'Open banking' is a concept that we're going to be hearing a lot about over the next couple of years as Australian banks are being mandated to adopt this very new, very technologically-driven concept. Mandated by the Australian Government to make banking data available to consumers from the start of the 2020 financial year, open banking is something that all Australian financial institutions will be expected to adopt.
As far as readiness goes, Australian banks are in a good position. The financial sector in Australia has already gone through many changes in recent years. Banks – big and small - have had to change their traditional legacy systems to become agile and create new digital products to keep-up-to-date with customer needs.
Titled Consumer Data Right, the open banking regulation is the next step in that innovation path. Professional services organisation, Deloitte Touche Tohmatsu, believes open banking was a "seismic shift in retail banking driven by regulatory changes, changing consumer preferences, and technology-enabled innovation".
According to Deloitte, "the evolution from a closed model, where each financial institution retained and controlled the information it collected about its customers, to an open model, has the potential to change competition in the sector and see the creation of new products and services based on that data".
Open banking will be phased in with the aim that all major banks will make data available on credit and debit cards, deposits, and transaction accounts by 1 July, 2019, and mortgages by 1 February, 2020. Data on all products recommended by the review -- including GST and tax accounts, foreign currency accounts, pensioner deeming accounts, and mortgages -- are to become available by 1 July, 2020, by financial providers in the top tier.
All remaining banking institutions will be required to implement open banking around 12 months after the major banks, with the government noting the Australian Competition and Consumer Commission (ACCC) will be empowered to adjust timeframes if necessary. The ACCC, alongside the Office of the Australian Information Commissioner, has been tasked with determining the rules of Open Banking, with the standards requested to include transfer, data, and security standards.
While two of the big four banks in Australia agree there are opportunities to come out of open banking, they are concerned about the security of customer data; and the further financial investment in having to purchase more technology in order to be compliant.
NAB CEO, Andrew Thorburn, showed support for implementing open banking, saying the regime may introduce new ways for banks to compete.
He said during a review of Australia's four major banks last year that while his bank was supportive of the concept, he wanted the potential risks of opening up data to be clearly identified, as he is concerned over the potential reputational damage to NAB with data getting into the wrong hands.
Westpac CEO Brian Hartzer, was less concerned over those potential risks, assuming if banks meet their compliance requirements. However, he was concerned with the cost associated with having to become compliant by the Government's chosen date.
"The investment required in these things (technology projects) are enormous," Hartzer said. "Open banking in the first instance is probably going to cost us somewhere between AU$150 to AU$200 million to implement because of the complexity of our systems environment.
"There's only so much investment and so many technologists who can work on all these things at once."
However, Seshika Fernando, head of financial solutions at open source integration vendor, WSO2, believes open banking costs shouldn't be in the millions for financial service providers.
According to Fernando, open banking was first implemented earlier this year in UK alongside PSD2 compliance for Europe. In fact, the Australian Data Standards Body is basing its requirements on the United Kingdom's existing open banking implementation specifications.
"Banks are currently already going through digital transformation projects. They should certainly look at open banking as an additional strength to current projects, rather than something new they have to take on," she said.
"What Australian banks must keep in mind is that the open banking regulation, unlike most other banking regulations, is more a journey than a destination. Banks should not expect compliance regulation to stop at the deadline. The regulation will evolve up to and beyond the deadline, as seen in Europe and the UK's current situation. Therefore, preparing the people, processes, and technology that can take you on this journey, is recommended."
According to Fernando, open banking involves securely opening data via APIs. The two key components needed by banks are API management platform and a robust identity and access management (IAM) platform, along with a comprehensive integration layer to incorporate new technologies with the existing tech stack.
Find out if Australian banks will require a complete overhaul to their technology system in the next part of this article series.