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This week New Zealand hosts the Digital Nations 2030 to discuss what is required to become a truly digital nation by 2030. Open Banking is a critical first step, but where is it on the Government’s agenda?
Data is now more valuable than oil, according to The Economist, Forbes and the Financial Times. It fuels the digital economy and has made Apple, Amazon, Google, Facebook and Microsoft among the world's most valuable businesses.
The propensity of customers to hand over their personal data – in exchange for free access to services – has propelled the tech giants' exponential growth. They are now leveraging that data to insert themselves into financial transactions between the banks and the banks' customers, disrupting the retail banking value chain.
Of course, the banks themselves are sitting on rich reservoirs of data, such as their customers' personal and demographic information, income and expenditure, credit history and buying behaviour. However, many are struggling to use that data in innovative ways because they are hindered by complex core banking systems and regulatory compliance.
Meanwhile, agile FinTechs – which have developed innovative, low-friction products and services – need access to the banks' data to power up their solutions.
No wonder that a global battle has erupted for access to banks' customer data. Who owns customer data – and who should own it? Who should be able to access it? How much should they pay for it? And what say should customers have in any of this?
Enter Open Banking.
What is Open Banking?
Open Banking is a scenario where customers have the right to direct that the information they already share with their bank be safely and securely shared with trusted third parties. The policy driver is to give customers more choice and control over their personal data, and to increase financial services innovation and competition by levelling the playing field for new entrants. Open Banking can be achieved by legislation or regulation, but equally by market forces as banks respond to growing consumer demand to reduce friction, improve innovation and diversify revenue.
At a technical level, it requires banks to build open application programming interfaces (APIs), or other communication interfaces, onto their core banking systems. The API enables a third party, such as a consumer-facing FinTech with appropriate permissions, to submit queries to the bank's computer system, and to receive back a response in a standardised format. Most banks already have numerous APIs operating internally to enable different parts of their complex systems to 'speak' to each other. The difference with Open Banking is that the API would open the core system to authorised outsiders.
Why is Open Banking so topical?
Open Banking is at the top of many countries' economic agendas as it is seen as a critical step in unlocking the value of digital commerce. It also reflects a new pro-consumer movement which seeks to bolster their rights to their own data, after the breaches of trust that occurred with the Equifax and Yahoo leaks.
The movement first picked up serious momentum in Europe. In December 2016, the European Union issued its revised Payment Services Direction (PSD2) which requires any financial firm issuing current accounts, credit cards and other payment accounts to create "communication interfaces" to enable registered third parties to access customers' payment account data and initiate payments on their behalf. The first phase of PSD2, requiring open APIs, took effect on 13 January 2018.
The United Kingdom quickly followed suit. After PSD2 was announced, the UK's Competition and Markets Authority released specific Open Banking rules to be implemented according to a strict timeline, building on the Open Banking Standard report commissioned by H.M. Treasury in 2015.
Across the Tasman, Open Banking has been the subject of top-level political engagement for some time. The Australian Productivity Commission recommended the introduction of Open Banking as part of a comprehensive data right 12 months ago. This prompted Federal Treasurer, the Hon. Scott Morrison MP – an outspoken critic of the major Australian banks – to commission a detailed report into Open Banking. The much anticipated "Farrell Report" was released last week, authored by senior King & Wood Mallesons partner, Scott Farrell, who has sat on the Australian government's expert FinTech advisory board for the past two years.
The Farrell Report's key recommendations include:
Open Banking should primarily be implemented through amendments to the Competition and Consumer Act, as a key aspect of the new 'Consumer Data Right'. This would embed "a customer and competition focus in Open Banking".
The primary regulator of Open Banking should be the Australian Competition and Consumer Commission (ACCC) which should be responsible for competition and consumer issues and standards setting. However, other regulators responsible for privacy, financial markets and banking should be consulted where necessary.
Banks should be required to share customer-provided data, transactional data for specific account types, and product data.
Open Banking should require informed, explicit customer consent, and customers should have visibility of their Open Banking transactions.
Only accredited parties should be able to receive Open Banking data. The ACCC should determine risk-based accreditation criteria and the method for accreditation. However, accreditation must not create an unnecessary barrier to entry.
Customer data should be transferred via APIs (i.e. not screen scraping or other means).
Banks should not be permitted to charge for the data shared via APIs.
The 'Big Four' banks (ANZ, CBA, NAB and Westpac) should be compliant on the commencement date. Other institutions should have a further 12 months to comply.
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Interestingly, the report states that it "has kept interoperability between sectors in mind. Interoperability means that what has been designed for the banking sector will also be able to work in other, different, sectors of the economy (for instance, energy and telecommunications)". In other words, banks are the first target but other sectors with customer data monopolies will be next.
New Zealand's appetite for Open Banking
Open Banking is inevitable. The question is how and when it should be implemented here. The strong, even urgent, political focus on Open Banking in other economies is currently absent in New Zealand – no doubt because our banks are not subject to the public animosity that exists in those other markets.
