In a recent announcement that has stirred both the financial and technological sectors, Australian banks have raised concerns about the cost-effectiveness of the Consumer Data Right (CDR). These institutions argue that they've invested substantial resources into the system but have yet to see commensurate returns. They are requesting the removal of what they perceive as "expensive and low-value" data sets. However, from the perspective of data recipients - fintech companies, consumers, and other stakeholders - this move could be detrimental.
Examining the Costs: Why do the banks say CDR So Expensive?
The banks' primary concern revolves around the high cost of delivering CDR. The Customer Owned Banking Association (COBA) estimates it has cost its members $100 million. But why exactly is it so costly, and what makes certain data sets low-value?
The Costs: Delivery Challenges
From my perspective as the founder of Wych, a fintech with experience working with both large and small banks, let me shed some light on these challenges. Many banks were operating outdated, clunky systems incapable of supporting modern technology. Often, these banks ran multiple systems simultaneously for deposits, loans, and credit cards, with disjointed internal processes and no unified view of their customers and products.
At its core, these organisations needed to invest heavily to bring their systems up-to-date. With impending deadlines for regulatory compliance such as CPS 230 and 234, avoiding this investment was not an option. CDR provided the motivation for these organisations to do what was necessary anyway.
Inefficient Solutions and High Costs
To accomplish these upgrades, several banks opted for bespoke solutions or enlisted Big-4 consultancies. This approach is inherently expensive, especially when more cost-effective Software as a Service (SaaS) solutions exist. It's akin to buying a Maserati for an Uber service when a Toyota Prius would be a smarter, more cost-effective fit.
Moving Towards Cost-Effective Solutions
Recently, we have seen banks migrating to Data Holder as a Service (DHaaS) providers. This shift promises to improve data quality, reduce operating costs, and decrease the frequency of compliance issues. This trend suggests that there are indeed more cost-effective solutions available, and the high costs incurred by banks may be a result of their initial approach rather than an inherent flaw in the CDR system itself.
The Costs: Maintenance
The second major concern revolves around operational costs. Banks argue that maintaining and sharing comprehensive data sets incurs significant expenses, which are not always justified by the perceived value of the data. The challenge here lies in measuring and recognising the true value of this data.
In the realm of open banking, no data set is inherently low value. Innovative applications and use cases reveal the potential of even seemingly mundane account details. For example, Know Your Customer (KYC) and Know Your Business (KYB) processes rely heavily on such data. Transaction histories and spending patterns are critical for fraud detection, while account details are pivotal for personalised financial products, credit scoring, and budgeting tools.
Banks use this data daily, whether from internal sources or third parties. Yet, there seems to be a disconnect in recognising its value. Risk and compliance teams often focus solely on the costs of sharing data, overlooking the broader benefits such as lending automation and fraud reduction. Cutting off access to these data sets would stifle innovation and limit potential benefits for both banks and consumers.
The Usage: Uptake
According to the latest report from the Australian Banking Association (ABA), in 2023, only 0.31% of bank customers used the Consumer Data Right (CDR). While this might seem concerning at first glance, it's essential to consider the broader context of innovation.
For instance, OpenAI, founded almost a decade ago, took eight years and significant financial investment to deliver ChatGPT. CDR, only four years old, has yet to see comparable investment or time. Innovation in financial services is a long-term process, and we are still in the early stages of this journey.
Transitioning from PDF statements to CDR data, for example, requires about 18 months to train lending models effectively. Until recently, the poor quality of available data hindered such advancements. However, the ACCC has made significant strides in improving data quality, and recent consensus at the CDR summit confirmed that CDR data now surpasses screen scraping in reliability, as stated by many speakers at the recent CDR Summit hosted by FinTech Australia. This improvement paves the way for greater innovation.
The 0.31% figure also doesn't account for the rate of growth. Our numbers at Wych show a steady increase in new connections, with more fintech companies leveraging CDR data to offer tailored products (e.g., Luno, Pokitpal, GoGive). Consumers benefit from better financial insights and personalised services (e.g., Ebiblo, WeMoney). Drawing parallels to the UK/EU, it took nearly five years to see substantial uptake in open banking there. Unlike Australia, the UK government invested in consumer education and provided write-access from the beginning, enabling more value creation.
Moreover, banks themselves have been slow to leverage this data fully. It's inconsistent to criticise the lack of consumer connections while still relying on outdated methods like PDF statements. The industry needs to embrace CDR more fully to realise its potential.
The Usage: Churn
The ABA report also noted that over 50% of data sharing arrangements were discontinued or allowed to lapse throughout the year. While this might seem alarming at first glance, it's actually a positive sign and aligns with the nature of consent in the CDR framework.
Consider that consent can be for one-off transactions or last up to 365 days. The assumption that all consent should be enduring to demonstrate value is misguided. For example, a mortgage pre-approval that lasts three months doesn't need renewal, nor does a one-off address or account verification for KYC purposes. These scenarios contribute to the 50% lapsed or discontinued arrangements, indicating that the ACCC got the consent duration right.
If churn were too low, it would suggest consumers were unaware of consent durations; if too high, it might signal an overburdened notification system. The current churn rate strikes a balance, showcasing a successful, flexible consent model. Congratulations to the ACCC for getting this right.
The Future: Strategies for Cost-Effective Data Management
Rather than scaling back, banks should consider more cost-effective strategies to manage and share data, potentially even deriving value from it themselves. Here are some strategies:
Adopting Advanced Technologies
Implementing more efficient data management and sharing technologies, such as cloud-based solutions and advanced APIs, can significantly reduce costs. These technologies offer scalability and efficiency that traditional systems lack.
Collaborative Efforts
Banks can collaborate with fintech companies to turn their obligations into opportunities. This approach can create a more sustainable ecosystem where all parties benefit.
Regulatory Support
Engaging with regulators to find a balanced approach that ensures the sustainability of the CDR initiative is crucial. Regulatory frameworks can be adjusted to provide incentives or support for maintaining essential data sets.
Streamlined Operations
Optimising internal processes and embracing automation can help banks reduce the overhead associated with data sharing, making the overall process more efficient and less costly.
Participate
The value returns to the banks when they start using the data. Sharing data comes at a cost, but that cost can be offset when the banks become recipients of the data. They have an opportunity to turn their regulatory burden into a commercial opportunity.
The Road Ahead: Embracing the Value of Data
The Australian open banking initiative, through the CDR, represents a significant step towards a more transparent and consumer-friendly financial landscape. However, its success hinges on the commitment of all stakeholders to see beyond immediate cost concerns and recognise the long-term value and potential of comprehensive data sharing.
Banks need to embrace innovative approaches and collaborate with the broader financial ecosystem to ensure the CDR's sustainability. Cutting off data sets now could lead to missed opportunities and a fragmented financial services landscape, ultimately disadvantaging the very consumers the initiative aims to empower.
By investing in efficient technologies, fostering collaboration, and maintaining a forward-looking approach, banks can turn their initial investments into long-term gains, ensuring that the Australian open banking system thrives for years to come.