Open Banking will pave the way for more transparent banking in Australia
That’s not to say the Royal Commission won’t improve bank cultures. It will and that’s a good thing.
But when it comes to risk assessments and offering of products, a revolution known as “open banking” was always going to change bank behaviour, whatever the outcome of the Commission.
Open banking will facilitate faster, cheaper and likely increased lending, including to individuals and smaller innovative businesses, as customers are empowered to shop around and banks operate with a clearer line of sight to risk.
The most obvious parallel is the insurance industry which has enjoyed a form of open data for decades. In insurance, underwriting data is freely provided by the consumer in the process of acquiring cover, just as open data will soon be provided.
When you go to buy a policy, your insurer can instantly assess your personal risk profile, price and sell you what you need.
If you don’t like the quote, all it takes is a quick phone call to switch providers. So, while buying insurance is not among the most exciting of customer journeys, it’s largely hassle free.
Contrast that with the abundance of process and limited data leverage involved in securing a loan or switching your bank and you get a sense of the potential of open banking. Given banking’s central role in all we do, commerce will simply work better.
In a world of open data, consumers will be empowered to share a range of data with potential lenders at the touch of a mouse button. This will radically simplify risk assessment on financial products and beyond, leading to quicker and less arduous customer journeys.
The extension of credit relies on the establishment of trust. Trust in finance is based on the simple idea that if I lend you money, you will ultimately pay me back and in the meantime, you will stick to your interest payment plan.
It follows that in a climate where I don’t have much information on you, I am likely to be more cautious and I will either not lend, or price in the risk of default. Where I have a line of sight to more information, I am more likely to lend to you, provided I see what I like.
Recent data suggests that 66% of millennials are being turned down by mortgage lenders for lifestyle reasons. Sometimes this is because the bank doesn’t like what it knows, but a huge proportion of these rejections are because of a lack of credit history.
Open banking will close a huge number of information gaps and deliver new sets of data to inform risk assessment; Does the aspirant borrower pay their rent regularly and on time? Do they look after their possessions? Do they have a gambling problem?
The power will be with borrowers. If you are willing to share your data and it reflects well on you, you will be able to get credit where before you could not. Those offering lower risk will achieve more competitive pricing.
At the same time, a better line of sight to risk promises to reduce defaults, lowering the need for bad loan provision and therefore banks’ overall cost of funds. It’s likely these savings will be traded away in the form of lower pricing for consumers.
While this week we have seen some of the more embarrassing lending mistakes made by banks, the truth is it’s not in their interests to lend to people who are likely to default. Most bankers are trying to get the balance right and open banking will deliver them the tools to do so.
Given it’s so fashionable to dislike big banks, it would be easy to forget the crucially important role they play in funding economic activity and growth. Open banking offers the potential for both having cake and eating it; increased and more responsible lending at the same time.