How consumers spend their money online is set to take greater importance when banks decide whether to grant a loan as the move toward so-called ‘open banking’ gathers pace.
With ever more spending taking place online, major lenders are hoping to make better use of spending data to make more informed decisions on how well individuals will be able to pay money back and how careful they are with spending habits.
This scheme is yet to go through a full legislative process but should be adopted by all Australian banks when it does so.
The amount of data that banks will be given access to is considered unprecedented compared to current levels of information, and provided that the customer consents, the information will be shared with all other banks as well.
At the moment, banks are only looking at information such as how much people spend on their groceries each month, what their bills are and how this matches up against their income.
Hopefully, the new scheme will provide a much clearer picture when it comes to spending habits, as someone may only purchase limited amounts of groceries but will spend much more on takeaways and dining out.
Some people believe that it will be just as positive for customers as it will for the banks. The General Manager of Credit Risk at ME Bank, Linda Veltman, said that what people claim to spend does not always match up to the results.
She said that when asking individuals what they spend, ‘it would be very different to what their spending habits have been over a period of time due to the fact it’s so easy to jump online and make a purchase.’
This means that people could enter into loans that they would struggle to pay back. With the open banking initiative, they would end up with a product better suited to their needs. The new scheme would reduce the amount of defaults and late payments and contribute to a more efficient lending process.
Veltman said that the industry has been energized by the potential of open banking and new legislation encouraging better reporting on credit.
The Royal Commission inquiry also played a part, with efforts underway to prevent unscrupulous lending practices through better data access and a clearer mechanism to determine which loans are suitable for which people.
Canstar Group Executive of Financial Services Steve Mickenbecker said: ‘The banks are under massive pressure now to apply much more rigor to their collection of personal spending habits of borrowers.’
Mickenbecker believes that open banking is an obvious solution that can be introduced quickly and be a ‘good and effective’ process that ticks many of the desired boxes.
A survey by Canstar found that the amount of food that people order online as takeaways is equivalent to $2,420 a year on average, which ends up being a significant amount that could easily sway a lending decision one way or another.
Mickenbecker also said that although there are clear privacy concerns, consent would be needed. However, given that most lenders are set to adopt this soon enough, people will likely have little choice but to go along with the initiative if they want to choose one of these providers for a loan.