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Open Banking Changes: What Will They Mean For You?
Smart Money

Open Banking Changes: What Will They Mean For You?

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New research from Experian indicates almost half of all credit card applicants stretch the truth when they apply for a credit card.

Uncovering the white lies told by Aussies applying for home loans, personal loans, credit cards, energy and phone plans, and BNPL, the survey revealed those applying for credit cards tend to be the biggest fibbers, with 44% of survey participants admitting to lying on their application.

So, what exactly are they covering up?

When applying for a credit card, 44% of applicants confessed to minimising their living costs, while 36% said they played down existing debts and 22% said they exaggerated their income. Just over one quarter (27%) admitted to holding back the truth regarding an upcoming change of job, and 18% said they failed to declare that they were expecting a baby.

Well then, how much of a problem are these ‘little white lies’?

When Little Lies lead to Big Problems

When you apply for credit – whether it’s for a credit card, a loan, or any other product or service – there are plenty of reasons why you would want your application to be approved.

If you apply for something, it’s generally because you want it, and perhaps even need it. If it’s a credit card you’re applying for, you may want it for its awesome bonus points offer. Or, maybe you’re applying for a balance transfer card so you can save on interest as you pay down your debt. Perhaps you simply want a credit card so you can manage your cash flow more effectively.

If your application is rejected, you won’t get that boost to your points balance, that balance transfer, that cash management tool.

Aside from that though, there are other, more serious consequences to contend with when your application for credit gets rejected. Most significantly, that rejection will be recorded on your credit report. This will have the knock-on effect of lowering your credit score, making it harder to get approved next time you apply.

With that in mind, it’s perhaps understandable why applicants may choose to stretch the truth.

But, that doesn’t mean it’s the right thing to do. What you may think of as little lies could lead to big problems later on.

      Potential Problem #1. Overstretched Finances

The survey revealed that one in five participants believe it is the credit provider’s sole responsibility to determine how much credit each applicant can handle. Less than a third thought it should be up to the applicant to decide how much they can afford to borrow and repay.

The question is though, how are providers supposed to determine how much credit to extend to borrowers, if those borrowers are not willing to tell the truth about their incomings, outgoings and potential changes to their circumstances?

Example

Let’s say you lie about your income, telling the card provider you make $10,000 more each year than you actually do. You also lie about your living expenses, downplaying them by $1,000 each month.

On assessing your application, the provider thinks you have $22,000 more to play with throughout the year than you actually do. As a result, the provider gives you a higher credit limit than you can comfortably deal with. You spend up to that limit, and you don’t have the funds available to repay what you owe.

As a result, you end up in over your head, fighting a losing battle to repay a debt with interest stacking up every day.

 

      Potential Problem #2. Juggling Too Many Debts

While some people are adept at managing multiple debts, others struggle when they have too much on their plate. Which is why on each new credit application, the provider asks for details of any debts currently being paid down, to then assess how much the applicant has available to keep paying them, plus any other expenses that need to be covered.

If the applicant is dealing with their debts efficiently, and can afford to take on more, the provider will likely approve the new application. On the other hand, if those debts are being mismanaged, and adding more debt to the pile will likely cause more problems, the application would be rejected.

Again, the trouble with lying about your situation comes from the provider not being able to properly assess your true financial state.

Example

Let’s say you have three credit cards with credit limits at $5,000, $8,000 and $10,000. Your overall risk on those credit cards is $23,000. However, when you apply for a new credit card, you tell the provider your current limits are set at $4,000 for each card.

After you are approved for the new card with a limit of $5,000, you are laid off at work. You start using your credit cards to cover everyday expenses. You max out your cards, and now owe $28,000.

If you had told the truth in your application, the card provider may not have issued you the new card, and your debt would be $5,000 lower. While not ideal, it is still $5,000 less debt attracting fees and interest that you will need to pay down.

 

      Potential Problem #3. Getting Caught in a Lie

When it comes to determining how much applicants can afford to borrow, the onus of responsibility remains with credit providers. For that reason, providers work hard to make sure the information you provide within each application is actually true.

If you lie on your application and the provider calls you out on that lie, the best case scenario is your application being rejected. Why do we say ‘best case scenario’? Lying on a credit card application amounts to fraud. You are not telling ‘little white lies’, you are making fraudulent statements.

Depending on the level of fraud, the card provider may choose to take further action by reporting your actions to the authorities. While jail time is extremely unlikely, you could end up with a record, and perhaps a fine.

Why Open Banking Could Change All That

Even if you don’t choose to lie on your application, you may still provide false information when you apply.

You may overestimate your income or underestimate your outgoings because you generally don’t pay attention to what goes in and out of your account. You may forget about certain debts or financial obligations because you have automatic payments to cover them.

Whatever the reason, you may provide incorrect information in your application that results in you being approved for credit when you would be better off without it.

So, what’s the solution?