In fact, the open data movement is well-established in New Zealand at a Government level. Three years ago the Government set up a Data Futures Partnership to enable data to be used to improve social outcomes. However, private sector initiatives have lagged well behind.
Prior to last year's election, Commerce and Consumer Affairs Minister Jacqui Dean wrote to the CEO of Payments NZ and the CEOs of the major local banks, telling them to demonstrate a commitment to Open Banking by this April or face regulation. Dean's Labour Government successor, Minister Kris Faafoi, has endorsed that message but has otherwise been coy about the strength of the new Government's commitment to Open Banking.
Since Dean's letter, Payments NZ (which is owned by the banks) has been duly building an API and is undertaking a pilot involving the banks, payment providers and large retailers. It is also developing a governance framework which addresses issues of security, privacy and related legal issues, with input from the banks.
As the April deadline approaches, there is increasing speculation as to what the Hon. Kris Faafoi will do if he is dissatisfied with the pilot. Will he grant an extension, or flex Ministerial muscle? What tools will he have available to accelerate progress?
How might Open Banking be implemented in New Zealand?
Legislation
The approach in most other markets has been to treat Open Banking as a competition law issue, which reflects the policy priority of giving consumers the ability to switch providers. Consequently, the competition watchdog in those countries has been charged with corralling banks (either gently through public recommendations, or more forcefully through recommended legislative change) to open their data coffers.
This is not an obvious path in New Zealand. The current Commerce Act does not give the New Zealand Commerce Commission (NZCC) the power to regulate for Open Banking, and the NZCC's mandate is to prosecute specific competition law breaches rather than make pro-active recommendations. While in rare instances the NZCC is able to conduct an inquiry into whether a specific industry should be regulated for anti-competitive conduct in a specific manner, this would not advance the Open Banking movement as the NZCC cannot recommend regulations that would require disclosure of customer data to third parties. Therefore, legislative change would be needed, and with a coalition Government bedding in, that would be a very slow and uncertain process.
Regulation?
The Reserve Bank has a statutory mandate to "promote the maintenance of a sound and efficient financial system", and to supervise and regulate banks. Therefore, the Reserve Bank – as the prudential regulator of the banking system – has a vested interest in overseeing the digital disruption of the banking system and, one might argue, a prudent approach to Open Banking.
The Reserve Bank also has the power under the Reserve Bank of New Zealand Act to set conditions of registration for registered banks. One suggestion mooted by advocates of Open Banking is for the Reserve Bank to make Open Banking implementation a condition of registration for the four main banks (all subsidiaries of the Australian majors) which could occur quite swiftly. That condition could mirror the Australian requirements to avoid duplication. However, critics would argue that such regulation would be heavy-handed and that banks should have the opportunity to submit on issues such as allocation of liability, consent, privacy, and cyber security. Also, this approach does not address the issue of which trusted third parties should be able to receive Open Banking data.
Market competition?
Perhaps no regulation will be needed at all, if one or more banks voluntarily adopt Open Banking and partners with FinTechs to grow their retail book, as Macquarie Bank has done in Australia.
Given that the four major New Zealand banks' parent companies will all be subject to the mandatory Australian regime, they may voluntarily apply the same standards to their respective New Zealand operations. However, the market competition approach arguably will not adequately protect consumer rights. As stated in the Farrell Report, "Open Banking should be customer focused. It should be for the customer, be about the customer, and be seen from the customer's perspective".
Final thoughts
We can expect much analysis of the benefits, costs and risks of Open Banking in the coming months, and lobbying from key stakeholders.
From a 'NZ Inc.' perspective, this will be an important debate. Despite the ease of doing business here and our collaborative, accessible financial markets regulators, we are already slipping behind other economies in terms of digital innovation – especially in financial services. If local consumers cannot access the services they want domestically, they will inevitably look to solutions provided by offshore providers that are outside the jurisdiction (and protection) of our regulators. Local FinTechs will move offshore to scale in markets where they can access data to demonstrate their products and services effectively. This would be an unfortunate outcome.
Open Banking is the first step towards a truly digitised economy. The risk of relying on the local banks and payments industry to deliver our Open Banking solution is that it will focus on financial services, rather than on the interoperability between sectors like energy and telecommunications that is fundamental to the proposed Australian model. For that reason, in our view, the engagement of the relevant Government Ministries and regulators early in the Open Banking process will be critical to the design of a regime that fosters trust among participants, and balances commercial and consumer interests, so that Open Banking can be a platform for data transfer in other industries.
It is also essential that New Zealand does not try to not reinvent the wheel. We have the ability to review and cherry-pick the best elements from the offshore models, and to combine them in a flexible, principles-based model (rather than a prescriptive, rules-based one).
Our Government needs to step up the Open Banking debate if we are to realise our aspiration to become a truly digital nation by 2030.
If you would like to talk to us further about Open Banking and what it means for your business, please contact one of our team.