Paul's Insights: Good money habits just became more important
Australia's open banking regime has kicked off, and it could pave the way to scoring a better deal.
If you’re not familiar with it, open banking gives consumers the option to share their banking data with another bank or service provider. Why would you do this? Well, if you think about it, when you apply for something like a home loan, the lender has to work off your loan application form, review your credit score, and then trawl through details of your income and spending. Not only is this time consuming, the lender may still not get an accurate picture of the way you manage your finances.
By contrast, open banking lets you authorise your bank to share all your transaction data with another bank. That way, a new lender can see, almost at a glance, how well you manage your money – whether you’re saving regularly or if your account frequently runs into the red.
Providing access to such personal information may sound intrusive. But it can have benefits.
Letting a bank view first-hand the way you manage money can help you access financial products better tailored to your needs. Consumers with good money habits should, in theory, be entitled to a lower interest rate on home loans and other credit products.
Australia’s big four banks launched open banking on 1 July 2020. Other financial institutions will steadily come on board over time. Eventually, more businesses will join the system including energy providers, hopefully making it easier to switch between services and land a cheaper deal in the process.
Handing over your account details is a big step. That’s why one of the key aspects of the opening banking regime is that the financial institutions involved are required to have strict security systems in place.
Bear in mind, you don’t have to agree to share your data this way. Open banking is very much an opt-in system, and your data can only be accessed when you've authorised it.
While open banking holds the potential for Australians to access lower rates on home loans, credit cards and other a variety of products, the system does reinforce the need for good money management. There’s not much room to hide poor financial habits when you hand your account details over to another bank. It means staying on top of bills, maintaining regular debt repayments and keeping your bank balance in the black just became even more important.
Paul Clitheroe is Chairman of InvestSMART, Chair of the Ecstra Foundation and chief commentator for Money Magazine.