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Open Sesame

Open Sesame

New Zealand’s out-of-date approach to financial technologies will receive a long-awaited shake-up in May 2024, when the big four banks — ANZ, BNZ, ASB and Westpac — implement open banking.

By Theo Macdonald

Left: Marinus van Reymerswaele’s painting The Banker and his Wife (1539). Taking after an earlier painting by Flemish Renaissance painter Quentin Matsys, art historians have interpreted van Raymerswaele’s painting as condemning avarice.

Powerswitch helps consumers find the best deals on electricity. Skyscanner lets you compare flights. With interest rates rising and household budgets pinched, shouldn’t we be able to access straightforward, sophisticated resources for comparing and switching between banks? 

Actually, these services already exist in much of the world, due to open-banking legislation. Next May, New Zealand will catch up with Europe, Australia and the UK when open banking launches through ANZ, BNZ, ASB and Westpac — with Kiwibank to follow in 2026. The difference here is that the banks themselves are handling this transition, and not everyone is happy about it. 

First, what is open banking? Open banking refers to banks and financial institutions sharing user data with third-party service providers and other banks. Central to the “open-banking revolution” is that account holders deserve agency over their data. In 2019, then-Minister of Commerce and Consumer Affairs Kris Faafoi said, “Open banking is about giving consumers control of their money and data and allowing them to benefit from the innovative uses that data allows.” 

Under open banking, customers can quickly and securely share their information, such as transaction histories and loan agreements, through Application Programming Interfaces (APIs), software that permits two systems to communicate back and forth. Secure APIs are a standard part of many online operations, from weather-reporting apps to search engines. 

Traditionally, exclusive access to customer data has been a valuable resource for banks. Currently, providing a third party, such as a financial mediator, with a long-term history of your transactions requires filing a request with your bank and processing this data manually. Open banking means banks are obliged to immediately provide this financial mediator, at your request, with the same comprehensive access to your data they make good use of every day. 

“The finance industry, for millennia, has traded on ignorance and apathy. Open banking removes the ignorance and apathy, or helps remove it, which means that ultimately, those with the best products win, rather than those with the best marketing, interface or app.” 

If the idea of a “third party” accessing your financial data gets your back up, it’s worth remembering how standard these arrangements are. A third party is any entity that facilitates a transaction but is neither the bank (or equivalent institution) nor the client. A typical example of a third party is a real estate escrow company. 

Open-banking advocates, including financial tech (fintech) developer Ben Lynch and Simplicity founding director Sam Stubbs, argue this gatekeeping disadvantages consumers by limiting pressure on banks to be competitive or innovate their services. In 2022, David Clark — Faafoi’s successor as Commerce Minister — said, “[Open banking] means banks will also have to work harder to retain their customers”. Remembering the record profits big banks have pocketed these past five years, obliging them to compete harder for their nut is an exciting proposition. 

Stubbs says open banking represents a tide going out on excess banking industry profiteering. “The finance industry, for millennia, has traded on ignorance and apathy. Open banking removes the ignorance and apathy, or helps remove it, which means that ultimately, those with the best products win, rather than those with the best marketing, interface or app.” 

Come May, fintech enterprises will be able to debut projects utilising open banking to streamline bank customers’ abilities to consolidate debt, send invoices, manage automatic payments, compare mortgage rates and more. It’s impossible to entirely anticipate the third-party services open banking will enable because of the technological innovation this change will foster. Looking overseas, one significant impact for consumers will be the ease with which users can switch their banking providers, carrying over all basic banking functions, including automatic payments and direct credits. 

Open banking also allows third-party service providers to develop account aggregation apps so consumers can conveniently and fluently manage their cross-company finances. You might choose to have your mortgage with one bank, a personal loan with another, insurance with someone else, and oversee all these relationships on a single application. Also, with a more diverse data pool, the algorithmically augmented financial advice available to consumers can become more personalised and valuable. 

The journey to implementing open banking in Aotearoa has been long and winding, like the eponymous reptile in the Jennifer Lopez film Anaconda. The European Union laid today’s open-banking foundations in the late 2000s, when it administered a directive to prevent traditional banks from monopolising the online banking sector. This directive created opportunities for fintech payment service providers to compete with banks in creating alternative payment systems beyond cash and debit or credit cards. 

In 2015, an updated version of this directive fortified these development opportunities by requiring banks to provide third-party access to authorised Account Information Service Providers (AISPs) and Payment Initiation Service Providers (PISPs). AISPs are the financial services consumers allow to access their banking data, such as accounting and credit score evaluation programs. PISPs are the financial services consumers allow to access their data and initiate payments on their behalf, PayPal being one of the most widely used examples. 

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But open banking is about more than just banks. Banking is the first of many sectors to be affected by Consumer Data Right (CDR) legislation the government mooted in 2021. With legislation yet to pass, this remains theoretical, but under the recommended pathway, other financial service providers, including insurance companies and personal lenders, would follow banks.

