Open banking is coming to Australia, creating both uncertainty and opportunity for incumbent banks.
Under the Consumer Data Right (CDR) legislation, Australian banking customers will gain more control of their own financial data, making it easier for them to seek out the best products and less cumbersome for them to switch providers. Banking is the first industry to be affected by the law, which the government plans to implement sector by sector throughout the economy.
Incumbent banks face a choice: They can make the minimum investments in technology and infrastructure to comply with the new law, acknowledging that they will likely lose some customers to competitors offering more attractive products. Or they can seize on open banking as an opportunity to develop new ways to meet customer needs for control, flexibility and trust.
While open banking has already taken effect in other countries, notably the UK, in Australia the concept is terra incognita. Banks have no clear winners they can emulate. Beyond proclaiming a grand vision that the customer’s needs must come first, Australian banks face great unknowns.
Leading banks understand that the key now is to focus on areas where open banking creates value. They recognize that they can’t do this on their own. They need to build collaboration capabilities and become part of a vibrant ecosystem of financial providers and technology firms ready to meet the evolving needs of customers. Banks also know they must parlay their newfound expertise in open data into areas beyond banking, such as building shared digital infrastructure, providing data and analytics services to commercial customers or even helping consumers make better everyday decisions.
Under the new law, Australian banks must share data on returns, fees and transactions with other parties that customers designate, including competing banks, fintech apps and aggregator sites. The UK introduced open banking in 2018 with the aim of fostering greater consumer choice, competition and innovation. The result was the emergence of apps such as Yolt, which enables consumers to easily view all of their financial accounts in one place.
The experience in the UK suggests that Australian banks have an opportunity to build on customers’ desire for more control of their data and digital personas, not only in banking but across the economic landscape. Surveys by Data61, the research firm advising the Australian government on the development of standards for CDR, show that consumers place a high value on directing how their data is shared with other providers, even if that means going through more steps to ensure their data is safe.
Despite scandals that have tainted some Australian financial firms in recent years, the country’s banks have maintained a reservoir of customer trust. Australian consumers trust their primary banks more than other providers when they’re considering the purchase of a financial product, according to Bain & Company’s annual global survey of loyalty in retail banking (see Figure 1).
Australian consumers trust their primary banks the most when considering a financial product
However, the data also suggests that banks are vulnerable to competition from nonfinancial providers. Fifty-five percent of Australian bank customers trust banks in general less than they trust one or more tech companies, and 31% of respondents trust their primary bank less than they trust one or more tech companies. These findings point to the opportunities banks face as they move into the era of open banking. If executed well, open banking can help banks regain some of the trust they have lost, or are at risk of losing.
Opening up the “walled gardens”
Giving customers easy and wide access to data marks a major change for Australian banks. For the most part, Australian banks have operated as “walled gardens,” offering business and corporate customers limited digital access to data via application program interfaces (APIs). Retail customers have been able to access data only through their bank’s proprietary platform (not through open APIs) and have found it difficult, if not impossible, to share that data with competing financial providers.
While many Australian banks are developing ecosystems built around core products such as home mortgages, these services don’t typically allow customers to control, share, assemble or disassemble their data and digital profiles. The good news for banks is that tech firms—their potential competitors in an open-banking environment—aren’t much further along in allowing customers to share their data, particularly through open APIs.
As the first sector to be affected by CDR legislation, banks must contend with Australia’s lack of a standard technology infrastructure that would facilitate the development of open customer-data ecosystems. India and Denmark are among the countries that have developed digital identity systems that citizens can use to access data and conduct financial transactions. That hasn’t happened in Australia, at least not yet.
Australia’s Digital Transformation Agency may eventually create a general identity framework for adoption in banking, but in the meantime banks will need to rely on other government agencies and initiatives to define standards for open banking—notably the Australian Competition and Consumer Commission and the Commonwealth Scientific and Industrial Research Organization. The upshot: Australian banks will bear the burden of making most of the significant upfront investments required for the introduction of open banking.
Why invest in open banking?
Confronting a lack of standards and infrastructure, a weak starting position and no clear in-market winners to emulate, banks and the broader financial ecosystem are asking themselves when and how much they should invest in open banking, and whether they have what it takes to be successful in an open-banking environment.
In our experience, Australian bankers broadly agree that open banking is good for customers, but they are less clear on whether it is a good thing for their banks. Established players see four opportunities to create value with open banking: short-term efficiencies, data security, new commercial adjacencies and a repositioning of the bank’s core services.
When it comes to near-term efficiencies, banks will be able to perform some existing processes faster, more effectively or at lower cost by using open-banking sources. These include income and expense verification for loan applicants. With access to open-banking data, credit providers can verify a customer’s income and expenses faster. Instead of manually scraping data from disparate sources, lenders will be able to leverage uniform APIs and common data sets across all banks. With API-enabled access to customer data from financial players across the market, banks will be able to speed up the onboarding of new customers for a wide array of products.
