Article

Open banking: Beyond Data Sharing

 

Open Banking - Looking beyond being a Data Provider

In this paper, we take a view on what ‘Open Data’ means for different financial institutions and what approach they can take to position it as their differentiator.

 

What opportunities lie in wait?

The Open Banking deadline is nearing for Data Holders, the major banks have already complied with product reference data, whereas non-major ADIs including non-major banks, building societies and credit unions, are well set to comply with these requirements by Oct 1st, 2020. While the compliance timelines for disclosure to accredited data recipients is still a few quarters away (phase-1 for major banks is Oct 2020 and for non-major banks/ADIs/ building society/credit unions is Feb 2021), the financial institutions have also started to define their strategy around being a Data Recipient. We are seeing a varied set of approaches to the Open Banking Consumer Data Right (CDR) compliance requirements. While the smaller financial institutions have primarily focused on compliance aspects, the mid-large tier organisations have taken a strategic approach to prepare themselves for a new world, where the customer and banking data can be potentially accessible to all financial institutions based on customer consent.

 

The opportunities for financial services

While the immediate focus of CDR has been product, banking and consumer data from Financial Institutions, it is expected to be extended to other industries such as utilities. Additionally, the Australian Competition and Consumer Commission (ACCC) is also contemplating ‘write access’, which can open up transaction processing by Data Recipients post receiving customer consent. The list of financial products, currently in scope of Open Banking regime, are listed here:

Data Sharing with accredited Data Recipients*

Phase-1

(Major Banks: Oct 2020

Non-major: Feb 2021)

Phase-2

(Major Banks: Feb 2021

Non-major: Jul 2021)

Phase-3

(Major Banks: Jul 2021

Non-major: Feb 2022)

Savings account Home loan Business finance
Call account Mortgage offset account Loan for an investment
Term deposit Personal loan Line of credit (personal)
Current account   Line of credit (business)
Cheque account   Overdraft (personal)
Debit card account   Overdraft (business)
Transaction account   Asset finance (including leases)
Personal basic account   Cash management account
GST or Tax account   Farm management account
Personal credit / charge card account   Pensioner deeming account
Business credit / charge account    

*Timelines as per ACCC and may change

Operating in an environment in which open access to banking product data is permitted can benefit customers with an enhanced digital experience, by providing the best value for the products they are subscribing through their financial institution. Financial Institutions can potentially look at a host of opportunities in the Open Banking regime, such as:

  • Data Aggregation. At the simplest level, financial institutions can provide an aggregate view of different customer product / accounts. Customers can be presented with a consolidated view of their balance across different types of accounts. In addition to this the organisation could offer their customers the ability to redirect to their internet banking or in-app mobile banking, while selecting an account that is with a different financial institution.

  • Recommender systems. Financial Institutions can build tools that can compare similar products across different banks, with default or customer defined parameters such as fee structures, interest rates, etc, and make recommendations to the customer. As a Data Recipient, the financial institution can extend this comparison to similar products from other financial institutions, where the customer doesn’t have an existing relationship. While a recommender engine may appear to be cannibalising an organisation’s own business, it provides an opportunity to tailor product offerings to market demands and to ward-off or even match the competition.

  • Re-selling opportunities. As a Data Recipient, financial institutions can not only identify product portfolio gaps, but also use the opportunity to partner or resell products that offer promising business. For example, a financial institution may identify an opportunity in the area of short-term credit by analysing transaction data for business customers and may look at assessing potential business opportunities.

  • Financial Insights (Retail). The Data Recipient can access the transaction history of customers across their different products / accounts. It provides an enormous opportunity to analyse the consumption and saving patterns, recurring expenditures and risk profile of customers. Financial Institutions can use these details to build insights, offer advice on investments, and assist customers in defining and achieving their financial goals. It can also assist them in expanding their engagement with the customer by offering needs-based loans, loan top-ups, etc, thereby matching new products to their financial needs. The insights can also be drawn at a customer segment / demographic level to identify any product portfolio gaps within the financial institution.

  • Financial Insights (Business). For business customers these insights can assist in conducting credit assessments and tailoring different savings and lending products as well as the products suited to meet the businesses financial goals. The data can be used to manage working capital and cash and help in benchmarking performance of similar businesses. The payment data of merchants can provide unique insights on the costs they are incurring while selling their products / services, for example, merchant fees. Financial Institutions can use this to provide options around minimizing some of these costs.
  • Responsible Lending. The transaction data for customers / businesses is a trove of information to conduct effective credit assessment and risk profiling. Access to loan accounts, credit card accounts and potentially any Buy now - Pay later (BNPL) accounts along with income / expense insights, and transaction categorisation can provide good insights on consumer behavior along with their credit profile. Financial Institutions can look at customising their lending product offering based on these insights, to improve the customer experience, reduce risk of Non-Performing Assets and maintain profitability.
  • Platform Banking. It is a digital marketplace, owned and operated by a financial institution, that provides banking and possibly nonbanking services. Financial Institutions can have complementary services from other Fintechs or Financial Institutions as part of this offering. They can analyse customer data and match to complementary services. For example, a bank may not only provide home loans, but also become matchmakers in helping customers buy homeowner’s insurance, or other services on the bank’s platform.

