The first phase of open banking was implemented without much fanfare, discussion or debate on the 1 July 2019.  The main banks have subscribed to sharing their clients’ transactional data with each other with their clients’ consent.  The next phase is February 2020, when all mortgage accounts will be shared amongst the banks as well.  The full phase of the rollout will take a few years, but it will provide an unprecedented opportunity for banks to ‘cherry-pick’ the exact types of clients they want, and identify the ones they deem too risky, not transparent or unprofitable. 

The impact of open banking can be illustrated by comparing two customers who walk into a bank; they may be on identical incomes, live in the same suburb and have the same number of children.

Customer A, who has been saving regularly and paying off the credit card in full each month, may be able to get a $15k personal loan at 5.99 per cent. Customer B, who is overdrawn on his limit, makes cash advances on credit cards and gambles online, is stuck with 21.99 per cent.

Mortgage accounts will become available for sharing in February 2020, in addition to transaction accounts.  This provides even more insight for banks to see what type of client you are, how you prioritise paying back loans on time and if you have a casual attitude to your repayments on time, every time.

As a consumer, you have time to clean up your act to and establish a ‘recent history’ of being the type of customer banks desire, and increase the likelihood of access cheaper rates and more favourable lending conditions. 

The more information banks can access in regard to their prospective clients, the more they can tailor the type of product and pricing they may want to offer to these clients to entice them to leave their existing bank.  This in-depth spending analysis will also better equip banks to predict a clients’ propensity to default on payments and their ability to repay loans without being caused substantial hardship.

Spending habits

It’s now time to be conscious of your spending habits if you are considering a mortgage in the future.  The effect of your spending habits will extend to the rates for which you will be eligible and help the banks determine the degree to which they want you as their client.  Making repayments on time, not gambling or spending exorbitantly on luxury items you may not be able to afford as a percentage of your income will affect your ability to borrow money in the future.  Developing a responsible spending history will allow banks to accept you as a good prospective client and eligible for better products, lower fees and interest rates.

The aim of open banking is to extend the negative reporting regime used in Australia to a more balanced positive and negative one.  The previous negative information was available to lenders to consider whether you would be a good or poor credit risk.  Their decisions were based on any black marks on your credit history, such as defaults, arrears, court judgements or bankruptcies.  Comprehensive credit reporting gave lenders access to 24 months of customer repayments history on credit cards and utility bills.

Lenders will be better able to monitor perceived problem areas like cash advances on credit cards, which are indicators of financial stress and gambling activity. 

Credit card use

Having a credit card can help to improve customers’ borrowing profile as long as they pay it off in full each month.  Being financially responsible with credit cards is one of the best things a customer can do. 

Lenders have traditionally used risk predictors such as postcodes to assess customers’ borrowing capacity.  This is likely to change under open banking where decisions can be based specifically on the individuals’ spending habits and situation rather than people who fall into a general  profile.  This will benefit some people and disadvantage others.

Easier refinancing

Open banking should make it quicker and easier for customers to refinance home loans.  This will allow clients to continuously chase better deals, and delays to the refinancing process will be significantly reduced.  Clients who have easy-to-read tax returns with fixed incomes and expenses will be easily assessed via open banking.  Clients who are self-employed, have commissions, bonuses or less straightforward financial situations will still be better served applying for their mortgages via experienced and independent finance brokers like Chocolate Money.

Customers who can demonstrate consistent and solid savings will also be able to improve their chances of refinancing or obtaining a home loan, as well as by cancelling unused credit cards and reducing credit card limits.

Even though open banking has not been implemented in its entirety yet, brokers can help you analyse your spending habits and give you feedback about preparing for open banking’s full implementation.  Red-flag spending items are pay-day lenders, gambling, taking cash out at casino venues, TABs or other gambling institutions, or taking cash out without clear explanations as to their use.

Open banking is clearly a double-edged sword creating premium clients for banks and labelling non-premium clients as bigger risks for all lenders. This means fees will be greater for those under financial stress than those with plenty of money.

Impact of brokers

Open banking will force banks and lenders to better differentiate themselves so as to attract the types of clients to whom they want to lend.  Therefore, matching the borrower’s situation perfectly with the lender’s requirements will become essential for borrowers.  Independent and experienced finance brokers who have expertise in an industry and insight into lenders’ policies will become invaluable members of a business’ finance team, and offer great value to borrowers who want to access the best finance deals for which they are eligible.

Chocolate Money t/a Master Builders Financial Services.

Please note: this article is general in nature and not to be considered specific advice of any kind.  For specific lending advice, contact Chocolate Money on 1300 137 539.  Australian Credit License 387277