What if COVID-19 occurred in an open banking world?

  • By Ross Sharrott

As the world has become a very different place due to COVID-19, the stakes have gone up dramatically for banks and the regulators to provide personal, intuitive services to Australians, writes Moneytree’s Ross Sharrott. 

The new world order of open banking may be key to both helping to manage the crisis over a longer term and to rebooting the Australian economy. 

Over the past few weeks, we’ve seen banks being overwhelmed by requests for mortgage payment holidays, a spike in deferral of loan payments and Australians flocking to access their superannuation nest eggs. 

Would it have been different if COVID-19 occurred in an open banking world? 

Could open banking create an environment where Australians have easier access to solutions that could help them better navigate the personal financial challenges many are now facing? 

What might these solutions look like and how would they help alleviate some of the anxiety many people are now experiencing?

Open banking is scheduled to begin in Australia from 1 July. In the short term, it will create opportunities for fintechs to partner with incumbents or to stand alone and facilitate innovations in personal finance experiences, particularly onboarding for loans, accounts and other services. 

To understand what types of financial tools could have been built on an open banking platform, let’s look at some solutions being offered in other markets where versions of open banking are already operating. 

In the UK, where open banking is now more than two years old, the financial services industry has discovered the benefit of unlocking data to greatly improve the small and medium sized business (SMBs) borrowing experience. 

The ability to share unlocked data has helped to facilitate a more efficient borrowing process for SMBs, which includes a faster on-boarding experience. 

From a lender’s perspective, automated and accurate data aggregation via open banking helps improve their internal operations, particularly when it comes to risk mitigation. 

Theoretically, the capabilities provided by open banking could make it easier and more efficient for Australian consumers and small businesses to modify their finances, to opt into loan repayment waivers – and for banks to offer more tailored solutions given individual financial circumstances. 

Australia’s approach to open banking

In comparison to other markets, Australia has taken a broader and more enterprising approach to open banking than any other country by introducing the Consumer Data Right (CDR), which enshrines in law a consumer’s ownership of their data.

The CDR will give Australians the ability to obtain their data from financial institutions and share it with other providers. 

For example, consumers may take their financial history data from one institution and share it with another institution to apply for a new product or seek better terms. 

This will help improve user experience by enabling faster onboarding processes, better attuned risk assessment algorithms and more personalised product offerings.

In the context of COVID-19, through the Consumer Data Right (CDR), financial providers could proactively offer "zero interest payment delays" on credit cards or home loans to individuals who have lost their jobs or taken a pay cut. 

With open banking data, qualifying for such loans or deferred payments could happen entirely online or in an app and could speed up the decision time, delivering a faster solution for the consumer and potentially greater peace of mind. 

The use of open banking data could also help address employers’ confusion around their eligibility for the Australian Government’s JobKeeper and JobSeeker payments. 

In the UK, similar wage subsidy measures were introduced in the wake of the pandemic, which included paying full-time employed workers grants equating to 80 per cent of their average wage over the past three years or £2,500. However, the proposed relief does not consider the self-employed workforce. 

Both lenders and consumers are eager to see a real-time view of consumer’s creditworthiness, as the traditional method of using credit scores comes with a time lag of six weeks. 

To address this issue, a UK fintech provider has developed a product using open banking data to help the UK’s self-employed community to demonstrate a loss of income as a result of COVID-19.

Similarly, new data from a UK-based fintech revealing the true cost of COVID-19 on the UK's credit landscape has prompted them to launch a new initiative to encourage users to provide real-time access to their bank account data in exchange for better credit options.  

According to their data, UK consumers have seen an average 59 per cent reduction in available credit offers across credit cards and loans, with self-employed and part-time workers hardest hit. 

Interestingly, consumers who have linked their accounts with open banking have seen a 39.4 per cent increase in credit available to them versus comparable users in March 2020. 

By granting access to data points not found on credit reports, such as bill payment history and source of income, lenders can leverage more data points to inform their lending decisions and open up the credit market to some of the country’s most impacted workforce. 

Both lenders and consumers are eager to see a real-time view of consumer’s creditworthiness, as the traditional method of using credit scores comes with a time lag of six weeks. 

With open banking in Australia poised to go live in less than three months, the system will be even more important in an environment where stressed consumers are in need of greater flexibility, tailored solutions and faster responses from financial services providers.
While we are currently navigating an exit strategy to the pandemic, there will be lingering concerns and potentially localised lockdowns to control flare ups, as seen in Singapore and Germany. 

It is possible that second wave or third wave effects will need to be mitigated over the long term. 

Against such a backdrop, banks and regulators may have a rare opportunity to proactively shape the response by utilising open banking as an accelerator for digital transformation and help boost economic recovery.

By Ross Sharrott, Chief Technology Officer and Executive Director, Australia, Moneytree