Open banking is on track to take effect in the UK in 2018, and it is a regulation that Australia’s major banks need to sit up and take heed of.

Regulation and market forces are combining to fundamentally transform the way that people bank by opening up customers’ payments and banking data to third party financial services providers. 

This benefits customers as they can share their transactional financial data easier with third parties online.

But it also benefits fintechs offering payments services, as well as banks wanting to initiate payments directly from a person’s account as a bank transfer.

The domination of Australia’s big four banks is slowly eroding as more agile fintech companies lead the charge on open banking.

The impact of open banking in Australia – which has been proposed for the nation by a parliamentary committee – will help even the playing field for fintech start-ups and non-banks entering financial services and improve competition.

And the open banking regime is getting underway in Australia with federal Treasurer Scott Morrison recently calling for an independent review into open banking to advise the government on the best way to open up financial data to consumers.

Mr Morrison said that open banking would provide Australians with greater access to their own banking data and has the potential to transform the way people interact with financial institutions.

He also added that open banking would mean greater choice and cheaper and better options for consumers. And Australian fintechs are waiting with bated breath.

Advantages of open banking

Open banking will herald in a new data economy; of which data will have a value and be used to provide better insights into pricing and boost new innovation.

It’s anticipated that open banking will help expand customer bases through innovative and personalised services that will in turn create new revenue streams and provide more value to customers.

The Capgemini World Retail Banking Report 2017 (WRBR 2017) predicts that as the open banking revolution continues to unfold, banks risk disintermediation.

The report offers two recommendations for how banks can avoid this: firstly, banks must carefully choose their customer interaction business model, and secondly, they must use application programming interfaces (APIs).

According to the report, APIs can offer a pathway toward open banking, if fintechs and financial institutions collaborate rather than compete to create customer-centric solutions.

The report also recommends that the key to securing customer loyalty is for traditional banks to collaborate across technology providers and drive open banking through the sharing and personalisation of banking data.

And while traditional banks still have a substantial hold on their customer base, more agile and customer-centric fintech firms are achieving traction globally, with nearly one-third of banking customers surveyed having a relationship with at least one non-traditional firm.

Getting in on the revolution

Banks around the globe can’t afford to sit on their laurels. Competitive forces globally are seeing leading banks leapfrogging regulation to open up their systems and data, and begin to develop ecosystems of partners. The result will be greater choice and competition for customers, and the possibility of entirely new revenue lines for retail banks. 

Why would a bank do this? The reason is simple. By doing this, banks shift from defending their slice of a US$4 trillion banking industry and move into an entirely new segment – the digitally distributed consumer economy worth US$60 trillion by 2025 (according to McKinsey).

In Europe, banks like Barclays, BBVA and Nordea are not waiting to open up just to be compliant. 

For instance, Nordic bank Nordea has set up a site for developers to experiment with the bank's open banking APIs.

According to Nordea, this as an opportunity for it to embrace the changing landscape. The bank states, “Our goal is to strengthen our collaboration with fintechs and go beyond the regulation by providing premium APIs which fit your needs.”

Banks facing disruption from fintechs are taking the strategic decision to keep these digital enemies close, even so close as to acquire them, rather than risk losing out.

So while open banking is transformational to the financial industry, there is also a technology barrier that may slow down its rate of adoption.

Many traditional banks rely on outdated legacy systems that can make access to their data via APIs difficult – if not impossible.

Getting to grips with this, as well as the security and privacy issues, will take time and investment – regulatory pressure or not. Banks will be open someday, like it or not. 

Brenton Smith is vice president, Australia and New Zealand, Software AG.

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