Open data - competition cuts both ways

“Silicon Valley is coming”. That’s what JP Morgan CEO Jamie Dimon wrote to shareholders in 2015. Dimon had been to the Valley and seen money pouring in to innovative start-ups, targeting the lending and payments space. Many other bankers have been since and come away with similar views.

Dimon et al saw by using big data to make decisions far quicker and more efficiently than existing financial institutions, these start-ups, collectively now known as fintechs, were lean, hungry and coming to eat banks’ lunch.

There’s been plenty written on that front, including this rigorous analysis on BlueNotes asking why you would invest in fintech.

Critically, in their quest to take a bite out of banking revenues, fintechs have always faced two difficult challenges: they don’t have access to bank data and they don’t have a banking license.

In Australia at least, those barriers were lowered with the release of the House of Representatives Standing Committee on Economics report into the four major banks.

The report, reflecting similar changes in the UK, makes a series of recommendations to bolster competition, dispute resolution and transparency in Australia’s banking sector.

Chief among these is the recommendation to force banks to expose customer data, product holdings, fees and transactions to customer-authorised third parties via industry-standard APIs (application programming interfaces) to be defined by the Australian Securities and Investment Commission.

This recommendation builds on similar recommendations by the Productivity Commission in their draft report into open data published earlier this month. The Committee hopes product comparison and switching services will flourish on the back of common, open data, leading to improved competition amongst banks and better outcomes for consumers.

The committee has also recommended bank licensing be shaken up to allow more competitors into the industry through lower barriers to entry via reduced initial capital requirements and tiered licensing regimes.

In the UK

The UK experience with open banking can teach us a lot about what to expect here in Australia post July 2018, the proposed start date for these changes.

The UK introduced easier licensing requirements in 2013 and as a result has seen the establishment of a number of new banks, such as Atom, Tandem, Monzo and Starling.

These so-called challenger banks are native-born digital companies, using a branch-less, mobile-only strategy to reinvent banking through features such as biometric security and two minute account opening.

Starting small with limited products as they test and learn and prove themselves to the regulators, these banks are iterating and innovating fast, making the best of not having large legacy IT platforms to maintain - unlike their more established competitors.

However, despite their fresh approach and modern technology, these new entrants lack a key intangible asset that established banks have: trust. In spite of recent crisis and fines, customers still trust banking institutions as a destination for their personal and financial data, and with trust comes customer stickiness.

Figures from the UK show that despite the rush of new digital banks with seamless account opening experiences switching between banks remains low as customers stick with institutions they know and trust to keep their hard-earned dollars safe.

Back in Australia, the other recommendations in the House of Rep’s report aim to improve community trust and faith in the major banks through independent risk reviews, complaints tribunals and transparent performance reporting.

Double-edged sword

Ironically the package of measures overall may end up being a double-edged sword for fintech. On one hand open data and open banking will make it far easier for fintech to enter the market and compete.

Easier paths to a banking license combined with industry standard product descriptions, comparison services and greatly reduced friction in switching will provide far more insight and choice to consumers, allowing them to more freely move between banking providers.

But on the other hand, the measures aimed at improving bank behaviour, complaint handling and accountability may bolster community satisfaction and trust in existing banks, further entrenching their dominant market share.

The thing to watch over the next few years will be whether existing banks can modernise their backend and adapt to a digital world faster than fintechs can build a brand and a trusted reputation to match their high-tech platforms.

And whether the two sides might figure out some way to work together…

This article was originally published on ANZ BlueNotes