Is Open Banking (Finally) About To Have Its Breakout Moment?

Is Open Banking About To Have Its Breakout Moment (Finally)

The breakout moment for an actor is the big one. The difference between $20m paychecks and three divorces, and a life of waiting tables and not enough money for a girlfriend (wait, has someone been reading my diary?!)

Think: Matt Damon in Good Will Hunting, Julia Roberts in Pretty Woman,  Bruce Willis in Die Hard, and home-grown larrikin, Paul Hogan in Crocodile Dundee (one of my Dad's favourite films).

Believe it or not, the same thing can happen in financial services and Open Banking.

You see, a shift is happening.

Not yet an avalanche, but more than a snowball.

In the past 3 months, three significant players in the consumer lending scene: one very big, one merely large and one worth maybe $50m (but doing huge volumes on the reg) have tip-toed out of the darkness and begun to bathe in the glorious, glorious light.

To be crystal-clear, this looks like this:

Company A - ASX-listed circa $1bn market cap

Company B - ASX-listed circa $300m market cap

Company C - Privately held circa $60m market cap (est)

Decent little roster, eh?

And just what is this Hades-like gloomscape they’ve been set free from, and what is this utopian scene they now find themselves a part of?

Well, they no longer process loans using “screen-scraped” bank data, and instead are becoming tanned (but not burnt) in the luscious glow of Open Banking.

This is both significant and a signal (to me, at least) – a significant signal, if you will – and could just be catalysing for Open Banking in Australia.

Let me explain why.

The Backstory [skip this if you’re bored. Or don’t like good writing]

Consumer finance providers (i.e. lenders) have been early adopters of using electronic  bank statement data to either make lending decisions or support lending decisions, primarily because your bank transactions reveal a more granular and accurate picture of your ability to repay a loan and not go rogue.

Simply, if the eyes are the window to the soul, the bank statement is a window to the wallet, and picks up on rogue or risky behaviour that a conventional credit checks may miss – like many other Buy-Now-Pay-Later accounts.

So, back in 2014 or so, these non-bank lenders (and I include Fintech non-bank lenders and ASX-listed lenders like WiSR, Plenti, Money Me etc) started using online banking statements to provide quicker, faster and often instant lending decisions – in exchange for the borrower pony-ing up their banking credentials in order that the fast, online ersatz credit check could be made.

[Wage advance providers came a little later but they were onto it too – BeforePay (the listed Fintech formerly known as Cheq) could approve a loan and have money in your bank account in seconds using this screen-scraping technology.]

The offer to the consumer was simple: do you want your loan in 3 minutes or 3 weeks, Mr Customer?

3 minutes? Well, just enter your online banking details here and we’ll do a quick check.

3 minutes later – money is transferred and the consumer is delighted by the whole experience.

A quick, simple, painless, risk-free (mostly) experience that disrupts a slow, cumbersome, friction-full experience – that’s Fintech right there, folks.

Other notable examples of this simple mission are:

Wise - international money transfers without delays and costs

UP Bank - consumer banking without branches

Stockspot - robo-financial advice without chunky advisors fees

Raiz - passive investing for millennials (originally)

The Now Story

Open Banking is chugging along, like a cockroach you can’t kill. [Honestly, you could also say the same thing about screen-scraping.]

Two ways of ingesting data to provide a speedy lending decision; one Government-mandated, regulated, 100% secure AND a person’s bank data is ring-fenced and can’t go elsewhere (or be sent elsewhere) or be sold.

The other: less secure, non-regulated, a bit more wild-west-y in terms of where your data might end up, and with some banks putting the blockers on it, AND the spectre of the Governing body finally taking steps to “ban” screen-scraping, as has happened in the UK.

And, currently, they are coalescing - each doing virtually the same thing, side by side, putting Fintechs and banks alike between a pig-and-a-poke. Sad times…

This is one of the key reasons why the “Open Banking isn’t working - there’s little customer uptake” trope is still being rolled out.

But, and here’s the good part, Open Banking usage is growing - and growing fast. 

The Global / Local Thematic

For all of the naysaying locally, Open Banking is happening in over 90 countries globally, and many - like Brazil and the UK - are going gangbusters.

Mastercard tipped $1.1bn into acquiring ‘Open’ Banking vendor Finicity in the US and are rolling out solutions globally.

Visa tried and failed to buy Plaid for $5.4bn, so instead acquired Tink in Europe.

[Side note: Plaid seem to have “won” Open Banking and are now worth circa $15bn. But this is no zero-sum game].

Locally, Cuscal, NextGen and Fat Zebra have all made OB acquisitions.

Other payments companies are also sniffing around looking for a deal. Or so I’m told.

 What Will The Next 12 Months Bring?

Well, it’s notoriously hard to follow up your breakout movie with another blockbuster hit (unless, of course, you’re Paul Hogan delivering Crocodile Dundee 2 hot on the heels of Crocodile Dundee).

But…I see this pattern continuing to grow: more consumer lenders, especially ASX-listed ones, making the move to Open Banking as boards demand squeaky-clean compliance and rigour around data and its usage and management.

Non-Bank Lenders will join the party too, and those that get on the front-foot and look into Data Recipient solutions before their Data Holder obligations will absolutely not regret doing so (in the not so humble opinion of your humble scribe).

My red-hot tip (that might be a little out of leftfield) is that a few banks, especially smaller ones, will adopt an all-of-bank approach to Open Banking and use it to generate significant competitive advantage by delivering use-cases (dang, I hate that term in this context but it’s all I have right now).

Some of these banks have “previous” when it comes to Open Banking, but possibly “went too early”. They have the battle-scars,  but also see the bigger picture. 

Open Banking is about “customers, choice, convenience and confidence” and it’s the ecosystem players who put these as their North Star will extract the most value and ensure their Open Banking sojourn isn’t a proverbial one-hit wonder.