Open Banking helped the rise of neo-banks and fintech lenders, and it's about to get even more competitive

Australia’s banking and finance landscape is about to get more competitive, which bodes well for the retail consumers.

The industry took a big step on July 1 when Phase 1 of the Open Banking initiative took effect, requiring non-major Australian depository institutions (ADI) to make their consumer data available.

This meant that institutions such as Bank of Queensland, ING Bank (Australia), and even Paypal Australia now have to join the big banks in sharing all their consumer data when requested by the consumer.

All this comes under the new Consumer Data Right (CDR) legislation, which requires information such as transactions, saving accounts, and personal credit cards to be shared with other ACCC-accredited third parties when requested.

The next phase of the Open Banking initiative, which is the Phase II, will happen on November 1.

On this date, ADIs will also have to comply with the CDR and provide data such as residential, investment property, and personal loans when requested by the customer.

The changing banking landscape

The Open Banking initiative itself was introduced in Australia way back in 2019, with the promise that consumers would have control over the data banks had on them.

The idea was to enable bank customers to search for a better deal on banking products, as well as to switch products or banks more easily.

The framework implores banks to hand over access and control of the consumer data back to the consumer, by allowing them to be shared with third parties when asked.

This has allowed an ecosystem where consumers could seamlessly integrate their banking data with other providers like energy suppliers, telco providers, or mortgage brokers – as well as look for better deals elsewhere.

The initiative has also rejuvenated the Australian banking sector, particularly in the wake of the Royal Banking Commission which uncovered major systemic failures within the industry.

Since implementation, the Open Banking shift has coincided with the dramatic rise of fintechs and neo-banks in the country over the last few years.

The rise of neo-banks marred by the fall of Xinja

Neo-banks, sometimes known as digital banks, are banking institutions that operate exclusively online with no physical branches.

The first neo-bank to list on the ASX was Douugh (ASX:DOU), which made its debut in October 2020.

The Sydney-based company has a suite of payment solutions which include a money app that links to the Mastercard.

Douugh also owns the investment management app called Goodments, which targets millennials who are entering the share market.

But perhaps the most spectacular Australian neo-bank story was that of Xinja Bank, if only for the way it rapidly collapsed in 2020.

Xinja crumbled after it burned through almost $100m in capital by offering unfeasibly high interest rates on savings deposits, which were as high as 2.25% per annum at one point.

After its demise, regulator APRA made changes for new banking entrants, by introducing a new two-year licence restricting new banks to a $2m deposit limit while having to maintain $3m in ongoing capital and $1m in reserves.

Other businesses that have benefitted from the Open Banking initiative include the non-bank lenders, which have grown in number in the past few years.

Non-bank lenders taking market share

The non-bank lending sector has indeed been a major beneficiary of the Open Banking initiative.

Over the last few years, the burgeoning sector has been taking market share away from traditional lenders, and has kept rising to new heights.

According to data, there are now more than 600 non-bank lenders in Australia, which make up 7% of all debt financing in the country.

Given they’re not burdened with regulatory capital requirements of traditional banks, these companies are more nimble and can operate at a much lower cost base.

These non-bank lenders have also been able to successfully chip away on segments that are shunned by bigger banks, such as automotive lending.

Plenti Group (ASX:PLT), for example, is a non-bank lender that specialises in automotive lending, where it commands 2% of the Australian market.

In the last quarter, the company delivered record loan originations, with the auto segment making up half of its total loan book.

Money 3 (ASX:MNY) is also another automotive finance company, while Prospa (ASX:PGL) focuses on the small business lending market.

Harmoney (ASX:HMY) is a NZ-based lender that has originated around $2 billion in personal loans across Australia and New Zealand.

Wisr (ASX:WZR) meanwhile, is a personal lender operating in the Australian market that has delivered 19 consecutive quarters of loan growth, on track for a $1 billion loan book.

At Stockhead we tell it like it is. While Plenti Group is a Stockhead advertiser, it did not sponsor this article.