There’s a new way of doing things in the financial sector, known as open banking. It’s already a well-established phenomenon in the United Kingdom and across Europe while, elsewhere, legislation is being drawn up and steps are being taken towards its widespread implementation. Ultimately, it is intended to make the sharing of banking data more convenient and intuitive.
As part of this worldwide push, open banking in Australia is well on its way. But, what is open banking? What benefits and risks does it bring in its wake? And just how smoothly is our country’s shift towards wider consumer data sharing going so far?
Let’s get to the following commonly asked questions:
Put simply, open banking is all about making it easier for consumers to consent to sharing their financial data with accredited third party financial institutions. Crucially, any data that is shared will be done so strictly on a need-to-know basis and only to improve the banking products available to the consumer.
Data sharing in open banking is facilitated by something called a banking API, which stands for application programming interface. An API acts as a messenger that tells your bank when you have agreed to grant a fintech start-up, price comparison website, or similar organisation access to some of your data.
The API will also ensure that only essential data is released to each financial institution. So if, for example, a money management app wanted to see your transaction history as a way of offering a more personalised experience, the API would release that data to the organisation and nothing more.
Open banking opens up exciting new opportunities for consumers and organisations alike. In giving financial institutions access to your data, you allow them to offer a more competitive service that is, in turn, tailored to your specific needs and monetary goals. As such, it has the potential to change internet banking for the better.
While a lot of online finance platforms are often limited in what they can offer, with open banking those same platforms will be able to provide exciting new services such as payment initiation. It will also allow them to speed up time-consuming processes like setting up direct debits and applying for a home loan, personal loan, or credit card.
Think of it this way: If you apply for a loan or credit card through accredited third parties, the process will inevitably be much quicker if they already have access to key information including your credit score. In many ways, then, open banking is a way of saving time and turning your bank account into more than just a place to keep and accrue money.
Account data from all different types of bank account will be shareable once open banking is fully rolled out. So, whether you have credit or debit cards, a savings account, joint accounts, offset accounts, or transaction accounts (to name just a few) you will be able to benefit from open banking.
Important: Eventually, all transaction data; both business and personal finance data will be available to share. But, while there are plenty of good reasons to consent to data-sharing, it’s important to keep in mind that there are risks attached, too.
When you, as a bank customer, are asked to share data, you will likely only do so when there are clear benefits. So, here are the advantages to keep in mind as open banking becomes more and more mainstream, as well as the associated risks.
Note: It will be up to you to balance out the pros and cons before consenting to data sharing on an open banking platform.
The main benefit of open banking is the fact that financial technology will become far more consumer-driven the more mainstream it becomes. You see, with access to sets of data that say more about a person’s banking needs, fintech companies and others can finally start putting the customer experience first.
Thanks to this new approach to data sharing, the banking industry will soon be able to expand online banking services and broaden the scope of what banking provides. And it’s not just major banks like National Australia Bank that stand to benefit.
With open banking, smaller companies can make a much bigger impact. So, when a start-up comes out with a new product or service, its roll-out is likely to be far more successful thanks to bigger, more insightful data sets. As a result, the financial services sector could begin evolving at a much faster rate, with the way we as consumers handle our money improving for good.
With the good inevitably comes the bad and, as with everything else in the world of finance, open banking comes with its fair share of security risks. While each banking platform and the financial products they offer stand to improve as a result of increased data sharing, there is of course a heightened chance of financial crime occurring the more widely information is shared.
People in countries the world over, Australia included, have major concerns about their online privacy and data protections. While APIs are designed specifically to be as secure and robust as possible, they do not entirely mitigate the threat of leaks and data breaches.
Thankfully, an account holder who has previously provided consent for open banking can stop sharing data at any time. So, should a consumer begin to fear for the safety of their financial data, they can rest assured that opting out is always an option.
Important: Another concern is that large, so-called “big tech” companies could become accredited data recipients, too. This would afford them access to more types of data than they already have and could affect the control consumers have over their information. This is a concern shared by the Australian Information Commissioner Angelene Falk, which you’ll find out more about shortly.
Open banking has already arrived in Australia via its main financial institutions. And, according to the new Consumer Data Right (CDR) legislation set out by the Australian government, all remaining eligible organisations must have the infrastructure in place to implement open banking by February 2022.
This CDR legislation has brought about a phased introduction of open banking to Australia. As a result, it’s been quite a quiet affair, with many people across the country still unaware that open banking is even an option. In reality, though, several data recipients have been accredited by the Australian Competition and Consumer Commission for a while already.
As mentioned above, the mainstreaming of open banking is forcing financial authorities in Australia to ask important questions. In particular, the Office of the Australian Information Commissioner wants to know whether affording already-privileged institutions access to increasing amounts of data might lead to consumers losing control over their information.
However, so far, the country’s data holders haven’t made too big of a splash. Open banking is still in its infancy and it’s unlikely any big changes to the sector, whether good or bad, would come about until it is far better established. In the meantime, we have to hope that the vigilance of the information commissioner is enough to keep consumer data as safe as possible.
For those still concerned about the potential risks and problems posed by Australia’s open banking initiative, you may be pleased to hear that other countries have managed to make the jump without a hitch.
In the UK, for instance, customer data has been available to regulated providers in the banking and financial sector since 2018. Now, more than 2.5 million consumers use open banking services regularly as a way of better managing and accessing their finances. As such, it has become the model for open banking implementation the world over.
The UK is far from the only success story. Open banking is also well-established in Berlin, Luxembourg, and others in Europe, while implementation is underway in countries such as Singapore, Mexico, the United States, and more across the world.
It might sound industry-changing or even world-shaking, but open banking is in many ways a natural evolution for the world of banking and finance. While there are snags to work out and important questions to face, the wider sharing of financial data brings with it a whole host of substantial benefits.
For one thing, consumers can expect to enjoy an improved, personalised customer experience when they opt in to open banking. For another, more innovative products and services are likely to be on the horizon once accredited data recipients become more settled in their new approach to service provision.
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Disclaimer: The author is not a financial advisor and the information provided is general in nature and was prepared for information purposes only. This article should not be considered to constitute financial advice. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs, or financial situation.