The new open banking regime will see even more data shared between financial institutions, with the express permission of customers.
The system is designed to help clients overcome one of the main obstacles to switching credit providers to get a better deal, by simplifying the process of collecting information to provide to a rival lender, thereby creating more competition. .
Many financial institutions track our spending habits using big data techniques, says Professor Elizabeth Sheedy, a banking risk expert at Macquarie University.
“A bank with a better ability to analyze spending information could potentially make a better deal for customers with ‘good’ spending habits,” says Professor Sheedy.
However, data mining also opens up the possibility that a lender could choose to withhold a financial product after mistakenly considering that a potential customer was not a good risk.
Sydney mortgage broker Samuel Philipos has seen banks mistakenly categorize spending when reviewing data, leading to loan denials.
âUnexpected one-time expenses are sometimes automatically included without looking at a client’s full situation,â he says.
âA recent loan application was turned down due to Christmas expenses – even though it was only seasonal and not continuous throughout the year,â he says. “The problem with looking at historical transactions is that it doesn’t take into account future spending changes.”
Banks often use automatic recovery systems that analyze data for three to six months to establish averages for various types of expenses, he says.
However, clients who don’t have a mortgage and decide to go on vacation may have a very different budget than clients who have a mortgage, says Philipos. The system does not make it possible to understand the individual situation of a borrower.
Professor Sheedy agrees, adding that past spending doesn’t factor in a person’s motivation to adjust to a change in financial situation, such as the additional tax associated with taking out a mortgage.
âHigh discretionary spending doesn’t necessarily mean you’re at bad credit risk. A lot of people would choose to cut spending if their circumstances changed, âshe said.