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Open banking may lead to a dependence on “hard data”, which would prompt some lenders to invest more in customer relationships with SMEs in order to gain a competitive edge, according to productivity commissioner Stephen King.
In his recent address to the Melbourne Money and Finance Conference 2018, commissioner Stephen King said that while the open banking regime, driven by Australia’s Comprehensive Credit Reporting (CCR) regime, would provide small businesses with greater choice in the lending space, it may lead to a dependence on “hard data” (customer-provided, transactional data).
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Mr King noted that this could cause some lenders, particularly incumbent banks, to seek competitive advantage by placing greater emphasis on information gathered from ongoing customer relationships, or “soft data”.
“[Depending] on the type of data covered by open banking, it may change the incentives for banks when they collect data,” Mr King said.
Mr King claimed that Australian banks that “gave up relational banking long ago” are “unlikely to hold true in the future”, arguing that the use of soft data would become more prevalent.
“With open banking, the ‘soft’ information provided by ongoing customer relationships, rather than ‘hard’ transferable data, is likely to be an incumbent bank’s point of difference,” the commissioner continued.
“A bank that downgrades the value of relational information may find itself out-competed by those that value and invest in this soft data.
“In other words, open banking may see banks refocus on the sort of soft data that is excluded from the open banking regime in order to gain a competitive advantage.”
The commissioner stressed that open banking would benefit SMEs “compared to the status quo”, and he noted that the sharing of data would help lenders better assess risks and develop bespoke products.
“The extra information available to competitor banks through both open banking and other IT advances will help banks better evaluate the risk associated with specific SME loans,” Mr King said.
“Because information will be shared across banks, this should make it easier for SMEs to get loans that are appropriately priced to their level of risk.”
However, Mr King warned that “one-size-fits-all” capital regulations imposed on lenders may impede their ability to offer products tailored to consumers’ needs.
“Banks may be constrained in their ability to increase the level of nuanced SME lending if their capital costs cannot change to reflect these differences in risk.
“Having an open banking system with the potential to provide information-based bespoke loan products to SMEs will have a diminished value if these banks face one-size-fits-all prudential regulation.
“So, for open banking to bring its potential benefits to SMEs, there needs to be a nuancing of prudential regulation.”
Mr King concluded: “What about the final caveat? Will open banking make all SMEs better off? No.
“Small business is often risky. New small businesses may have little information — hard or soft — that can be evaluated by lenders.
“Sometimes, a well-operating business will hit hard times. In some cases, it can recover and information will help lenders support this recovery. In other cases, the SME will be terminal and the business should be wound up, despite potential protests from the owners.
“Open banking is not a panacea for poor business. It will enhance, not undermine, SME lending. But there will still be disappointed SMEs.”
[Related: ‘Innovation’ is key for improving SME finance outcomes: RBA]
