The Australian financial services sector is in the midst of the most dramatic period of change since the deregulation of banking in the 1980s. Revelations of malpractice and misconduct from the Royal Commission have thrust customer trust firmly into the limelight as a major issue. Add to the mix increased regulatory pressure and a fast-moving competitive environment, and we have all the ingredients for widespread disruption.
How can banks successfully navigate their way through this change?
The answer lies in Open Banking. Part of the Consumer Data Right (CDR) to be introduced in 2019, the new regime mandates that banks must enable customers to share their data securely with third parties to accelerate digital change, enable new financial services and increase competitiveness across the entire sector. Open Banking will force banks to make account and payment data available through secure application programming interfaces (APIs), giving consumers greater freedom and control in how they interact with their financial service providers.
Having better access to data will allow customers to make more informed decisions about the financial products that are right for them. This exchange will reshape how banks deliver value in their financial products. When systems speak to each other, innovation and collaboration is accelerated. Open APIs represent an enormous opportunity for banks to create ecosystems of value for customers. However, by definition the term ‘regulation’ implies restriction and control. Is Open Banking a barrier to innovation or is it a catalyst?
Innovate or fail
When the CDR was first announced in November 2017, it’s not hard to imagine that the banks threw their arms up in consternation. Another piece of legislation; another compliance pain point.
However, the regulation is designed to improve standards and will change how financial institutions of all shapes and sizes do business. The introduction of Open Banking is an opportunity for banks to flex their innovation muscle. To borrow words from the late Steve Jobs, "Innovation is the ability to see change as an opportunity - not a threat".
It is a chance to go above and beyond in how they deliver secure customer experiences which will ultimately create a competitive advantage and lead to them acquiring new customers. It is an opportune time for institutions to reset relationships with customers which have been fractured by incidents such as the Royal Commission and put trust at the heart of them.
At the core of Open Banking is the concept of consumer trust and consent. For banks, and any organisation handling consumer data, making user consent a central part of their strategy has never been more important. The regulatory environment of Open Banking and the public pressure from the Royal Commission revelations demand a new and more customer-centric approach to data sharing and management. By putting consumers in control of how and under what circumstances their information is shared, implementing dynamic consent and taking transparency seriously, organisations will be able to grow consumer trust and build positive and long-term relationships. This will in turn allow them to offer additional services, based on personalisation, explore new revenue streams and add to their customer base.
Case in point; Macquarie Bank has enthusiastically embraced the framework. Through its award winning app, customers are able to manage access to their data in real-time. Customers have the option to securely connect personal banking data such as transactions and home loan balances, as well as business and wealth data, into third party providers. This move signals Macquarie’s intent to improve its market share in credit cards, deposits and home loans and acquire new customers. With today’s customers demanding digital experiences, it’s a smart move.
In August, then-Treasurer Scott Morrison released the findings of the Productivity Commission’s report into competition in financial services. He called for a new era of banking, one led by ‘consumer powered competition’. As the incumbents prepare for a fresh wave of competition from fintechs and challengers, how can they use the regulation as an innovative edge?
Open Banking is all about giving consumers the ability to share their banking data through APIs. The natural inclination is to think that the more third-party access is involved, the higher the risk. With information flowing freely, data privacy and control is critical.
Incumbents have a head start on their digitally native competitors in having long standing customer relationships and a track record of storing and managing consumer data safely. When it comes to securing access to customer data via APIs, banks already have years of expertise to show for themselves with well-defined security operations and experienced teams in place who are using the latest security technologies combined with established standards.
Importantly, it is the beginning of much more to come. The Consumer Data Right will initially be implemented in banking before being rolled out to energy, telecommunications and economy-wide on a sector-by-sector basis. In a climate where customers have become increasingly wary about data misuse and abuse, there is a golden opportunity for the banking sector to become the poster child for consumer rights.
Beyond the regulatory requirements, there is a chance for banks to make the most of the unique situation they find themselves and innovate: by building on their existing customer relationships, giving customers choice and control of their own data can enable first mover banks to become the leaders of an era of truly personalised digital services.
Nick Caley is vice-president, financial services and regulation, at ForgeRock.