Banking Innovation

25/09/2019

Open Banking

What is it? In simple terms Open Banking gives people the ability to share their banking information with other parties, including other banks.

The origins of it relate to a concept called “Consumer Data Rights” which has the objective to build better consumer control over the data which businesses hold about consumers’ use of their products and services.

Open Banking means that you will be able to share your data on-line with trusted third-party providers. The objective is to increase competition and to facilitate better terms for your banking.

Australia’s ‘big four’ banks have made data available on credit and debit card, deposit and transaction accounts. By early next year, mortgage data available. It is part of a raft of innovation changes in the banking industry that will change how finance is assessed and transacted upon in the future.

Open Banking…only as good as your Credit Score.

You may have heard about credit scoring in the context of your finance application. A credit score is a statistical number that, based on credit history, indicates your credit worthiness.

Your credit score in Australia typically ranges from 0 to 1,000 or 1,200. The higher the score, the more financially trustworthy a person is from a lender’s perspective.

The score is driven by many obvious factors (your previous conduct, frequency of application etc.) though also by other demographic factors such as age and where you live.  This science has been around for a while now, but we are seeing this being applied at new levels in the future, especially with emerging technology.

One of these is Comprehensive Credit Reporting – which allows more details of the credit you have (e.g. actual loan terms and repayments) to be included in your report. Though it goes further than this, and financiers are building their credit decisioning to new levels.  Again, credit scoring is not new but is now based on deeper demographic data too, which allow a bank to look at high volume historical behavioural data, to produce a more sophisticated real time credit assessment. In fact, they are so prevalent you will hear niche funders say for a point of difference, “we don’t credit score our loan assessments”.

Complementing these Behavioral assessments is Credit Segregation.
This is a blunter means of credit decisioning determined on whether you meet exacting criteria. It allows financiers to target a direct segment of the market as a result.  This has become popular with certain business finance products, take Equipment Finance for example. Say you purchase a new vehicle for business use, and you meet the following criteria:

✓ Have been in business for 2 years and have a registered ABN
✓ Have a clear credit history
✓ You own a residential property
✓ Clear ATO Tax Portal

You will generally get an immediate approval without the need to supply verifying income documentation. In addition, the rate on this finance facility may be cheaper that if you do not meet the criteria and need to supply all other documentation.

Why is it Cheaper?
The banks are a business too, in this scenario they get the customers they want, and take a lot less time to generate a credit decision.

Makes sense.

How can I establish or maintain a good Credit profile?

There are some obvious statements to make here, and some softer measures that will help you too:

✓ Do not use the ATO as your banker! The ATO are getting more stringent about arrears and from July 2017, the arrears can appear on your personal credit report. For business finance, banks are always asking about ATO conduct and this will ultimately, in our view, extend to home loan borrowers too.
✓ Make your loan repayments on the obligations you have. Don’t think a missed payment or two will go unnoticed.
✓ Pay all other commitments (utilities, phone etc.) on time.
✓ Lowering limits on your credit cards. Banks are starting to assess your credit card limit as a loan commitment over a 3 to 5 – year period.
✓ Consider consolidating multiple debts into less facilities. However, keep the repayment terms the same or shorter.