Open banking – Can it open new doors?

At the Loan Market Game On conference last year, Jason Furnell, Loan Market’s chief customer experience officer, urged the broking industry to embrace open banking and Consumer Data Right (CDR). He said the themes and end goals “exactly align” with the end goals of mortgage brokers.

He also called on broking groups, brokerages and lenders to take the lead in embracing open banking, stating it will help brokers create even closer relationships with their clients.

Choice Aggregation CEO Stephen Moore believes the primary benefit of open banking will be competition. The more a broker knows a customer’s circumstances, including their repayment and savings history in a verified manner, the better placed they will be to understand what the appropriate solution is for clients.

“Where that’s likely to lead to is for a whole range of new lenders and neobanks then being able to tailor products and micro price products at a customer level to meet different customer needs,” Mr Moore tells The Adviser. “That’s going to lead to a real drive in competition in lending, which is a great benefit for customers.”  

But what exactly is open banking, and what has it got to do with borrowing? 

First, a recap

The open banking regime was first announced in January 2019 and is a framework designed to enable the open exchange of data in the private sector, beginning with the big four banks.

Open banking is designed to give customers greater access and control over their banking data. Banks will be required to share product and customer data with accredited third parties, including brokers, with the customers’ consent.

A key piece of legislation that facilitated this regime is the CDR, which allows customers to access their own data or direct custodians to share their data with accredited entities such as banks and comparison service providers that have “satisfactory security and privacy safeguards” in place.

According to the Treasury Laws Amendment (Consumer Data Right) Bill 2019, the CDR is described as providing individual and business consumers with a right to access specified data in relation to them held by the businesses.

When open banking will take effect

While the regime was first meant to start in phases from 1 July 2019, this was later pushed back to 1 February 2020. However, in late December 2019, the Australian Competition and Consumer Commission (ACCC) issued a timeline update in which it was revealed that certain aspects would be further deferred to July 2020.

The new timeline outlines that data and information will be shared in three phases. Should customers of the big four banks give permission for their institution to share certain financial data under the CDR, the big four banks will share information on a customer’s transaction accounts, savings accounts, debit and credit cards and term deposits from 1 July 2020. This was postponed from 1 February.

Under the National Consumer Credit Protection Amendment (Mandatory Comprehensive Credit Reporting) Bill 2018, the ANZ, Commonwealth Bank, NAB and Westpac are required to share credit card, debit card, deposit and transaction account data via a reciprocal data exchange system, established by the Australian Retail Credit Association, in consultation with the industry.

All other banks are to follow from 1 February 2021.

In phase two, information on home loans and personal loans will be shareable by the big four banks from 1 November 2020 (original implementation date was 1 July 2020), and by all banks from 1 July 2021.  

In phase three, information on all other relevant products, including overdrafts, investment loans and leases, and business finance must be shared by the big four banks from 1 February 2021, and by all banks from 1 February 2022.

The ACCC said the postponement of implementation dates of certain aspects of the CDR reforms will allow additional implementation work and testing to be completed and ensure necessary security and privacy protections operate effectively.

“The CDR is a complex but fundamental competition and consumer reform, and we are committed to delivering it only after we are confident the system is resilient, user-friendly and properly tested,” ACCC commissioner Sarah Court said.

“Robust privacy protection and information security are core features of the CDR, and establishing appropriate regulatory settings and IT infrastructure cannot be rushed.”

Relevant changes to the CDR rules and further consultation regarding any consequential changes to other phases of the CDR are ongoing.

As well as sharing financial data (as detailed above), a new method of credit reporting is also rolling out. As of last year, lenders began providing more information to credit reporting bodies under the comprehensive credit reporting (CCR) regime. This new regime will show repayment history for up to 24 months, as well as if any loan repayments are more than 14 days late.   

What’s this got to do with borrowing?

Open banking specialist and Volt Bank’s head of partnerships - engagement, Marcus Cann, admitted there is always genuine concern when an industry goes through changes, and a new regime like open banking is no exception. He said that in this case, the concern will be around the greater visibility of consumers’ spending habits at a more granular level.

But with this increased visibility, Mr Cann sees opportunities for mortgage brokers to increase their value proposition with their clients.