Having just moved into its latest phase last week, Open Banking could make it easier for both applicants and credit providers to make more prudent financial decisions.

Here’s how it works.

      What is Open Banking?

In a nutshell, Open Banking is a government initiative designed to allow financial providers to share consumer data in a safe and secure way.

What does this mean for you? Open Banking will allow you to share your banking data with other banks, financial providers and third parties that have been accredited by the Australian Competition and Consumer Commission (ACCC), to then enjoy benefits such as easier product comparisons, faster applications and approvals, and a clearer picture of your financial situation.

      What is the Consumer Data Right (CDR)?

We can’t discuss Open Banking without getting into the Consumer Data Right. Essentially, the CDR is what gives you, as a consumer, the right to choose to share whatever data providers hold on you. With Open Banking, that means sharing financial data between financial providers and third parties, but in its next phase, CDR will turn its attention to data sharing within the energy sector.

      What can be shared in Open Banking?

Open Banking is currently being rolled out in phases, so the type of information you can share will depend on which financial providers you have accounts with. Shareable data could include balance and transaction details on your credit and debit cards, deposit and transaction accounts, home loans and personal loans. It may also include rates, fees and features of the various products you hold.

      How can Open Banking be used?

Open Banking is designed to make it easier for you to compare and switch financial products, while also giving both you and financial providers a clearer picture of your financial circumstances. As a result, you could use Open Banking to apply for a credit card, cutting down on the amount of information you have to provide manually, to then ensure the card and credit limit you’re provided are suitable for your circumstances.

Another way to use Open Banking could be through a budgeting app. By allowing the app access to your financial data, it provides you with a more complete picture of where you stand financially, with little to no effort on your part.

      How secure is Open Banking?

Wondering how safe it is to share sensitive data in this way? Bear in mind that Open Banking is a government initiative, and as such, it is heavily regulated. Only accredited organisations can take part in Open Banking, and all participants must adhere to strict security standards when accessing and storing your data.

In terms of which organisations can access your data, that is completely up to you. You have to provide consent to the receiving company regarding what data it can access, and how long it will have access to it. Even after you have provided consent, you can withdraw it at any time. At that point, the company must stop using your data, and delete or de-identify it.

      When is Open Banking being phased in?

Open Banking is being phased in over a number of years, with the Big Four rolling out changes first, to then be followed by all other banks. According to the Australian Banking Association, the rollout is going ahead as follows.

  • During Phase 1, banks will make available details on customer savings accounts, call accounts, term deposits, current accounts, cheque accounts, transaction accounts, personal basic accounts, GST and tax accounts, and credit card, charge card and debit card accounts.
  • During Phase 2, banks will make available details on customer home loans, personal loans and mortgage offset accounts.
  • During Phase 3, banks will make available details on customer investment loans, business finance, lines of credit, overdrafts, asset finance, cash management accounts, farm management accounts, pensioner deeming accounts, retirement savings accounts, trust accounts, foreign currency accounts, and consumer leases.

Open Banking Timeline

  • May 2017: The government announced it would commission a review into Open Banking as part of the 2017 Federal Budget.
  • May 2018: The government accepted all recommendations of the review into Open Banking, including the Consumer Data Right.
  • 1 July 2020: Open Banking begins. Customers with the Big Four banks can now request data sharing of Phase 1 products with accredited recipients.
  • 1 November 2020: Customers with the Big Four banks can now request data sharing of Phase 2 products with accredited recipients.
  • 1 February 2021: Customers with the Big Four banks can now request data sharing of Phase 3 products with accredited recipients.
  • 1 July 2021: Customers from all other banks can now request data sharing of Phase 1 products with accredited recipients.
  • 1 November 2021: Customers from all other banks can request data sharing of Phase 2 products with accredited recipients.
  • 1 February 2022: Customers from all other banks can request data sharing of Phase 3 products with accredited recipients

It’s worth mentioning that quite a few of the banks outside the Big Four have been granted exemptions, and as a result may not have to follow this timeline rollout.

Benefits of Open Banking

Time to delve a little deeper into the various benefits of Open Banking. Is this something you want in your life? Let’s take a look.

      ☛   Better Understand Your Finances

You have an everyday account that you access with your debit card. You have a couple of credit cards. You pay out on your home loan, car loan and personal loan. You have bills and expenses that need to be paid monthly, quarterly and annually. How do you keep on top of it all?

If you’re old school, you may use a spreadsheet. If you’re even older school, you may have your expenses written down on paper.

Both of those options are time consuming. You constantly need to update information, and it’s easy to miss things.

Using a budgeting app is definitely an easier option – but it’s not always easy to get all the data you need in one place. Which is where Open Banking comes in.

With Open Banking, you can share all relevant payment and expense data, so you can see exactly how much you have coming in and how much you have going out – and where that money is going. This can make it easier for you to budget when needed, and to set goals.

