Banks disrupted

With the advent of open banking, banks will continue to remain disrupted. But by understanding what the consumer thinks, wants and does will position the sector to embrace the challenge. Christine St Anne and Azhar Khan report.

August, Reserve Bank of Australia assistant governor (Business Services) Lindsay Boulton spoke about the “significant role of technology” in reshaping the central bank’s business at RFi Group’s Global Business Banking Summit. Open banking was among the big tech and regulatory themes Boulton spoke of. Such innovations allowed Australia’s central bank to improve its business banking division, enhancing its services to government agencies.

“The role of technology has changed over the past decade, from supporting the provision of business services to being a competitive difference,” he said at the summit. In fact, the bank’s spend on technology in the total cost of its transactional banking business is now around 50 per cent, up from 25 per cent 15 years ago.

It was an interesting assessment made by the central banker. Central banks are of course known being behind the levers of monetary policy, yet innovation like economic outlook also governs their focus. While the RBA is harnessing technology to remain competitive with government tenders, banks are continuing to innovate in a bid to stave off competing sectors as technology continues to evolve.

The regulatory push to open banking will continue to pave the way for new players from the big technology to fintech firms to impact the banking landscape, most notaby through payments. Disruption now is a permanent theme in banking.

While some of these competitors have advantages in being nimble without the constraints of legacy systems, banks are positioned to adapt to the new opportunities that flow from these opportunities. In this cover story we assess one of the big themes underpinning this month’s Sibos conference – open banking and how banks while disrupted are ready to embrace the challenge.

Australian banking customers will soon be able to share their transactional data with certified third parties, including their banks’ competitors, to find better deals on banking products and services and improve competition in the market.

Open banking will require banks to share customers’ details right down to transactions if the customer consents to have their data shared. This data will only be shared with approved third parties who will have to take precautions to protect the customers’ information. The system will be enabled through APIs which third-party developers can integrate into their applications and services.

Open banking is expected to increase transparency in the financial industry, while also making products offered by banks more competitive. This, in turn, could drive down lending rates and fees. The Australian government is a key driver in implementing the system and has imposed tight deadlines to ensure that open banking is rolled out quickly; the first APIs must be ready by July 2019, with the remainder due by July 2020. It has mandated that all the major banks need to comply with these dates, with non-major banks getting later deadlines.

A matter of trust Australia’s four major banks, ANZ, Commonwealth Bank, National Australia Bank (NAB) and Westpac will also benefit from the system. At a RF-Group/AB+F roundtable last year – and at the time the government greenlighted the open banking framework – ANZ CEO Shayne Elliott said that open data will give the bank the competitive edge.

He spoke of the ability of ANZ to effectively harness data to the benefits of its customers. “If we can make it easy for potential customers, and customers to come to us with their data, I can win,” he said.

Westpac’s chief executive Brian Hartzer also spoke of the opportunities to tailor products and services to customers in an interview with the Australian Financial Review. “We see it as an opportunity because if you have more information about the customer, assuming the customer has given you that permission, you can make better decision making on credit, you can tailor your services more specifically to that customer, you will have more information to provide back to them in other info to manage money better,” Hartzer said.

“It gives customers more control as to who is providing services and to compare products and make sure they are happy with the choices they make. More availability of information will help drive efficiency and innovation.” However, banks need to tread carefully if they are to really harness the benefits of an open data regime. Australian banks have requested that the system is phased in product-by-product.

Deposit, credit and transaction account data is set to be shared from the start of July next year and banks will need to develop their systems soon so that they can be adequately tested before being rolled out. Data sharing for mortgage products will be the next step (in February 2020) in the implementation of open banking, followed by personal loans (in July 2020). The banks will thus need to introduce systems which can be adapted for use across multiple product lines.

To achieve this, the major Australian banks will need to first set standards for the software which will enable open banking. An advisory committee, comprising 15 members from the industry and chaired by Data61’s (a leading analytics firm) Andrew Stevens will set the standards. Once standards have been set, the banks will be able to start developing the required software and implementing the agreed upon systems. In discussing these standards, the committee will need to consider many factors so that the final system addresses key customer concerns.

In discussing the open banking framework, the Australian advisory committee needs to not only address customers’ concerns, but also communicate how data will be safeguarded and used. This will ensure that the system is widely adopted and thus achieves its key  outcome: to improve the industry.

For RFi Group managing director – Asia Pacific Gerald Ferguson, banks have the advantage in that they own the customer and are trusted even in the shadow of a public inquiry in Australia. “We did a research piece with bank customers and they continued to trust their bank to keep their money safe. The royal commission has highlighted negative issues, but customer still perceive banks to keep their money safe.

Banks could also have the upper hand when it comes to data security. “Who owns the customer with their data and security will be important in open banking,” Ferguson said.

According to RFi Group Research, 39 per cent of respondents are not concerned with open banking and its data sharing implications. Younger respondents, aged 18- 34, were far less concerned (59 per cent had no concerns) than older Australians, aged 55- 80 (only 22 per cent had no concerns). These young adults will benefit most from the system as they use technology more: Seventy eight per cent of respondents aged 18-34 use mobile banking, while only 28 per cent of those aged 55-80 report doing so. They are thus more willing to overlook potential risks.

