Policymakers and regulators are under increasing pressure to rethink how data is collected and accessed, how digital identity is authenticated and how transactions are effectuated on bank accounts.
The UK government and the European Commission have taken the lead in providing policy enablers that open up the market to challenger banks and fintechs, so why can’t Australia get onboard the open API and open banking bandwagons and open up our market to new players too?
The fintech opportunity
Consumers and businesses across the globe expect the ‘new age’ user experience from their banks that is offered in the media and e-commerce space, simply transacting when and where they want.
Fintech start-ups have shown what is possible, yet in Australia, they have not been able to quickly scale up.
The big four have held the fort for far too long and have been slow to innovate and recognise the changing needs of customers. Fintechs have the tools and the know-how to turn banking on its head.
Small businesses need banks that are agile, tech-savvy and clued-in to the banking products and services that businesses need to be able to run effectively.
The banking sector is ripe for disruption, so why hasn’t there been a proliferation of hyper-growth fintechs in recent years?
Back in the early days when I was first launching Tyro, the RBA supported our efforts to enter the payments space to compete head-on with the major retail banks.
This was before the term ‘fintech’ had even been coined. The RBA saw the opportunity for the market to be opened up to new players like Tyro who bring their technology DNA to the forefront of their banking agenda.
Make no mistake, there is great potential to build on the fintech opportunity in Australia. There is a huge army of talent in start-up spaces filled with budding fintechs looking to reinvent all aspects of banking. We have momentum.
What we don’t have are policy enablers that allow for an ‘open’ economy that would encourage the growth of this ecosystem.
The open API economy
API has become the new ‘it’ acronym, yet Australia has been slow to see the light with regard to the benefits of an open API economy.
To have open APIs between financial providers would mean that information would be readily accessible across the board (open data) and could be transacted upon (open API).
Yet, as stated in the Productivity Commission draft report, Data Availability and Use, released in October 2016, “transforming data to a standardised, structured, machine-readable state can come with high costs”.
Do the suggested “high costs” really outweigh the benefits of open APIs? No way. I am not convinced.
To standardise how data is shared and accessed, and how credits and debits are effected on bank accounts would improve the integrity of the market, especially to the small business sector that is constantly swamped by the administrative burden of banking as it currently stands.
An open API economy will increase productivity by reducing the frictions in banking (such as the ‘switching inertia’ between banks due to know your customer (KYC) regulations), by offering new, brilliant banking solutions that have not yet been thought of.
Further, innovation and competition would dramatically increase within the sector.
What the retail banks fail to realise is that Australia is behind the eight ball in terms of open API schemes.
The slower we are to develop in terms of an open API policy, the further behind we will be in the global innovation race.
KYC: A data-sharing issue
There is an increased obligation on financial providers to fulfil know your customer requirements.
It sounds simple enough but it is often a complicated and time-consuming process for banks to complete which further demonstrates the need for data-sharing to be prioritised within our economy.
As Australia has no shared system of KYC information, new entrants in the banking sector cannot overcome the switching inertia of customers, who cannot be bothered to go through the KYC bureaucracy when they want to use a financial product or service of a competitor.
The problem is that fintech start-ups cannot scale up if they are unable to access and rely, at their own risk, on appropriate KYC information from another financial provider.
This means that they lose out on potential customers and Australian consumers are unable to obtain better financial products due to the market concentration of the banking oligopoly.
Fixing this problem would be as simple as opening up the existing KYC data between financial providers.
Having shared KYC infrastructure would boost competition within the market, provide consumers with choice in who they bank with and give new fintechs the chance to really scale up within the sector. It’s a win-win for all involved.
Fintechs have created excitement within the banking sector and have attracted huge investment, both domestically and internationally, yet there needs to be a strong mandate from government and regulators on open data, open APIs and shared KYC infrastructure in Australia.
Only then will innovation and competition in banking become more apparent, and the potential of the fintech opportunity that we have at our fingertips will be fully realised.
Jost Stollmann is the executive director of Tyro Payments.