Because this process will be electronic, it will have the ability to categorise and group consumer data.

“The benefits of this is with the data categorised accurately and aggregated into various spending categories, it’s a lot easier for the broker and the consumer to sit down and have a conversation about how they earn their money, how they spend their money and whether there are things they could be doing to improve the way they spend the money leading up to the home loan application,” Mr Cann tells The Adviser.

“For example, the broker could ask the client to demonstrate in the next three to six months that they can scale back on discretionary spending in order to try to get the client more home loan amounts.” 

Mr Cann acknowledges that mortgage brokers may be hesitant to advise their clients on their spending patterns. However, as banks scrutinise consumer spending habits to detect any changes in spending behaviour when determining if they are suited for home loans, he suggests that this is a key service brokers can provide.

“Banks have got pretty sophisticated techniques to understand what people are spending on today, and moving forward they will become more sophisticated about what behaviour is likely to change,” Mr Cann says.

“The broker works for the consumer, so I think the best brokers will understand that while they cannot dictate how their clients spend their money, they can give them advice on how their income and spending patterns will impact not only their ability to get a home loan, but also accumulate wealth over their life.”

“I think brokers who feel they can’t get any more value out of open banking than filling an application form are really missing a huge potential to demonstrate a lot more value to the consumer by what they add to the process,” he adds.

Meanwhile, Choice Aggregation’s Mr Moore (who is also chairman of the data transaction standards body, LIXI) says brokers will have access to more data than anyone else, which means they are in a position to tailor solutions to customers.

“What becomes critical is not only the ability to accept that data, but ensure it is secure, and ensure you have the right tools to be able to develop insight around the data, spot opportunities and execute on those insights,” Mr Moore states.

Mr Moore adds that a brokerage’s CRM system will become even more critical in the future than it is currently as brokers need to manage customer data and develop insights.  

The introduction of CCR, also known as “positive credit reporting”, will also help brokers understand all the banking relationships and commitments a client may have, according to Mr Cann.

Clients previously did not have to disclose information to a broker on all of the accounts and transaction relationships they hold. But under the open banking regime, a broker can obtain all the information from institutions on their clients.

“Whereas today I can go to my broker and not tell him I have an account with NAB. I could say all I do is bank with Volt, and all my income and expenses are there. I may not show I’ve got a credit card with NAB,” Mr Cann says.

“Well, if that’s missed on a credit report, a CCR report will pick that up. Brokers can tell clients if they have got a commitment with a bank or an institution, that will change how much they can borrow.”

Automating living expenses process

While some brokers have had to bring in additional staff or outsource services given the increasing complexity and scrutiny around living expenses (and ongoing confusion around the extent of the application of responsible lending laws), Mr Cann believes the open banking regime will automate this process and eliminate the administrative work for brokers.

“Open banking will allow the client to log in to their bank and confirm they want the data to go to the broker. A few minutes later, the broker will receive a report with expenses fully categorised, and the broker will be ready for that conversation with the client,” Mr Cann tells The Adviser.

“If you have a report that’s fully categorised, the broker is less likely to make an error. They’re less likely to be influenced by the consumer about what really is going on with their income and expenditure because it’s there in fact.” 

Expectations from the regulator

In December, the Australian Securities and Investments Commission (ASIC) released Regulatory Guide 209: Credit licensing: Responsible lending conduct. The guidance was updated to reflect various developments since it was last updated. These include initiatives such as comprehensive credit reporting and open banking.

The guide states that responsible lending obligations are not static and what is reasonable can change as the broader professional and regulatory environment in which the sector operates change.

“For example, legislative developments (e.g. open banking and comprehensive credit reporting) and other developments and innovations adopted by the credit industry will affect the measures you could reasonably be expected to take,” ASIC’s guide states.

Mr Cann says once regulators understand the range of data sets that is available to brokers and lenders, they will expect the industry to use it when assessing a client’s eligibility for a home loan.

“The excuse until now has been around how hard it is to get the data and how hard it is to aggregate it, but they start falling away,” Mr Cann says.

“The regulator can move quickly and say, ‘Once the data is available, we expect you to use it’. And say, ‘We expect your understanding of the customers’ income and expenses to be a little bit more robust than what you’ve been using today’.”