Unsurprisingly, security (36 per cent) and privacy (57 per cent) ranked highest as reasons provided by those concerned with the system. Many respondents who quoted security as a concern wanted to know what measures would be taken to safeguard their data, whilst some who mentioned privacy were not receptive to the sharing of data at all, even if assurances were provided. Open banking will be opt-in and so those who are not willing to share their data will be largely unaffected.

The UK experience

The United Kingdom introduced open banking in January this year and while the system is still taking off, the regulation and safety measures employed could serve as a guide in developing Australia’s own system. Other countries, such as New Zealand, are also looking into open banking and what it might achieve. These countries will be closely monitoring Australia as it implements the system so that they can evaluate what challenges and opportunities open banking presence.

With the United Kingdom already moving to open banking under its PSD2 directive, London-based RFi Group managing director – EMEA Victoria Bateman is seeing a number of themes emerge on the landscape.

So much of the debate has focused on the threats to traditional banking, Bateman said. “The disruption potential across the industry, fintechs and technology giants taking over, the end of financial services as we know it.” Amid all the talk around the argy bargy of competition between banks and disruptors, it will be the consumer who will emerge front and centre in the brave new world of open data.

“The new legislation could be a game changer but at the end of the day what it all comes down to is the end consumer. The customer is king. We wanted to strip out the noise and focus on what the end consumer thinks, wants and does.”

In her speech, Winning the Post PSD2 customer at the RFi Group Global Digital Banking Conference in September, Bateman tackled issues around trust and comfort. She highlighted an interesting finding – that the younger age groups have the highest degree of trust in Amazon and PayPal in terms of trusting these businesses with their personal data. Based on a study by RFi Group, the research found that overall level banks are ahead by a tiny margin. “Importantly in this study we broke out the GAFA [Google Amazon, Facebook and Apple] companies – Facebook was pretty much decimated by the Cambridge Analytica scandal, but Amazon is doing very well and the rest of the GAFA companies don’t seem to have suffered by association.”

However, the concepts underpinning trust such as brand presence and longevity in financial services does breed comfort, a positive for even the banks. Bateman also looked at how consumers feel about sharing their data in a PSD2 environment. The research found that when it comes to sharing personal information, consumers have the highest overall trust in banks.

The fintech and challenger bank landscape was also assessed in the study which found that these two groups are doing slightly less well at meeting customer needs and in fact have lower Net Promoter Scores across the industry. In terms of awareness of fintechs, Nutmeg was the most widely known, followed by Atom, Funding Circle, Zopa, Monzo and TransferWise. Consistent with the Australian market, fintech usage corresponded highly with digital engagement, particularly among mature millennials.

“The more frequently consumers use digital channels the more likely they are to be engaging with fintechs which is intuitive but also an interesting conundrum for the banks with the best digital propositions who manage to achieve a highly valuable and profitable customer base but also a substantially less sticky one,” Bateman said.

To surprise and delight

The research also looked at the big pain points for consumers – which could also provide an opportunity for banks in an open data world. In particular customer wanted greater visibility of payments in their account - where they have the ability to see payments in real time.

“Rates, charges and fees inevitably came through and the number of comments related to branch closures or a need for human interaction once again proving that the branch isn’t dead yet,” Bateman said.

In terms of prospects emerging from open banking, she sees opportunities to “surprise and delight” particularly in the area of value-added services such as personal finance management apps. However, she also sees some potentially new services that could come out of the new regulation which all broadly relate to the avoidance of fees, fraud and financial optimisation. These include notifications of lower cost services; analysing send patterns for out of ordinary transactions, avoiding fees, advising customers on how to get the best out of their money and prompting ways in which consumers can earn more and better rewards.

These factors also underpin consumer behaviour around switching in light of PSD2. “Consumers are not currently switching because they want access to better digital services, they are switching because they are being incentivised to do so – when they say they want access to products and services their banks don’t offer what they actually mean is that they want better rates, fees and rewards.” However, for Bateman, “ultimately the opportunity is not going to arise simply from harnessing dis-satisfaction but from offering new to market propositions.”

Closer to home, RFi Group’s Ferguson also sees opportunities for Australian banks around PFM tools and the ability for these businesses to provide customers with a single view of their finances by integrating their data. The latter is a theme touched upon by Scott Farrell, who led Australia’s open banking inquiry (see page 6). Australia’s open banking framework is distinct to the UK framework in that it will allow the energy sector and telecommunications sector to participate – a move that will make the system “bigger than open banking”.

It’s also an initiative that will amplify the benefits of open data and Ferguson sees banks positioned to provide their customers with value-add services such as bill management. Indeed, open banking will pave the way for an active engagement between banks and their customers. “Open banking will allow banks to engage in a smarter way with consumers even before discussions like borrowing comes up. There are big opportunities to surprise and delight by being proactive with their

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