Open Banking is the Disruption the Finance Sector Needs

Australia’s financial sector is facing its digital moment with the shift to open banking.

It seems strange to say that we are in a world where we can pay for groceries using our wrists or check our account balances on our phone. The Reserve Bank of Australia found 62 per cent of transactions now take place without people ever touching a physical dollar. But while digital exists, it still happens within a relatively traditional financial system.

Open banking will do what these innovations couldn’t – create an entirely new model for the banking system centred entirely on the customer. It’s designed to put the customer in control. Expected to start from 1 July 2019 for the major banks, open banking will enable Australia’s financial institutions to share customer data with third-party developers. The intention is to improve transparency, competition and service levels for customers.

That’s good for customers but it will also help restore trust in financial systems. Data has been called ‘the new oil’. By placing it firmly in the customer’s hands, they control their most valuable asset. Banks will need to improve the value proposition they offer customers if they want access to it.

And it starts with consent. They need to have the systems in place to ensure they can leverage data appropriately with full consent. This will restore trust and enable them to extend their value proposition beyond what we see today.

A pivotal moment

Australia’s financial sector is currently under the intense scrutiny of a Royal Commission and this is having a dramatic impact on trust. This extends to the custodianship of financial data. It’s a difficult time for open banking to emerge. Australia is grappling with big questions around how to implement the right risk framework, cybersecurity protections and levels of transparency to make open banking a secure reality that the public will trust. Reshaping the system around the needs of customers could be just what the doctor ordered. But, for it to be adopted and embraced, it’s critical to get the foundations right.

Australia can draw inspiration from examples overseas, most notably the launch the EU’s Revised Payment Services Directive (PSD2) and the UK’s Open Banking Standard. These markets have seen first-mover advantage in terms of driving the pace of innovation. They’ve set the standard because other countries must comply to do business with them.

This coincides with the launch of Europe’s General Data Protection Regulation, which standardises data protection laws for any business that provides goods or services there. It’s another example of regulators looking to move power back into the hands of consumers.

The canvas for competition

Customer expectations when they interact with a bank are now shaped by experiences in retail and other consumer industries. SAP’s Australian Digital Experience Report (DXR) shows financial services companies are already creating good digital experiences. The challenge is lifting these standards in an era of open banking.

Until now, Australia’s financial services industry has been dominated by the big players because they held the currency – customer data. With open banking, the floodgates will be opened to financial technology start-ups, smaller banks and even non-banking companies like Facebook or Amazon. The currency of tomorrow will be ideas.

With open banking, the floodgates will be opened to financial technology start-ups, smaller banks and even non-banking companies like Facebook or Amazon. The currency of tomorrow will be ideas

Customers have been reluctant to move away from large institutional banks in the past because it was seen as a painful process. But with the ability to move data made easy with open banking, this barrier will be removed. This is where service level starts to differentiate brands and attract new customers. Banks will need to provide high-quality, personalised services that address specific customer needs if they want to retain them. Innovation and collaboration will be key. Banks with existing scale will have an opportunity to work with fintechs in delivering a better service to existing customers and therefore retain them.

Turning threat into opportunity

In the era of open banking, banks have a significant opportunity to improve trust by offering customers more useful services. We’re a year out from the regulations coming into full force but now is the time to prepare.

Technology will be the enabler in delivering on the promise of open banking. The adoption of powerful open application programming interfaces (APIs) provides an opportunity to shape both product innovation and partnerships across the finance industry. It will turn the sector into an ecosystem, linking retail and corporate customers, banks, fintechs and partners.

Data is key to making this a reality. This includes intelligent data management strategies, enterprise-class data models and technologies such as predictive analytics – embedded with machine learning, artificial intelligence and the Internet of Things. These powerful tools can convert customer information into valuable insights and develop personalised offers in real-time, providing better customer outcomes.

Blockchain will also streamline complex tasks like clearing to provide faster, more efficient service delivery. And of course, security must be at the core of any system built on trust. Open banking is a challenge for major financial institutions but it’s also a huge opportunity. Customers want intuitive digital experiences and more personalised options. Open banking makes it easier to deliver them. More than that, open banking has the potential to reshape our financial systems and rebuild trust. That’s a great result for everybody.

This article was originally published on the RFI Group website.