Financial firms and their customers stand to gain significant benefits from Australia's planned open banking ecosystem. However, before those benefits can be realised, there are key security issues that need to be resolved.
The concept of open banking involves making the financial data of customers traditionally held by banks available to third-party fintech firms. These firms, in turn, then use that data to create a range of new and innovative services.
Proponents see it as a way to boost competition in the financial sector and greatly increase the number and nature of services available to businesses and consumers. Start-up fIntech firms that are able to build a compelling offering will be able to use these data links to quickly bring a new offering to market and grow their client base.
During coming months, a number of personal finance management services are expected to appear that will provide customers with a single view of their financial position, based on data drawn from multiple banks and financial service providers. Such services will make it much easier for consumers to keep track of their money and investments, even when their data is spread across a range of different locations.
Fintech firms are also expected to create new payment and lending products that could be offered to retailers. They, in turn, will add their own brand and market it to their customers as a new service.
The growing open banking trend is being given a push in Europe through the Payment Services Directive 2 (PSD2). This requires banks to provide access to their data for third-party firms by 2018.
While this will take longer to become the situation in Australia, open banking is currently the subject of a federal government review. A report is expected to be released by the end of this year which is likely to eventually lead to similar legislation.
Security is key
For such initiatives to work and be accepted by customers, however, maintaining security around personal financial data is paramount. Any breaches or incidents of fraud that occur could undermine confidence in the new services and result in widespread customer rejection.
Bank are also hesitant to provide customer data to third parties without knowing the level of security that will be in place within their systems. If a data breach occurs, the bank's brand and reputation would also suffer.
For this reason, having in place APIs that manage access to and sharing of financial data is critical. APIs will allow the automation of data flows and ensure third-parties can build appealing new services while at the same time protecting the data being used.
For the system to work effectively, it will be vital that these APIs adhere to standards. Just as standards govern the financial transaction systems used by banks, so too must they govern flows of data.
The alternative would be a fragmentation of APIs that would restrict progress and competition across the sector. Being able to quickly create links between banks and fintech firms would become difficult if not impossible.
Maintaining standards across the financial sector will assist in maintaining data security. Participants in an open banking ecosystem will be able to interact as desired, safe in the knowledge that all parties are treating data in a similar, secure way.
Progress is underway
Large Australian banks are already busily working on API-based open banking strategies. All are keen to cement their positions by being able to offer a number of data-based services to both business and consumer clients.
As a sign of the level of impact of this disruption, the banks are now regularly running open banking 'hackathons' designed to harness innovation from their internal staff, customers and their fintech partners.
Some are also working on ways to make creating links even simpler. For example, Macquarie Bank recently announced their AP-driven open banking platform which gives customers the option to connect their bank data with third-party providers while removing the need to reveal their banking logins to those providers.
A customer experience network
Once open banking is embraced and in place between Australian financial sector organisations, the benefits to businesses and consumers will be significant.
More innovative services will be available that streamline transactions and add value in a variety of different ways. It will result in the creation of a new customer experience network.
In partnership with fintechs, Australian banks will also overlay services to capture so called 'business moments' as either an owner or contributor. These moments include things such as a house or car purchase as well as more granular services such as the income and account balance verification data that is required during a personal loan application.
By working now to ensure effective security standards are in place and an agreed set of APIs is deployed, Australia's financial sector can take advantage of all that open banking has to offer. The future of finance has never looked more exciting.
Colman McCaffery is vice-president, sales and operations, at Axway.