The dawn of open banking in Australia

Australia is pushing its digital chips to the centre of the table by announcing its intentions for an open banking regime, a move that has the potential to transform the country’s financial industry.

Typically, this news would just impact Australia’s big four banks – Westpac, Commonwealth Bank, Australia and New Zealand Banking Group (ANZ), and National Australia Bank (NAB).

But in the same announcement, the government, along with the Australian Prudential Regulatory Authority (APRA), which oversees Australia’s financial services industry, said it would “reduce regulatory barriers to entry for new and innovative entrants to the banking system”.

So what does this mean for financial companies in Australia, and do they have what it takes to compete? The challenges are immense, but one answer may be DevOps.

Open banking means that certain transactional and product data belongs to customers, not banks. And only customers have the ability to use that data with third parties, potentially leading to greater competition, faster innovation and a lighter load on the customer’s wallet. Financial technology (fintech) startups will also be able to use the bank’s data and offer products and services that may be better suited and more tailored to the client.

The customer data is shared via application programming interfaces (APIs). Simon Redfern, founder and CEO of the Open Bank Project, told Nordic APIs that APIs are great for abstracting away ageing IT systems that are barriers to innovation.

“We think banks need to open up their infrastructures, and they should be developing ecosystems so they can better respond to their customers and compete better in the market,” he said.

Australia is one of a growing number of countries that are keen to establish an open banking regime. Scott Farrell, head of the federal government’s open banking review, told AFR that while there are lessons to be learned from other countries, the government is not emulating any specific model, but is focused on finding the unique model that makes the most sense for Australia.

As the big banks are forced to adapt to a new open banking regime and prepare for more competition, they will face some obstacles, including legacy technology, and lack of speed and agility. But they still need to comply with the regulations, while competing with startups vying for their customers.

That means the big banks need to get to market first with the best API capabilities, allowing third parties to build digital experiences on top of their platforms and not a competitor’s. For example, positioning itself as a leader in the space, NAB has announced APIs for third-party data sharing.

Banks will also need to combat the sleek, easy-to-use interfaces that startups use to lure new customers by building better digital customer experiences of their own. And they will need to deliver frequent and agile changes to these interfaces. To do this, banks need to undergo transformation while diligently managing the potential risks.

But those challenges are not unique to the big banks. In fact, some regulatory hurdles may be easier to climb for the big four because they have the financial muscle to do so. For example, one issue still being resolved in the UK is who (banks or startups) should be responsible for a major cyber breach, should one ever happen. The insurance and capital requirements will be costly for startups.

The thought of a breach is a major concern for customers, particularly those in Australia who have been reluctant to switch banks. According to an ABC News report, Australians, on average, tend to spend 16 years with a bank, compared to just nine with a spouse. Although Westpac supported the move towards open banking, its CEO, Brian Hartzer, has made it clear that the potential security vulnerabilities are not to be taken lightly.

“These are not hypothetical concerns,” Hartzer said in an interview with the Sydney Morning Herald. “These are concerns that every single Australian should worry about.”

That said, the brand equity and loyalty associated with banks will be an asset if used appropriately, according to a McKinsey report on open banking. “The ‘trusted agent’ status that incumbents currently enjoy will remain a competitive advantage for some time, but it must be exploited now to halt the loss of business to new entrants,” it said.

There are bound to be ripple effects and repercussions from the roll-out of such a new open banking regime, which offers an opportunity for fintech startups to capture market share. They have a digital-first, built-in-the-cloud, mobile mindset that offers customers a full range of alternative banking services.

Startups are disrupting many financial services markets with new business models, potentially putting banking margins under pressure. They can take more risks and adopt newer technologies more quickly than a big bank. However, modern tools and platforms, such as cloud computing and containerisation, are incredibly powerful and big banks need to start modernising and using these platforms aggressively.