Busting open banking wide open

The start of open banking in Australia is just a few months away and many people are starting to ask what impact it will have.

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The ability for consumers to share their account and transaction data will reduce barriers to entry and enable new banking startups to be more competitive.

" The majority of Australians are satisfied with their current banking products and providers.”

These new players in financial services will be able to leverage insights provided by a customer’s transaction data to create new tailored propositions for currently unmet needs. If they happen to catch a customer’s eye, the individual will then be able to more easily switch from their current provider.

But what will entice people to change banks? Is open banking enough to impact customers’ behaviour?

Deloitte’s new report: Open Banking: Switch or Stick? Insights into customer switching behaviour and trust explores what influences people’s decisions to change banks.

And the survey does challenge some misconceptions about banks and switching.

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Myth: Most people are dissatisfied with their bank.

Busted: The majority of Australians are satisfied with their current banking products and providers.

Only between 5 to 9 per cent of account holders said they were dissatisfied with their account. Almost 80 per cent of transaction account holders are either satisfied or very satisfied with their existing provider. Similarly, three quarters of credit card holders and two thirds of mortgage owners reported being satisfied.

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Myth: People make rational choices about switching banks.

Busted: People’s behavioural biases influence whether and how they search for information and make a decision to change provider. These behaviours include:

Analysis paralysis: “There are too many options, I just can’t decide.”

Consumers freeze when too many choices are presented. Decision paralysis brought on by the inability to choose between options is typically the result of cognitive overload and fatigue.

Facing an uncertain future: “I know I should… but that can wait.”

Consumers strongly prefer present payoffs to future rewards. While the potential savings from a lower mortgage rate can be significant over 25 years, it may not create enough of a sense of urgency to offset the more immediate transaction costs of gathering information and switching now.

The impact of emotion on behaviour: “I worry about failure and I hate feeling dumb.”

Consumers are often overcome by fear of failure when presented with an important choice. They hate the idea of being forced to live with a sub-par option but, just as importantly, they worry about looking silly or stupid for having chosen poorly.

Loss aversion effect: “I’m worried about what I’ll lose… and not certain of the value of what I’ll gain.”

Consumers focus on what they may lose by changing provider. They put three times as much weight on what they’ll lose, compared with what they may gain.

Endowment effect: “I value what I have now more than something new.”

Consumers value things they’ve previously made a decision to acquire.

Status quo bias: “I prefer to stick with what I have… even if there’s a better alternative.”

Consumers value stability, preferring to stick with what they have.

Improving people’s financial literacy, financial capability and financial consciousness helps them avoid these behavioural biases.

Open banking can help by enabling third parties to assist with the decision making process by making sense of the range of options or with making the potential benefits more tangible.

Ultimately it is important for both incumbents and challengers to create tangible benefits and communicate these clearly.

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Myth: Switching is hard.

Busted: Almost half the individuals surveyed thought it would be easy or very easy to switch providers. Only 17 per cent thought it would difficult and just 5 per cent thought it would be very difficult.

For non-lending products such as transaction accounts, savings account and term deposits, the results were even stronger. Almost 70 per cent of people thought it would be easy or very easy to switch providers. Only 11 per cent perceived switching the provider of these products as difficult or very difficult.

Lending products, including mortgages, were different. Opinions were more divided on how easy it was to switch.

While 36 per cent of people thought it would be easy or very easy to switch mortgage provider, slightly more (43 per cent) suggested switching mortgages would be difficult or very difficult.

Across the generations, millennials (born between 1981 and 1996) generally perceived switching to be easier than other age groups. This is unsurprising as millennials are the age group most likely to search and to switch.

People who had switched providers in the past were more likely to rate switching as easy or very easy.

So, with the exceptions of mortgages, the difficulty of switching is not a factor which prevents most people switching banking provider.

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Myth: People switch banks just to get a better price.

Busted: People switch banks for a range of reasons.

The primary reason why people switch banking providers is the pursuit of better value - in short, getting more for less. However, value isn’t necessarily the same as price.

Price is an important part of value: price factors were very important or important in choosing banking provider for 87 per cent of mortgage holders, 76 per cent of credit card owners and 74 per cent of transaction account owners respectively.

But price is not the only component. Perceptions of trustworthiness also impact perceptions of value. For all classes of banks, the survey showed customers choose to bank with the type of company in which they have the highest level of trust.

There are a number of other factors that also cause people to change their banking provider: service quality, product and service features, reducing complexity and relationship trust also influence consumers’ choices.

Value becomes less important for younger age groups; bank reputation, digital experience, prudential trust are also important for millennials and Gen Z.

Better product features such as offset accounts, interest free periods or interest only accounts can also influence that value that a consumer gets from their use of a banking product.

As people become more aware that their data has value and as their ‘ownership rights’ in the data they generate are strengthened through the consumer data right, people can decide to share their data (and their privacy) in exchange for value and benefits.

However, to successfully get customers to switch, banks and other financial institutions need to overcome customers’ inertia.

Changing customer’s behaviour can be hard but it starts with trust - a compelling proposition that delivers value and clear communication to the right target customers.

Paul Wiebusch is Partner, Open Data and Open Banking for Deloitte

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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