Example

You want to use an online budgeting tool to get a better grip on your finances. Using this tool, you will have all your financial information in one place, so you can budget better as you track your spending.

The first thing you will need to do is check the budgeting tool provider is accredited. You can do this by searching the CDR register.

From there, the provider will ask for your permission to securely access your data from the various financial providers holding it. On the new provider’s site, you’ll be asked to confirm your consent preferences. These will include:

  • What data you’ve agreed to share,
  • What your data can be used for, and,
  • How long the provider can use your data.

You’ll then be directed to each of your current financial providers’ CDR pages, where you’ll be prompted to enter your customer ID and a one-time password that your financial provider will send you. You will then have to confirm what data you want shared, and over what period.

Note: you’ll never be asked to share your regular password for your existing financial providers.

Once you’ve given consent, your data will be secured and transferred from your financial provider to your budgeting tool, ready for you to use.

 

      ☛   Receive More Accurate Credit Decisions

It’s not just you who would benefit from a clearer view of your finances. When you apply for credit, the credit provider would also gain a more in-depth view of where you stand financially. With this information, the provider would be able to provide you with credit better suited to your circumstances, reducing the possibility that you will overextend yourself.

Of course, this also leaves you nowhere to hide. Opponents of Open Banking have claimed providers could use the information they receive to penalise applicants for perceived frivolous spending, perhaps by rejecting the application, or when it comes to loan applications, bump up applicants’ interest rates.

In a recent SMH interview, Sydney mortgage broker Samuel Philipos claimed to have seen banks mistakenly categorise spending when scrutinising data, leading to loan refusals. “Unexpected one-off expenses are sometimes automatically included without looking into the full circumstances of a client,” he said. (1)

“A recent loan application was declined due to Christmas spending – even though it was just seasonal and not ongoing across the year,” he said. “The issue with looking at historical transactions is that it does not take into account future spending changes.”

Then there’s the issue of changes in motivational spending. As an example, someone who doesn’t have the responsibility of paying a home loan may spend very differently to someone who does. But, that doesn’t mean that person wouldn’t change their spending habits once they had a mortgage.

“High discretionary spending now doesn’t necessarily mean you are a bad credit risk,” said Professor Elizabeth Sheedy, a banking risk expert at Macquarie University. “Many people would choose to cut back on their expenses if their circumstances changed.”

      ☛   Compare Products More Easily

When you use comparison sites to compare financial products, you enter some information regarding what you’re looking for, but it’s usually pretty general. As a result, the products offered to you are a general fit, rather than a perfect fit.

With Open Banking on board, you can provide comparison sites permission to access your data, and from there, you will be provided a much more personalised recommendation. A tailored fit, you could say.

      ☛   Switch and Apply for Products More Easily

It’s not just comparisons that will be easier, applying for financial products should be faster and easier as well. When you apply for a credit card or a loan, your new provider will have instant access to your financial data, which will significantly reduce the amount of information you need to provide during the application process.

Switching between products will also become a much more streamlined process. Where you may have been put off switching bank accounts or even home loans in the past, Open Banking will take the time and stress out of that process.

More complete data sharing will also allow you to share direct debit data through Open Banking, so when you switch accounts, auto payments such as those you make to the gym or to Netflix can be updated automatically to reflect your new account details.

      ☛   Enjoy Faster Approval Times

According to the Experian study, three out of five survey participants either had no idea, or very little understanding of how providers assess credit applications. For the most part, participants thought assessments were automated, despite the fact that many providers still use manual processing techniques.

So it’s perhaps not surprising that the research also showed that the majority of participants thought home loan applications should be processed in three days, personal loan applications should be turned around in 24 hours or less, while credit cards should offer instant approval. Happily, this has become the norm with Open Banking.

      ☛   More Competition Between Providers

When Open Banking was launched in July last year, Australian Banking Association CEO Anna Bligh welcomed the changes – and the competition they would encourage in the sector. Ms Bligh stated the new scheme would allow consumers to “search for a better deal on banking products”, and in doing so, push financial providers to do better.

“This sharing of data is a watershed moment for competition in the banking industry and, in time, will enable every Australian to use their data for their own benefit,” she said.

And it’s easy to see why. If comparing products was easier, if switching products was less stressful and time-consuming, if applications and approvals were more streamlined and required less effort from us, wouldn’t we all be more open to finding a better deal?

1. https://www.smh.com.au/money/banking/how-big-data-shapes-your-ability-to-get-a-loan-20210628-p5850k.html
Photo source: Getty Images
Founder - Roland B Bleyer

Roland Bleyer

Founder of Creditcard.com.au. Roland has extensive knowledge about credit cards in Australia. Known as a credit card expert, he has been featured on tv and in various publications. Some popular offers on our site right now include the ANZ Low Rate. This special offer has no annual fee first year, a low purchase rate and long 0% balance transfer. Have a look also at the huge 0% for 30 months balance transfer from Citi with no balance transfer fees.

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