Practical Innovation with Open Banking
Mike Cutter
Group Managing Director, Australia & New Zealand
Equifax
Stroll the streets of London and you will notice banners, prominently placed in high street bank windows, offering a variety of apps that tap into the now operative UK open banking regime. From a perspective of deep experience with financial data, I question whether the benefit of open banking will ultimately be an app, no matter how well designed, that simply consolidates bank accounts in one place for the sole purpose of evaluating Responsible Lending obligations.
Do we truly believe the average person can’t keep track of their finances – or at least that it’s a problem big enough to justify the inherent risks of open banking?
Beyond the Trough
Our Government has consistently stated that appropriate, secure access to banking data is the first step in addressing the recommendations from the Productivity Commission’s Data Availability and Use inquiry. The intention is to move towards open data, extending to industries such as telecommunications and power retailers, and a more ubiquitous Consumer Data Right. Let’s keep this article simple and stick to open banking rather than the broader discussion.
When it comes to change such as open banking it’s a short, sharp downward slope into Gartner’s trough of disillusionment with technological innovation. Taken by itself, open banking could easily plateau as a colourful mobile app that consolidates balances or statements across various banks. This, I think, misses some of the deeper trends shaping people’s financial life and wellbeing.
To paraphrase CSIRO’s Data61; data now infuses every part of human activity. The shift to predictive analytics and smart algorithms is already here and making real-life decisions for, and about, all of us. This goes beyond recommending TV shows or music, to decisions about your ability to borrow money for example. This won’t be stopped, and possibly can’t even be slowed, by trying to close the door on open banking.
Like all innovations, open banking has both good and potentially not-so-good consequences. To ensure broad based take up and deliver the benefits we all hope it will deliver, it will be necessary to guard against the unintended consequences of potential mis-use.
Sharing Value
The Farrell review into open banking emphasised the need for genuinely informed consent. There is copious research into what informed consent might mean, but it tends to be light on practical solutions. The Farrell review envisages providing the customer with a one-page explanation of how their data will be used. Even if a reasonable explanation can be represented on one page, how many of us simply click the “accept” button when installing a new app?
Given the evidence of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry it is clear that there is a need for more responsible lending – not just by enabling lenders to better assess credit risk and ability to repay, but by equipping individuals with the best financial tools and knowledge, sharing value with all stakeholders and balancing near term profitability with long term sustainability and stability.
When handled appropriately, more granular transactional data can help banks make better decisions about the suitability of a loan for a person in their specific circumstances. Such data can alert borrowers and banks to potentially adverse trends and, should difficulty arise, could help people find reasonable paths to rebuild their financial position. In order to share such sensitive data we need to build trust between the individual and all of the participants who will handle their information. Building such a trusted relationship is a two-way street, which starts with informed consent based on existing, well-tested privacy principles.
Genuine consent is only enlivened by choice - the choice to share or, should you choose, to build a relationship with another financial provider. There is a real risk of over-baking regulation to the point where either vulnerable consumers have little real choice in how and where they can access credit, or those who may be more financially secure are dissuaded from investigating other options due to unhelpful hurdles or processes.
Horses for Courses
Some commentators have equated Comprehensive Credit Reporting (CCR) data with open banking transaction data. At best this misconceives how money is lent. At worst it may undermine substantial privacy protections built around the use of credit data; that is, the rules designed to promote financial access while protecting privacy, not secrecy.
Even loan applications that are completed within minutes pass through a cascade of decision points. Risk is multi-dimensional, and each decision point is designed to address a different aspect of risk, both for the lender and the borrower.
Often, the initial decision point relies on credit data because it quickly answers the first question – is the borrower likely to repay the debt given their history of repayment of debts and what is their willingness to meet their obligations?
Those with secrets to keep, an unpaid credit card for example, are unlikely to consent to the disclosure of those secrets. Even those with an unblemished financial history may struggle to disclose that history if, for example, they have closed the account that held that data.
The next decision point asks if the borrower has the ability to meet the loan obligations; their capacity to meet their obligations. This is not entirely the same as a responsible lending obligation, which is the next decision point.
Assessing the suitability of a loan from the borrower’s perspective depends on their individual circumstances, but in part asks whether the additional loan might create repayment difficulties under stress scenarios.
Comprehensive credit data can quickly address willingness and capacity to repay debts without additional upfront sharing of financial data.
The type of data required to all the risk assessment points – a borrower’s willingness and capacity to repay and the suitability of a loan – will differ depending on the product they have applied for, as well as their individual circumstances and the existing relationship the lender may have with the customer. There will not be a one-size-fits-all solution.
CCR and open banking do however hold the promise of making this experience easier, more accurate and more secure than many current practices.
Future Proofing
Valuable insights are derived from data that is relevant to the decision being made, is consistent through time and comes from a trusted source. Not all predictive data is stable, immutable or can be demonstrated to be causally related to the outcome you are trying to predict.
Economic history is littered with examples of people believing in the certainty of mathematical models while forgetting the underpinning assumptions. Data can help people make better decisions, but the trust required for the take up and use of open banking data and CCR derives from the accuracy and fairness of those decisions.
What does open banking mean for credit reporting bodies such as Equifax? At its core, Equifax is a data and analytics business, putting us at the forefront of the 4th industrial revolution – the ‘digital transformation’.
Any business today would be foolish to believe it is safe from disruption. The purpose of an open banking regime is to give people tools to improve their financial wellbeing and enable financial service providers to make more informed decisions. To start with, that might be a simple app that consolidates the customers various account statements. But innovative solutions will surely grow to meet a wider set of existing problems and evolving opportunities.
Many things will need to be put in place to develop the trust required to make this workable and secure: technology, data and service standards, codes of practice and, possibly more importantly, suitable business models, processes and culture. This can only happen through cooperation, in the sense of giving every participant room to do what they do best. The fundamental purpose of a credit reporting body is to cultivate industry co-operation and connections. That hasn’t changed.