Access to open-banking data may also help banks conduct anti-money laundering (AML) checks, allowing them to detect suspicious transactions more quickly. In the long term, banks may find their AML reporting responsibilities lessened as regulators gain direct access to transaction data.
In an open API environment, banks may be able to build on their experience to become leaders in personal data security, not just in banking but across other sectors. Banks already manage vast amounts of sensitive, complex and valuable customer data. Some banks believe they can extend their expertise in keeping data secure to support customers beyond the bank’s firewalls.
Some banks have already begun exploring new services that could flow from the skills necessary for open banking. These adjacent business opportunities include identity services. For a fee, banks could help customers manage their digital identities. They could also parlay their deep expertise in know-your-customer processes to help other businesses vet their clients.
Banks can also become central players in digital ecosystems, in which customers agree to have banks share their data with nonfinancial providers in industries such as travel, home-buying, e-commerce and transport. Banks would earn a commission on each dollar spent in the ecosystem. Banks in other markets have shown how ecosystems can work. Deutsche Bank, for example, launched its Digital Factory ecosystem in 2016. The German bank has collaborated with fintechs to provide value-added services such as invoice scanning, personal financial management, payments and insurance, and it is actively seeking out new partners.
Benefits beyond banking
Either as part of an ecosystem or on their own, banks can assist customers with everyday decisions by monitoring and analyzing their past, present and projected future earning, spending and saving patterns. With open banking, a customer’s primary bank can more easily get a 360-degree view of the client’s finances, including accounts held at other institutions.
With more complete information about their customers, banks can better evaluate risk, which has the potential to make loan approval more predictive and efficient, thus reducing the cost of credit. Armed with a more thorough knowledge of their customers’ spending, banks will be able to create value with tailor-made products, such as offering a holiday loan to clients who are planning a trip.
In addition to helping their own customers, banks can be of service to the merchants their customers frequent. Banks can combine customer data and payments APIs, enhanced with advanced analytics, to enable merchants to optimize cash flow. Banks can also help businesses manage their supply chains, by providing them with integrated customer data, financial services and analytical algorithms.
As banks embrace open banking, they have an opportunity to overhaul their core services, making them more customer-centric. By reducing friction around payments, information gathering and other everyday banking activities, banks are likely to be rewarded with heightened brand affinity, more customer interactions, enhanced insights into customer behavior and expanded options for future monetization. Some of these services may take time to become profitable, but many banks are investing in them with a tech-industry mindset, aiming first for increased scale through better customer experiences rather than trying to quickly monetize specific offerings.
Commonwealth Bank in Australia is one of the banks that has developed low-friction offerings. With Commonwealth Bank’s Spend Tracker, customers can monitor their spending and allocate budgets to categories such as groceries and rent. Once open banking goes live in Australia, Spend Tracker users should be able to include spending information from their non-Commonwealth Bank accounts.
Managing the risks
While open banking will create significant opportunities for Australian banks, it will also bring considerable risks. Incumbent banks worry about threats to their core revenue streams from new, nimble competitors; they fret that open banking will bring increased vulnerability to data theft; and they wonder if their closed-data systems and processes will be up to the challenges of operating in an open-data world.
Incumbents know that open banking will reduce the barriers to entry for new, lower-cost, digital-only players. With customers able to control and share their financial information, competitors that previously lacked access to historical data will be able to more accurately assess and manage risk when offering credit. Banks will be compelled to share detailed information on performance, including fees, and customers will be able to easily compare returns among competitors and seamlessly switch to higher-yielding accounts offered by challengers.
Banks also worry that they might lose their customers’ attention to fintechs with more aggressive marketing and slicker digital experiences. As a substantial portion of bank revenue now comes from accounts with limited activity, banks are asking whether open banking will raise consumer awareness of the perils of lax money management and prompt them to seek better terms elsewhere, thus increasing customer churn.
Open banking brings the risk of data misuse or theft. When such breaches do occur, banks are likely to take a hit to their reputations, even if they weren’t directly involved. Suppose a bank supplies customer data to a fintech with the customer’s consent, as the Australian open-banking rules require, and the fintech is then hacked. Most of the banks we have spoken to believe they would suffer reputational harm in such a case, despite no wrongdoing on their part.
Customers are likely to expect bank-level security to exist outside the bank’s walls, even though banks will not have full control of the data supply chain envisioned by open banking. To gain consumer trust regarding data security, banks, regulators and other players will need to agree on clear and enforceable standards for liability in the case of a breach.
The biggest challenge Australian banks may face with open banking is executing effectively. Simply assembling and presenting open-banking data in a standard form can require a major investment in IT. Banks say they may have to earmark as much as 15% of discretionary funding for open-banking IT spending over the next one or two years. And that’s just to become compliant with the new regulations. Developing products suited to open banking will require additional investment.
Beyond the investment in IT and product development, banks face the challenges of articulating a coherent strategy for open banking, melding their technology into a multiplayer ecosystem built on a monolithic architecture and overcoming the bank’s own cultural hurdles to operating in an open environment.
