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1st October 2021


What is open banking?

Open banking is a banking practice that provides third-party financial service providers open access to consumer banking, transaction, and other financial data from banks and non-bank financial institutions through application programming interfaces (APIs), which one may use to establish a connection between a set of trading algorithms and the trader’s preferred trading broker platform for obtaining real-time quotes or pricing data in financial markets. As of now, open banking is becoming an important source of innovation for reshaping the banking industry.  

Advantages of open banking

By allowing networking of accounts between consumers and financial institutions, both parties are better off. For lenders, they can better grasp the financial situation of consumers to assess risk level before offering profitable loan terms. On the other hand, consumers get a more complete picture of their finances before taking on debt. In effect, this would help banks strengthen customer relationships by helping customers manage their finances instead of simply facilitating transactions. 


Risks of open banking

However, open banking might expose consumers to breach of financial privacy and security and consequently liabilities for financial institutions. As consumer data is becoming increasingly interconnected, it is subject to hacking, insider threats and breaches due to poor security. For example, under open banking APIs, a customer’s account might have the potential to be cleaned out by a malicious third-party app. 


The current state of open banking in Australia

The hype for open banking in Australia is shared by many businesses in that 71% of respondents- including banks, lenders, fintechs, brokers, technology providers and consulting firms state their intention to use Consumer Data Right (CDR), an open banking system under which consumers consent to a transfer of their data from a bank to an accredited data recipient. In particular, most popular use cases center around using financial and account data to streamline processes and improve user experience. These include verifying income and expenses being called out as valuable by 56% of respondents, followed by onboarding automation 52% and account verification 43%. In Australia, open banking is expected to go mainstream by 2025 as stated by 79% of respondents. 


Example and implications

TrueLayer is a leading company in the open banking space and is responsible for the majority of the UK’s open banking usage, attributed to the strong security of its data sharing technology that is considered years ahead of Australia. 


TrueLayer are moving to improve the space even more by using new open banking technology to enable cheaper direct account-to-account payment and bring this to Australia. The company has kickstarted its launch, announcing its accreditation from ACCC to receive banking data under the consumer data right, allowing it to receive customer data in order to enhance their products and services. Their plans in Australia are to help non-banks assess loans without brokers as well as provide businesses with easier access taking money directly from customer accounts rather than through payment systems via the new payments platform (NPP) PayTo. 


With open banking providers like TrueLayer becoming a cheaper alternative payment system for companies and merchants which is predicted to cut costs by up to 90%, credit card companies have had no choice but to embrace the new movement. Visa is rushing to incorporate open banking to their services, acquiring another leading European provider Tink for approximately US$2billion in order to incorporate open banking interfaces to its service. Mastercard has also acquired financial data provider Finicity this month and are looking to join TrueLayer in becoming accredited to receiving data under the consumer data right.. 


While there is an expectation that open banking will become a mainstream financial payments service, the integration of open banking in Australia is still a working progress. The consumer data right regime has progressed significantly since its launch in 2018, full data transfer for consumers is not yet available in Australia. Particularly, the final phase of the regime which will allow full data transfer is scheduled to be implemented in February 2022. Despite this, Open banking will become a disruptive player in the banking sector as consumers are beginning to gain more discretion and control over their data.  


The views expressed within this article are those of the authors and do not represent the views of the Finance Student's Association. All images and references in this article are for fair and educational purposes only. The content in this article is not intended as legal, financial or investment advice and should not be construed or relied on as such.

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