Open Banking is a system of secure data exchange between institutions so that no one organisation can effectively own an individual’s data. It involves unbundling internal bank data and processes for external parties via an application programming interface, or API.
Following a recommendation from the Productivity Commission in 2017, the federal government announced the introduction of a Consumer Data Right (CDR) as part of the 2017 federal budget, which formally gives consumers ownership of their data and makes switching between financial institutions easier. The CDR will be implemented in Australia under the open banking framework from July 2019.
As jurisdictions around the world begin implementing open banking reform, banks and non-banks are presented with a range of challenges and opportunities.
The challenges and opportunities of open banking
PWC’s Future of payments in Australia report identifies five main forces that are shaping the new world of payments in Australia, including a stronger customer demand for greater personalisation, and the need for financial institutions to nurture more customer-centric business models.
Perhaps the most significant opportunity of open banking will be the control awarded to consumers over how their data is used, including an ability to dictate who provides which services and how they provide them, while also having the freedom to switch to an alternative provider more easily.
Under the new open banking system, consumers will be able to access and share their data so that it can be analysed and presented to them in a way that adds value and provides useful guidance on how they should manage their finances.
This will foster a data economy that can be used to enhance the experiences of both consumers and institutions, providing unparalleled insights into what consumers need and want so that providers can deliver more personalised banking experiences.
Open banking reform will also nurture a more level-playing field for fintechs and non-banks entering the financial services system, improving overall competition and innovation.
However, with greater amounts of data exchange come inherent risks and the need for a security-first mindset. Organisations must equip themselves with the right tools to successfully navigate compliance, including secure APIs to connect with a banking ecosystem that facilitates safe data sharing.
Western Union works to strengthen the world’s financial system, committing 20 percent of its current workforce to compliance, and using big data, AI, machine learning and robotics to study consumer behaviours and identify patterns globally to detect transactional anomalies.
Coupled with the ongoing digitisation of the financial services industry, one key challenge for institutions will be the depersonalisation of the client-provider relationship. Consumers will enjoy the freedom of shopping around for the right provider, potentially at the expense of customer loyalty.
As the financial services landscape changes, businesses must continue to innovate through new partnerships and networks. Collaboration between industry players will minimise risk, improve operational efficiencies and invite a wider selection of businesses to get involved.
What open banking means for consumers and the financial services industry
Many expect the introduction of open banking in Australia to revolutionise the financial services sector, transforming the way consumers interact with the banking system. Indeed the banking royal commission in Australia has proven itself a catalyst for much needed change in the financial services industry, including a greater focus on consumers and the quality of services they’re provided with.
As a growing number of SMEs and consumers come to expect a number of different services in the same place, it’s important that larger banks work with challenger institutions to provide customers with a superior end-to-end service.
Together this will make the payments landscape much more collaborative and integrated, which should benefit the end customer. Western Union is building out integration APIs for its international payments platform, WU® EDGE, providing a community for buyers and sellers to fulfil all their business needs in one place.
As open banking becomes the mainstream and consumer expectations adapt, more financial institutions will implement API strategies to foster innovation.
What’s next for the payments industry?
Accounting for 25 per cent of all revenue in the Australian financial system, payments remain at the centre of everyday banking. Open banking reform appears to be the next step in the natural evolution of the payments industry, and will usher in a new era for Australia’s banking ecosystem – one focused around the consumer.
Occurring concurrently is the theme of collaborative competition – or coopetition – in the financial services industry, which involves providers playing to their strengths and looking to others to fill gaps in order to provide the best possible service for the consumer. Western Union partners with companies it has identified as ‘need-matching’, helping both parties serve end customers more effectively.
According to PWC’s 2017 Global Fintech Report, the relationship between fintechs and traditional financial institutions is transforming from competition to collaboration, with 82 percent of financial services and fintech executives expecting to increase their partnerships in the next three to five years.
Considering the apparent neglect of customers by the banking industry, as exposed by the royal commission, the introduction of open banking in Australia represents a step in the right direction.
Across the entire financial services industry there is a need to drive change, to innovate, and to put the customer experience at the centre of it all.
Alan Verschoyle-King, Global Head of Financial Institutions, Payments, Western Union