  • Monetise analytics on data. The open APIs also provide the opportunity to monetise value added analytics that may be of interest to other banks or Fintechs. For example, a bank aggregates transaction data from customer accounts and determines spending habits for specific customer demographics. This information can be made available for a small fee to third parties looking at insights for a certain demographics.

  • Simplifying Payments Experience. Open Banking is enabling Financial Institutions to have access to customers account related transactions, their payees, scheduled payments and direct debits. It is expected that the ACCC may introduce “write” access in near future and it will open up different opportunities such as enabling payments from other bank accounts through Open Banking APIs. With New Payment Platform (NPP) “request to pay” services planned in near future and Open Banking potentially enabling “write” access to customer bank accounts, it can open-up opportunities for Financial Institutions to streamline the direct debit set-up process for merchants as well make life easier for customers around tracking their direct debits. It may also lead to Fintechs looking at innovative offerings to the industry.

  • Beyond Financial Services. Opening access to data from utilities or other sectors can enable the financial institution to tailor products that can enhance customer financial well-being, thereby increasing customer retention. For example, there can be potential offerings around switching utilities providers based on product comparison, or even compare similar offerings in sectors such as education. There are energy comparison offerings in the market today, for example, the Energy Switch program from Service NSW, or a similar offering from 86400, which are broadly based on publicly available product information. However, opening of data access from utilities can help provide further insights into the behavior at consumer level, thereby tailoring offerings based on customer needs.

 

What is needed to be done?

Just sharing data with other Financial Institutions in a Data Holder model may not be an effective strategy for any Financial Institution. It poses serious risk to the very business they are in given the customer can switch products based on the services and best value they may get from other institutions. Digital savvy Millennials and Gen Z are much more open to such switching (refer attached data from Deloitte Report: Open banking: switch or stick? Insights into customer switching behaviour and trust, October 2019) given that products can be applied for and approved digitally within minutes. Hence, taking no action is an immediate business risk.

A range of operating model / solution approach are being adopted by Financial Institutions to become ready for the Open Banking world. They are looking at a mix of approaches such as building in-house capabilities, partnering with Fintechs and other vendors, investing in early start-ups and Fintechs, and partnering with technology companies.

Building Futuristic Architecture

Few of the Financial Institutions have been redefining their existing Digital Banking architecture and looking at various mechanisms such as building Data Lakes, identifying performance bottlenecks and bringing in concepts around the speed layer. The end goal is to be ready to have this data accessible on demand through APIs and ease of applying Analytics on top of those to get meaningful consumer insights. While this approach is good to be in control of customer experience through internal capabilities, the challenges lie in terms of ongoing maintenance and improvements of those capabilities as well as being agile to the changing customer and regulatory needs.

 

Partnering with Fintechs

Banks like NAB have invested in Fintechs like Basiq, where they are using the specific APIs and analytics offering provided by the Fintech to provide value add services to their clients. In Europe, there are examples around banks like BBVA partnering with multiple Fintechs to solve specific business problems. This can be a good model for Tier-2 banks, Building Societies, and Credit Unions to remain competitive in an Open Banking world.

 

Separate venture to continue innovation

Some of the Financial Institutions have created separate ventures or platforms to continue innovating and be ready for the Open Banking world. CBA has launched X15 Ventures aiming to get five Fintech businesses up and running over the course of this year alone. They have partnered with Microsoft to drive this venture. The new incubator has hit the ground running, having already snapped up two startups to participate. The first, Home-In, is an online service designed to simplify residential real estate transactions. The second is a free of cost application that generates analytical business insights for businesses in Australia.

We have also got examples of Digital Banks such as Virgin Money from BOQ, Up Bank from Bendigo and Adelaide Bank, UBank from NAB. These subsidiary brands can be a good testing ground for new services and product offerings in an Open Banking digital world where the learnings and capabilities can be extended to parent banks.

 

Conclusion

As the Covid-19 pandemic has highlighted, digital enablement is key for Financial Institutions if they want to retain their existing customer base while looking at growing market share. With Open Banking coming into play, they need to define their business and technology strategy around how to remain relevant in this competitive market. Digital transformation is the first step towards preparing for the Open Banking regime. On top of that, they need to define which strategy they want to adopt – invest in inhouse systems transformation, or strategically partner with Fintech providers that can shorten time to market. The decision made at this stage will either define the journey towards success or the path towards oblivion.


References

 

 

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