Why it pays to be an early mover
As banks determine when and how much to invest in open banking, they must wrestle with a dilemma companies often confront when dealing with uncertainty. If they are overly cautious and do just the minimum needed to comply with the new open-banking regulations, they run the risk of losing ground to competitors. But if they are too confident in their ability to prosper in a new environment, they run the risk of overinvesting—increasing their cost base but not their returns.
In our view, Australian banks should move early. They can use their status as pioneers in an open-data world to explore and shape the structures that will create the most value, while mitigating risk. Leaders will emerge as banks learn which offerings resonate with customers and then shape their product portfolios accordingly. Banks understand that they need to invest now in order to be ready to scale later.
Early movers say they are able to shape the open-banking agenda through participation in regulatory conversations. One of the key lessons from the UK’s experience is that the regulator won’t get everything right at first, but if banks stay focused on what is best for the customers, they can work with the regulator to shape a better environment for consumers.
By moving early, banks will be able to build productive ecosystem relationships with other digital players, including fintechs and Big Tech, learning what works and what doesn’t, and which companies have winning approaches and which don’t. As is often the case with systems built on the interactions of multiple parties, the first participants to achieve significant scale in open banking are likely to have more chances to benefit. Banks with a larger presence in the ecosystem stand to have more clout—and more branding power—and thus be better positioned to tap into the most profitable pools along the value chain.
Understanding the three stages of development
As consumer expectations grow and as sectors beyond banking develop open-data regimes, we see three stages of development for open banking in Australia. We expect that the open-banking ecosystem will evolve gradually over the next five years before massively scaling up starting in 2025.
In the first stage, establishment (between now and 2021), banks will focus on building an open-banking infrastructure and concentrate their efforts on using open banking to deliver existing services more effectively.
In the second stage, open-data infancy (from 2021 to 2025), new services will emerge that are only possible with shared tools such as digital identification and authentication in place. During this phase, adoption of open-data services will increase, but not yet be pervasive in customers’ lives.
The third stage, data as a service (from 2025 forward), will see real-time services based on CDR data from multiple sectors become integral to consumers’ digital lives. There will be clear winners and losers among companies that handle consumer data. Adoption of CDR-based services will be pervasive, and consumers will understand, and be in control of, how their data is used (see Figure 2).
Australian open banking will evolve in three stages
Banks that move early into open banking know that the investments and commitments they make during the establishment stage will shape their ability to compete in the data-as-a-service era. Early movers will influence regulatory direction and play a role in developing core components of the open-banking infrastructure. They’ll be able to test and learn both from their customers and from other ecosystem participants, and they’ll have time to build the right culture and capabilities to be successful.
What it takes to win
On the international stage, no bank has yet declared itself fully ready to win in an open-banking world. While regulations differ from country to country, leading banks know that globally the future belongs to open banking. They are feverishly burnishing their capabilities in three key areas: governance, data and technology, and partnership skills.
Australian banks, like their international counterparts, typically start by investing in risk governance. From there they extend their investments in innovation and experimentation, scaling into existing customer bases and ensuring alignment between all parts of the organization.
When customers make a purchase in an open-banking world, they are no longer buying just a discrete product such as a home mortgage or a credit card; they are buying a holistic digital experience. Banks should therefore consider how ready they are to invest, act and operate like a technology company. Many banks will find that they need to transform their IT architecture and operating model to become as nimble at large-scale open banking as Big Tech players such as Amazon or Netflix have become in managing their respective supply chains.
Banks will need to reshape their IT architecture from the current spaghetti-like agglomeration of interconnected and overlapping applications into a plexus of micro-services. They’ll want to be able to scale their business and technology operating models in an agile fashion to keep up with the rapid evolution of the ecosystem. Data will need to be comprehensive and comprehensible rather than dispersed and locked up. As banks face the challenges of maintaining thousands of APIs, building analytics into all services they offer, and keeping open-banking products constantly refreshed and updated, they will need to upgrade their talent pool.
Open banking, by definition, means working with other players in a vast ecosystem of partners. Today, banks are looking to build ecosystems with participants whose offerings complement their own. In the future, banks will need to be ready to work with open-banking brokers that may be their direct competitors.
In our view, every Australian bank can find the right balance between risks and rewards to justify becoming an early mover in an open-banking world. Banks should shape, scale and collaborate to set themselves up to win:
- Shape where open banking creates value by iterating and testing propositions collaboratively with customers, regulators and innovative service providers.
- Be ready to scale beyond banking by consciously building the business, technology and data foundations required to support new offerings.
- Take advantage of the ecosystem by building a muscle for collaboration.
From a regulatory perspective, open banking in Australia has barely begun, but the momentum is inexorable. Even without an impetus from regulation, open banking is inevitable—driven by the compelling vision of serving customers’ inherent need for control over their data. Winning banks will be those that move early and find ways to create value in pursuit of that overarching vision of an open-data world.
Pascal Gautheron and Katrina Cuthell are partners with Bain & Company’s Financial Services practice, and are both based in Sydney.