and the platforms, the Googles and the Amazons. They realise their differentiation is a focus on data, and they have been set up around leveraging, managing and commercialising the data. But banks have been set up around products.”
Data increasingly valuable
However, as the march towards a cashless society continues and digital transactions proliferate, more and more revealing information is being generated. Banks understand this information will be increasingly valuable to power the new economy.
For example, seeing how much a customer is spending on Afterpay or Uber, will give banks a better picture of whether they’re disciplined enough to repay a hefty mortgage. Customer profiling will also help them cross-sell products.
ASX-listed payments company Zip is ahead of the fintech pack when it comes to data analytics. It’s using data to not only conduct income and expense verification but feed credit engines and model expected loss rates and the probability of defaults. It’s thinking about how to build bespoke products and personalise services.
“You need some regulatory proscription to ensure customers are protected, but if any accreditation scheme is too proscriptive, you will stifle innovation,” says Zip’s chief strategy officer Tommy Mermelshtayn.
Faster due diligence
While details of the regime are worked out and consumer awareness takes time to build, Mermelshtayn reckons the uptake of open banking will be slow and agrees the major banks will be the ones taking advantage of it initially.
It could help them unblock the credit assessment pipes, after the royal commission has led banks to go through every application with a fine-tooth comb as they scrutinise customer spending habits.
“The royal commission has created a due diligence blowout and open banking should bring that back down by making data readily accessible,” he says.
Banks will also want to use data to determine when a customer is heading towards hardship, says Damir Cuca, the founder of Basiq, a start-up developing open banking platforms.
“The fact that the bank can access this data and work out that the customer is in dangerous territory to service their loan will put additional obligations on them to act before the customer gets into further trouble,” he says.
“This is a whole new level of responsibility which banks will need to take on, ensuring that it is not just about responsible lending but also about responsible serviceability of the loan.”
While open banking could be used to help banks monitor vulnerable customers in hardship, it could also be used by banks to justify interest-rate increases for less-well-off customers, as repayment history information is fed into algorithms to identify “risky” behaviour.
This could see vulnerable borrowers pushed outside the regulated banking system and be forced to turn to high-cost and exploitative payday lenders.
“Like so many financial products, especially insurance, the lending system works off a subtle form of cross-subsidisation, the good credits subsidise the bad, to a degree,” says Gilligan, also co-founder of a data sharing platform Data Republic.
“So one of the challenges now under CDR will be the potential emergence of data discrimination – will people be denied financial services, or be asked to pay more because of the CDR? Is this a good thing? We may need to enable more financial literacy and support services.”
National Australia Bank chief technology and operations officer, Patrick Wright, says NAB is creating an “ethical practice model” for the use of data that goes beyond governance and security.
“Within NAB we’ve established a clear data governance framework, put data controls in place and implemented data stewards across our organisation to help with management of the guiding principles. But ethics go beyond that,” he says.
“As companies use massive amounts of data to enable the customer experience – for example through artificial intelligence and machine learning – they need to be really thoughtful about how data is used and we are bringing that thinking into our data operations.”
As the ACCC seeks to finalise the rules for the regime, other questions abound. These include: what limits there will be on direct marketing, given banks will want to use banking information to cross-sell? How will banks be able to make offers? What limits will be put on the ability to use certain data sets?
Labor’s spokesman on the digital economy, Ed Husic, says the opposition supports giving consumers control of their data but believes the success of the reforms will rest on the ability of open banking to provide value to a broad range of customers, not just high-net-worth people.
“It is a reform whose time has come, but we have got to get the architecture – and overall consumer awareness – right,” he says. “The proper rules and standards will be crucial, and the bill will need to go to an inquiry to flush these issues out.”
Banks realise the emerging data economy will transform the financial services industry in coming years, but in unknown ways.
Gilligan suggests it could allow banks to become resellers of energy and telco services, but may also allow the likes of Qantas, Woolworths or Coles to become financial services providers. Similarly, the consumer data right may see banks acquire fintechs to adopt their algorithms but may also open the door to global players to compete.
ANZ’s Gray says banks “want to drive open banking so consumers can do exactly what they want to do with their data – but with the right protections”.