Australia's newly introduced Open Banking regime provides customers with "ownership" of their financial data. The legislation passed through parliament in August 2019 and means that, by virtue of what's known as the consumer data right (CDR), both individual and business customers will have the ability to access their data and share it with trusted and accredited third parties. The basic premise of the CDR is that customers own their financial data, not institutions, and should be free to access and share that data as they choose.
Financial data includes information about customers' transaction history, how they spend their money, and the financial products they use. Third parties may include, but are not limited to, other banks, product comparison services, financial technology companies, and utility providers.
What will it change?
Open Banking has the potential to fundamentally shift Australia's financial landscape. Switching between products will become increasingly seamless for customers, leading to significant changes in the way financial services are delivered.
Open Banking opens the door for the creation of new services that utilise customer data to provide automated, yet tailored, services such as:
- "super applications" which allow customers to view their products from multiple financial providers via one interface
- comparison services that utilise customer data to provide tailored recommendations from panels of financial institutions
- personalised financial management software optimised to meet individual needs.
Open Banking has the potential to remove much of the inconvenience involved in switching between financial institutions. Tedious tasks such as updating direct debts may be automated, as transaction data can be made available to the new financial institution. Institutions will need to deliver optimal customer experiences to compete.
The increased ease with which customers will be able to transfer from institution to institution poses a threat to the dominance of Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd. (ASX: NAB), and Westpac Banking Corp (ASX: WBC). Between them, the 'big four' banks hold the transaction records of the majority of Australians, so may find themselves having to hand over precious customer data to their smaller competitors more often than not (at the customer's request, of course).
What is possible?
With access to customer data, institutions will have the ability to offer highly tailored customer outcomes. Loan approval times could be considerably shortened, and personalised pricing becomes a possibility. Customer data may be used not just to monitor the current financial health of customers or potential customers, but could also be used to make predictive insights about their future financial health. Smaller competitors such as Bank of Queensland Limited (ASX: BOQ) can gain access to rich data sets that were previously unavailable to them.
Open Banking has a phased implementation, with banking data on credit, debit, transaction and savings accounts available from the big four banks from February 2020. The big four banks must make banking data on all other accounts available no later than February 2021. Other banks have a 12-month grace period following the big four.
Bank of Queensland will be hoping Open Banking prompts a change in fortunes for the embattled second tier. After a period of chronic underperformance, BOQ again disappointed with an underwhelming set of results last week. Net profit after tax was down 11%, cash earnings after tax down 14%. The net interest margin was down 5 basis points and loan impairments were up. Earnings per share were down 16% and return on equity down 8.3%. Not a lot to like, really.
Bank of Queensland blamed low interest rates, slowing credit demand, increased regulatory costs and a generally challenging environment for its less than impressive results. CEO George Franzis warned of challenges ahead as he conducted a strategic review to revamp BOQ. A market update is expected in February. Nonetheless, Franzis views the business as fundamentally good, with sound underlying asset quality and capital "well positioned for 'unquestionably strong'."
Post-Hayne Royal Commission regulatory and compliance costs are expected to increase in FY20, as are operating expenses ties to technology expenses. In the meantime, cash earnings are expected to decrease. Unsurprisingly, BOQ's share price, which had reached as high as $10.66 in February, is back down around $9.07. Still the dividend yield is currently a high ~7% with the P/E ratio a low 11.2.
So, who else wins?
It is not only banks who are set to benefit from the introduction of open banking. Non-ADI (authorised deposit-taking institutions) lenders can equally benefit from the data that can now be shared with them.
Wisr Ltd (ASX: WZR) a non-bank lender for personal loans, would benefit greatly from being able to access the data of those it lends to. Not only could it make much more accurate credit assessments about its potential customers, Wisr could then tailor its offer precisely to their circumstances. Open Banking will allow this level of customisation in product offerings. Wisr shares are currently up 250% to ~12 cents from 0.04 cents in January.
Loan origination volumes in FY19 were up 281% year on year to $68.90 million, while revenue grew 91% despite marketing spend reducing by 4%. Revenue is predominantly driven by loan establishment fees and management fees for servicing loans sold to third parties. Growth in revenue was driven by the increase in loan volumes over the year. Wisr has recently entered into a three-year agreement with SmartGroup Corporation Limited (ASX: SIQ) to partner on the distribution of Wisr products, or as Wisr calls them, "Wisr's ecosystem of financial wellness products."
The lender commenced life as an online peer-to-peer lender before evolving to a wholesale funding model, and then a hybrid model via diversification of debt funding models. Wisr expects to receive 4.4 million applications for consumer credit products over the six months to February, including 1.36 million for credit cards, 1.53 million for personal loans, 1.15 million for home loans, and 374,000 for auto loans. As Wisr CEO, Anthony Nantes, told the Australian Financial Review back in June, the trifecta of Open Banking, the Royal Commission and positive credit reporting makes it the perfect time to start a consumer lending business.
Foolish takeaway
Open Banking has the potential to shift the balance of power in the banking industry, potentially opening the door to allow smaller and more nimble competitors to gain market share. As it becomes easier to shift between financial institutions, the companies that retain their customers will be those that best meet customer needs.
