Open banking will spur customer revolt

Just when the banking sector thought the worst was over following the Royal Commission, the industry looks set to come under the spotlight again. Not only has the Federal Treasurer asked the ACCC to investigate the failure of banks to pass on rate cuts to borrowers, but they are also facing the prospect of further scrutiny from the boss of the competition regulator, Rod Sims ,as he presses the government to support his calls for an inquiry into the barriers to entry imposed by the “big 4” in retail banking.

Despite it being unlikely the government will approve an inquiry into the barriers to entry for some time, any such inquiry could well be a royal waste of time. Because change is already afoot. In this brave new post Royal Commission world, consumers are starting to vote with their feet, shifting away from “bank owned” products to independent providers. As a recent Deloitte Access Report showed, around 2.8 million customers have switched to new banks or service providers in the last year alone. In so doing, a major opportunity is opening for the growing Fintech sector of alternative providers.

Up until now, there has not been the technology infrastructure to enable customers to move freely and easily between institutions. The Open Banking regime will change that. Rolling out in February 2020, to the malaise of the big banks, this supportive regulatory regime plays into the hands of fintechs focused on connectivity and collaborating with other providers to present a seamless customer experience. Fintech providers will further challenge the large monolithic platforms that tie customers into products and services with excessive margins.

Although consumers are increasingly aware of the advantages that the highly visible fintechs such like neobanks can deliver, the unseen and unsung B2B(2C) fintech companies will be the quiet achievers as the banking system transitions to open banking.

Wealth management technology infrastructure is already lowering the costs of accessing financial advice and holding equities, and in so doing is providing Australian investors access to a wider range of wealth management services. Australia has around $800 billion of non-superannuation wealth assets invested across a range of asset types, with half of this being held in listed assets, including equities and managed funds, for which they are paying excessive fees to hold.

These fees are the result of retail investors and SMSF investors holding listed assets in ‘wrap platforms’, devised by banks and independent investment platforms. In by-gone eras this allowed financial advisers and brokers to consolidate their clients’ assets under a custodial arrangement, providing access to a range of other products and enabling them to offer consolidated tax reporting. Perhaps a great concept twenty years ago but not now, when one looks at the fees.

Wrap platforms come with multiple layers of what are now unnecessary fees, meaning retail investors are collectively paying up to $2 billion of annual fees that could be avoided if they used emerging B2B(2C) fintech to hold their assets.

These platforms also carry additional risk. With financial institutions holding securities on behalf of their customers, it naturally creates another level of complexity in the event of significant market corrections. Something to consider in today’s markets.

The strangulation hold the banks have had on these wrap platforms has prevented a unique and more efficient, cost effective structure coming into play, where clients hold their ASX-listed assets directly in their own name – referred to as the “HIN” (Holder Identification Number), which is used to identify an account, register its holdings and also identify the broker it holds the securities with.

A HIN platform, unique to Australia, offers a genuine alternative to wrap platforms using an ever-growing universe of listed products at a low cost. By shifting assets to a HIN based Managed Accounts solution, investors can achieve the same investment outcome at a lower cost and in a more transparent and portable manner, while negating counterparty credit risk against a custodian.

As with the introduction of Open Banking FinClear’s HIN platform will be one of the many fintech services that will genuinely change the game for retail and SMSF investors, as it will provide direct investment model portfolios that enable their financial advisers to offer affordable and accessible Managed Accounts.

Retail investors and SMSF account holders will see meaningful reductions in annual fees, which over the lifetime of a portfolio will likely amount to tens or hundreds of thousands of dollars in savings.

In time, direct ownership of assets through HINs could also be extended to Australia’s $2.7 trillion superannuation industry, resulting in similar benefits of portability and reductions in billions of dollars of fees.

Fintech has the power to put a lot of money back in people’s pockets and in combination with the recent changes to comprehensive credit reporting, the introduction of Open Banking and legislative changes resulting from implementing recommendations from the Royal Commission, is perhaps better placed than the ACCC to drive meaningful change in financial services.

David Ferrall is CEO of The FinClear Group.