Consolidating all of these services under a consumer right to compel data holders to share their consumer data with trusted third parties securely means consumers can make their financial decisions in one place. 

Open banking only happened in Europe and the UK because of government action. In New Zealand over the past seven years, the government has leaned on the banks to implement open banking without overriding their prerogative to internally manage the implementation timeline. The internal push comes from Payments NZ, the internal governance organisation formed in 2010 by the banking industry heavyweights: ANZ, ASB, BNZ, Citi, HSBC, Kiwibank, TSB and Westpac. Payments NZ regulates core payment processes between institutions, such as online banking, EFTPOS and direct credit, and its responsibilities include ensuring New Zealand isn’t left behind in the technological scramble. One recent success was the launch of 365-day banking, which required hundreds of millions of dollars in investment and thousands of technical staff. 

With Payments NZ pushing for open banking from their position as an internal regulator, scepticism is natural. When Faafoi launched the Payments NZ API Centre in 2019, he cautioned against a reluctance he perceived from some banks. “It’s fair to say that there is still more work to be done, and some things I’d expect to see before I can be confident that this industry-led approach will go the distance.” 

In July, New Zealand Herald finance writer Diana Clements expressed similar doubts toward the industry’s self-regulation under the headline “Why can’t banks be open about open banking?” 

Stubbs agrees, arguing that the government must put the CDR into law rather than continue along the voluntary-basis pathway represented by Payments NZ’s sluggish implementation of open banking. “Open Banking has been in other OECD countries for almost seven years now, and we still don’t have a piece of legislation that enables it.” He believes Payments NZ has deliberately delayed the launch and obfuscated public understanding of a (relatively) straightforward concept: data sovereignty for bank customers.

Of course, Payments NZ deny these claims, with CEO Steve Wiggins telling economic news site, “I haven’t seen the ownership as being an issue at all in terms of [delays in New Zealand’s open banking rollout].” Defending his position, Wiggins refers to the internal regulator’s three independent board members alongside the banks, and Payments NZ intentions to establish a sturdy ground, learning from the UK and EU’s mid-2010s technological hiccups. 

Labour’s inability to pass CDR, and National’s likely disinterest in doing so, has been particularly frustrating for fintech startups, who have the tech ready to go but diminishing confidence they will get their chance to shine. Lynch, of fintech startups Akahu and Dolla, has been working toward open banking’s much-promised launch since 2017. Across six years of profiles in Newsroom and Stuff, Lynch’s frustration with the continual delays in banks’ progress is evident. 

This criticism is not to suggest that Payments NZ’s protocols are insufficient. Under their requirements for ANZ, BNZ, ASB and Westpac, the APIs these banks will have standardised for May must be enduring (meaning they don’t expire after every transaction) and enable PISPs (meaning users can actually transact within third-party service providers). On the other hand, the delays in implementing these requirements, deliberate or not, translate to billions in profits over the past seven years.

Of course, there are also fears that open banking will jeopardise consumer privacy. Consumer satisfaction studies in Europe and the UK suggest account holders fear open banking has exposed them to privacy risks. Whether these are legitimate concerns or routine paranoia may be irrelevant if such mistrust derails the pickup of open banking-enabled services, such as account aggregators, when the change comes in May.

Abhishek Mukherjee, a Lecturer in Accounting and Finance at the University of Waikato, believes that the CDR is crucial for enhancing consumer trust. In late 2022, he co-authored an article for The Conversation evaluating what New Zealand’s approach to open banking might learn from Europe and the United Kingdom’s experiences. 

Asked to comment on the open banking rollout a year after this article, with Payments NZ’s protocols and processes having fallen more securely into place, Mukherjee says a positive public reception will depend upon effective communication, ensuring the public is well- informed about the benefits, robust data security and privacy protections, and being responsive to issues and feedback post-launch. He believes Payments NZ’s launch of open banking without a legislated Consumer Data Right can be analysed through several lenses. The international models of the UK and the EU highlight that successful open-banking systems are underpinned by robust regulatory environments — the mixed reception of these multinational systems has been partially tied to governance concerns. “Without comprehensive legislation, there might be gaps in how consumer data is protected and used.” While Mukherjee thinks Payments NZ’s implementation is a positive step toward modernising New Zealand bank systems, “The full potential of open banking in New Zealand will likely be realised only with the support of robust, legislated consumer data rights.”

For now, it all feels highly speculative. For open-banking boosters, it comes down to customer empowerment and ensuring New Zealand remains in step with the rest of the world. The more critical crowd, including Stubbs and Mukherjee, temper their enthusiasm with reminders that the government needs to step up and implement CDR. Once ANZ, BNZ, ASB, Westpac and Kiwibank are all live, open banking will be available to 90 per cent of consumer bank accounts. Only then can we begin discovering what a more competitive financial industry might look like.