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Customer data is the next banking battlefield

Via Financial Review : It’s a battle set to define the parameters of financial services competition in Australia’s new “agile”, “innovative” economy: control of digital customer transaction account data.

The adversaries are the banking oligopoly and disruptive fintech start-ups. Their positions are ideologically opposed.

Banks believe deeply that they own the data on their customers’ transactions. Holding the digital records of when and where and how much and on what money is spent will further entrench incumbents’ competitive advantage, given that data’s usefulness is set to grow as the big-data economy emerges.

Data is becoming a prized resource. If it remains largely proprietary, traditional banks will be in a better position to engage with their customers’ digital interactions and cross-sell them new products.

But fintech players say customer transaction data belongs to the customer – who should be free to tell the incumbents to pass it over to the start-ups.

For the disrupters, access to the data held by big banks on their customers will help them tailor products and services. For example, peer-to-peer lenders can deploy credit-risk algorithms over transaction data to price services more competitively; or budget or investment apps can analyse spending patterns to help customers manage their finances or to decide what to invest in.

As fintech companies emerge, incumbent banks are making data access difficult. While a bank customer today can download bank statements onto spreadsheets or print them out, it is not easy to share transaction account history in a form that a computer can read in order to feed into other apps.

The current batch of fintech applications that use transaction bank account data often do not access it directly. Most are forced to deploy “scraping” tools which read data on the banks’ pages then replicate it in the fintech systems. Sometimes, banks change the code running across their account pages to thwart the fintechs, who have to spend time and money re-engineering their scraping tools.

Engaging with fintechs also has uncertainties for bank customers.

In order for fintech start-ups to link into bank accounts, customers have to hand over their account numbers and passwords. It is possible such action could breach the customers’ standard banking terms and conditions regarding non-disclosure of passwords to third parties.

ASIC ePayments code

Many fintechs say a strong argument can be made that account password disclosure is justified under the Australian Securities and Investment Commission’s ePayments code, but this is a notoriously grey document.

This is the background to a proposal made by the new industry group Fintech Australia to Treasury last week at a meeting with Prime Minister Malcolm Turnbull, Treasurer Scott Morrison and other senior members of the federal cabinet.

The fintech industry wants requests by customers for their bank data to be accessed by a fintech firm to be legitimised in legal regulations, to make it clear it does not amount to a breach of terms and conditions.

It also wants a new regime to mandate “open data APIs” [application programming interfaces]. This will provide a standard under which customers permit a fintech to directly access transaction account data. Rather than scraping that information surreptitiously, fintechs will be able to link directly with the part of the bank IT system holding the transaction account data. This will be a much more efficient process, and one that could facilitate more competition and innovation.

The big banks may fight against such an impost. But their resistance would be swimming against the tide.

In Britain, government, banks and the country’s thriving fintech scene are already collaborating under the direction of HM Treasury to build a common, data-sharing standard. The initiative is called fdata.

An Open Banking Working Group has been formed in the UK and in a report earlier this month said a basic standard to allow third-parties to read consumer transaction data will be released later this year. By 2019, the UK plans to move to full openness of customer, business and transaction data.

Australian fintech start-ups currently tapping and aggregating transaction account data remain unregulated by either ASIC or the Australian Prudential Regulation Authority, which seems unnecessarily risky given heightened sensitivity about cyber-security. But in the UK, The Open Banking Standard has been developed to provide technical, security standards for fintechs to meet before accessing a banking API.

Turnbull and Morrison said last week in a statement that fintech is “at the cutting edge of innovation and will help to deliver more efficient financial markets and more customer-focused outcomes for consumers”. But when it comes to creating a regulatory environment supportive of open data and other policy settings more broadly, Australia has a lot of catching up to do.

The UK realises open access to customer data can drive competition and help to lift the pace of innovation. Turnbull says he wants more government information to be made available to to outsiders to allow them to create new services to enhance constituents’ experience of government.

The question the fintech sector is asking now is will the Prime Minister similarly be willing to force the banks to open up and let their data create the future.

The big short

Variant Perception’s report on shorting the Australian housing market hit a raw nerve inside Australia’s big banks.

In my conversations with half a dozen senior bankers last week, all were adamant coverage of the dramatic predictions that property prices in parts of Sydney and Melbourne could fall by 50 per cent delivered profits to the hedge funds. This was because the publicity about the report pushed bank equities down last Wednesday, enabling the funds to cash out regardless of whether the doomsday scenario ever comes to fruition.

Several numbers convinced Variant and its client Bronte Capital that Australian housing is heading for a cataclysmic wipeout. One was very high levels of household debt as percentage of income; another was the high level of new loans that only require the payment of interest, not the repayment of principal (around 40 per cent).

But the senior bankers say while household debt is high, so is serviceability. Many borrowers remain well ahead with mortgage repayments; debt is being repaid at a faster rate than usual; and the household savings ratio remains at the higher end of averages for the past 30 years. So long as interest rates and unemployment stay relatively low, the debt can be serviced.

And while accepting that 40 per cent of new mortgages are interest-only, bankers say these are not “low doc” loans to borrowers unable to repay principal. Rather, the high level of interest-only loans reflects the large numbers of borrowers taking advantage of negative gearing (where interest payments are tax-deductable). Interest-only loans are only made to customers able repay interest and principal at an interest rate of more than 7 per cent (a “serviceability buffer” of around 2 per cent is added to current rates), the banks say.

Banks and regulators alike have had a heightened sense of caution as the property bubble inflated over the past 18 months. Bankers say privately that money will be lost in parts of Sydney and Melbourne, especially where supply is being ramped up quickly. But they suggest market losses will be limited to particular areas of sharp oversupply and this should not be extrapolated to the entire market, especially detached housing close to city centres.

So while senior bankers are not losing sleep about Variant Perception’s nightmarish visions becoming a reality, they are fretting about Canberra changing policy relating to negative gearing, which will act as a catalyst for reduced demand for housing. They are also worried about macroeconomic shocks, especially the potential for widespread deflation to trigger a global recession that will drag Australia’s economy down with it.

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