Open Banking: A boon or bother for the Big 4?

The future of banking will look different to the present. Banking services may increasingly be provided by companies that are not banks.

One pathway to that future is open banking. It's effectively a requirement for banks to share data – think payments history, spending habits, and income sources – with other providers of financial products. 

The idea is that by freeing up your data from your current bank or finance provider, greater competition and innovation will evolve. In time, that should lead to better products, more efficient service and new ways to manage your finances more effectively.

Shake up

That's a big change to the present. Banks – and the big 4 in particular – currently use customer data that is used for their benefit. Applying for new products from other banks, for example, requires you to provide the same detail over and over as you shop around. And that can be a restriction for alternative providers that could offer you a better deal.

So, with more access to customer data – with appropriate permissions – alternative players, such as financial technology companies (‘fintechs'), will be able to shake up the banking industry. Major banks would be subject to a more level playing field, putting profits under pressure.

That's the theory anyway.

Impact not clear

Accurately predicting industry change is notoriously difficult, and it will be a while before we know how open banking will play out.  We can, though, think about the areas that might be affected.

For one, the impacts of open banking are more geared to retail customers, not large companies. That means the focus will be on deposits, home loans, personal loans and credit cards.

These products have material differentiation in terms of dollar amounts (home loans are large compared to credit cards) and complexity in data requirements and verification.

Deposits provide a cheap source of funding for banks, and consumers have historically been reluctant to switch banks. Open banking may make that process easier, and the fact that these are simpler products suggests that alternative providers could be very competitive.

Improved data access will make smaller home loan lenders more competitive. However, economies of scale mean the major banks are still the lowest cost operators in this area and it will be hard for newcomers to compete.

Credit cards and personal loans are likely to be the initial battleground from open banking. These products comprise a small portion of the big 4's lending, and the low values lent (per customer) would be digestible for fintechs (and the array of current competitors).

In any case, we need to remember the sophistication and resources of the major banks.  While new and existing players can provide innovation, banks are capable of matching many products and services, either by themselves or with partners.

BigTech not FinTech

The bigger risk for the Big 4 is likely to be from large, global technology players – think Alibaba, Amazon and Apple.

These companies have significant resources and established relationships to compete.

Open banking will make that easier.

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