Explainer: Open Banking and Digital Banks

This post is part of a series of informational posts on current topics. Today we look at Open Banking and the new digital banks – what they are, how they work, and what implications they hold for the future.

“Open banking” and “digital banking” as concepts have been around a good while now, but many people even in financial services are not clear on their meanings.

Here is what the terms actually mean:

Open Banking refers to the various initiatives around the world of implementing data sharing between banks and third parties.

Digital Banking refers to the new types of bank that offer banking services without physical branch infrastructures and without using legacy banking systems. Digital banks are also known as new banks, challenger banks, or the preferred industry term “neobanks”.

So let’s look at these two concepts one at a time.

Open Banking

Open Banking is the concept of sharing banking data between banks and third parties. Drivers of Open Banking are the desire of governments and regulators to give customers more control over their data; to encourage competition and innovation in banking services; to modernise the banking industry; and to facilitate connectivity and data movement between entities.

Open Banking is growing around the world. First to implement was the UK in 2018, and since then the US, EU, India, Japan, South Korea and Australia have begun to roll out their own versions. Different jurisdictions are implementing open banking differently; the UK, Hong Kong and Australia are very much regulation-led, while the US, India, Japan and South Korea are more market-led in their approach. But all share some commonalities.

Common elements in Open Banking regimes worldwide:
- promoting, enabling and accelerating data sharing
- API-based
- regulated, to varying extents

In Australia, Open Banking is the first wave of the Consumer Data Right (CDR), which begins with banking and will subsequently be applied to Energy and Telecom – and potentially other sectors in future.

What does Open Banking mean in Australia?

It refers to data, not banking services (though Open Banking does have the potential to open up the types of service that can be offered to consumers of banking services).

The governing framework is the Consumer Data Right (CDR). CDR allows customers to easily share their bank data with other banks or third parties.

Anticipated uses of Open Banking in Australia

• Budgeting Apps such as Frollo or others, can use the Open Banking API to get data more securely, more reliably and faster than by screen-scraping.
• Switching: A big intended consumer benefit of open banking is to make it easier for consumers to switch banks. Customers considering switching banks could give their new bank access to their current banking data to provide a customised quote, pre-fill their automated payment setups, and make switching faster with less friction.
• Lending and credit scores: Customers applying for loans or checking their credit scores can give (or may be asked to give) lenders their bank data for faster more accurate assessment.
• Platform aggregators such as wealth platforms and advisory reporting services can aggregate a client’s accounts and transactions from multiple banks for consolidated reporting and wealth management.

Other uses are expected to evolve. In addition, companies that get in early can position themselves as consultants or technology sellers to others.

What data is available?

CDR has made available Product, Customer, Account, Balances and Transaction data. The data protocol is the Consumer Data Standards, the governing framework of which is the CSIRO’s Data61.

Open Banking framework

Regulator	Australian Competition and Consumer Commission (ACCC)
Governing framework	Consumer Data Right (CDR)
Data Standards Body	Treasury, ACCC, Office of the Australian Information Commissioner (OAIC), Data61
Data Standard	Consumer Data Standards – Open Banking APIs
Data Holders	Banks
Data Recipients	Non-Bank financial services providers, Fintechs

Accreditation and Consent

Authorised Deposit-taking Institutions (banks) must become accredited as Data Holders, and entities that want to collect and use data must become Accredited Data Recipients. Accreditation is not automatic for any entity. To date, there are still very few registered accredited providers! But, as at 1 July there were a further 39 entities who had started the process to become accredited.

The consent requirement is central to Consumer Data Right. An Accredited Data Recipient (ADR) must have consumer consent to collect and make use of specified data, for a specified purpose, for a specified time. Concurrent Consent allows a Data Holder to simultaneously have multiple data sharing arrangements with an individual consumer. Consent arrangements must be easy to understand and a consumer must be able to withdraw at any time. ACCC recommends that Data Holders put in place dashboards where customers can review their data sharing arrangements.

Australia’s Open Banking Timeline

Roll-out is phased as visualised below, with the order of rollout being product data followed by account and transaction data, major banks followed by other banks and then Fintechs, and Phase 1, 2 and 3 products in order.

How do banks see Open Banking?

It is probably fair to say that the “big four” banks in Australia did not jump enthusiastically on board the Open Banking implementation. No doubt there were many in these organisations who were keen, but legacy systems, compliance and control concerns and the desire not to give up data control too early have kept the banks’ progress slow.

Threats	Opportunities
Banks are forced to make data available to third parties including competitors	Banks can start offering new offerings and services
Traditional banks have a lot of work to do to make their data available via API	A chance to kick-start long-planned modernization of infrastructure and vision
Open Banking will make it easier for their customers to switch banks	Open Banking will make it easier for other banks’ customers to switch banks

Which leads us on to those banks that have more enthusiastically embraced Open Banking: the digital banks, otherwise known as neobanks.

Neobanks

First, some bank context. In Australia, Authorised Deposit-taking Institutions (ADIs) – i.e., banks – are regulated primarily by APRA and ASIC, but also in various capacities by the RBA, Treasury, ACCC, ATO and AUSTRAC.

Australian banking has long been dominated by the “big four”: NAB, Westpac, CBA and ANZ.

Other banks can be thought of as falling into two broad categories: smaller banks and credit unions on legacy banking systems, some of which are subsidiaries of the big four (e.g., Bankwest as a subsidiary of CBA); and digital banks, otherwise known as new banks, challenger banks or neobanks.

References

Digital banks

• https://which-50.com/cover-story-australias-first-ten-open-banking-pioneers-revealed/
• https://www.finder.com.au/digital-banks