Open banking is coming – here’s what it means for you
Some big changes are coming to banking laws that could dramatically change the lending landscape for borrowers.
It’s called open banking, and if you haven’t heard about it, don’t worry – you’re not alone.
The proposition was announced during the messy banking royal commission when most of us were distracted by the damaging revelations that littered the headlines.
In a nut shell, open banking is a new system that, if you opt in, will make it easy for data about you to be shared around.
This sounds like a bad thing, but it’s not.
It will make it easy for you to have control over your information and for it to be shared between banks and other financial institutions when you want it.
This, in theory, will lead to you getting better deals and being in the position of power when it comes to negotiating.
How does it work?
Who owns all of the data about you? Is it you or whoever has collected it?
It’s always been quite a legal grey area, but one that the government has been looking at for a few years.
It all led to a thing called the Consumer Data Right, which essentially gives ordinary people the power to control their information.
The first way this new system will be used in banking – what’s now being called open banking.
The system will be opt-in, meaning that if you’re not sold or want to know more before you jump on board, you can take your time.
Basically, you’ll allow your data and information to be accessed by rivals to your bank or lender.
They can, in turn, offer you competitive deals, new products and attractive services that best suit your needs.
So, it’ll be easier than ever to get a good deal. And, it’ll be much simpler to switch banks. You can simply shift your information across to the lender you want to switch to, or you can wait for them to come to you with an offer.
Let’s say you’re looking for a home loan. You go to your mortgage broker and they collect all of the information they need to be able to go off to the banks and haggle for the best deal.
The lender your broker approaches must make a calculated decision about whether you’re a good borrower.
They will delve into your history, making sure you’re in a good position to pay. They will make you jump through every single hoop possible. You’ll sweat on their decision for weeks.
However, with open banking, all of the data they need is already there.
They’ll be able to get a clear picture of what kind of mortgage candidate you are.
And, if they can see that you pay your bills on time, don’t have a large discretionary spending habit and keep your financial house in order, you might even get a lower interest rate.
The program is being rolled out gradually, starting with a pilot program extending to credit cards and savings accounts from July 1, before rolling out to more lenders and products early next year.
The other great thing is that you’ll need to consent to sharing your information, so it’s not like anybody and everybody in the financial sector will be able to see it.
You get to choose who and there’ll be an expiry date on it.
The kind of information that will be kept on your data file is what you would expect – it’s information about your bill payment history, spending, credit score, delinquencies, financial liabilities, history with lenders and your use of various products.
Why it’s good for borrowers
We know that most Australians loathe to change banks.
It’s a huge hassle that takes a lot of time, a lot of paperwork, a lot of phone calls to change direct debits or redirect payments, and much more.
Unless, of course, they use a mortgage broker to do the heavy lifting for them!
There’s been research that found a whopping 40 per cent of Australian adults are with the same bank they joined up with when they were children or teenagers.
That’s several million people who are potentially missing out on a better deal, all because they think it’s inconvenient to move.
By making it easier to switch and putting the onus on lenders to make attractive deals to win your business, well, you’ll likely end up saving time and money in the long run.
So will the banks play ball?
Our banks capture, as we speak, an incredible amount of data and analytics for all people that transact via any technology medium.
So whether it’s an ATM withdrawal, a Tap & Go transaction at the petrol station or out for dinner, all these transactions and analytics are now tracked and recoded by our lenders.
The biggest banks – CBA especially – are the ones with the most power… And also the most to lose.
You see, the Commonwealth bank is widely regarded as being well ahead of the game when it comes to this data and analytics, so why would they make it easier for their good clients to leave them?
Short answer – they won’t!
This is still an area that will be tracked in the future but don’t expect any of our big lenders to openly offer any more data or information than what they need to, why would they?
Be prepared
They key is that with the ability to know more about you, your creditworthiness and your habits, you may also be asked questions that you haven’t been asked before.
We have written about that more questions are being asked about your living expenses and this data adds another layer.
If you have a good handle on your spending and management of your credit now, these changes should be a benefit to you.
Conversely though, if you don’t manage your finances well then this will now show up even more and may be detrimental to that next loan application you are planning.
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