What is open banking?
We explain how it works and how it could affect you.
We explain how it works and how it could affect you.
Potentially one of the greatest shake-ups in how consumers manage their money is on the horizon. But just what is open banking and how could it affect you?
For some consumers the only thing more boring than banking is reading about banking. It’s understandable – it can be an unadventurous experience. Once we’ve signed up with a bank, we tend to stay the course.
Our latest banking survey showed a meagre 6% of customers switched banks in the past 12 months and less than one out of 10 were very likely to change this year. The big four Australian banks still command the lion’s share of the market.
You could understand this dominance if the big banks had deliriously happy customers, but our banking surveys regularly show they bring up the rear when it comes to satisfied clients.
So is there a way to shake up this staid industry and deliver better outcomes for consumers?
Have you heard about open banking?
Open banking is where your bank “opens up your books” to another financial service provider (think a company running a money manager app or price-comparison website). This provider uses your information to find the best deal.
So if you were looking for a new credit card, for example, you could allow a financial advice service to analyse your banking history and spending habits. It would assess this information against what the banks offered and give you tailored recommendations about what’s available and which card suits you best.
While there are many potential advantages to open banking, the scales won’t automatically tip towards consumers.
A money-manager app could help you avoid fees or boost savings. Or the next time you’re fixing your mortgage you could quickly find which bank offers the best rate by simply opening an app.
You might even walk into your favourite store and another app on your phone recognises this and notifies you that you’ve almost hit your weekly spending limit – maybe not the best time to buy that new T-shirt.
That’s just the tip of the theoretical iceberg. The nirvana of open banking would not only usher in a raft of new financial services, it could also put pressure on banks to lift their game.
While there are many potential advantages to open banking, the scales won’t automatically tip towards consumers. A major concern is that consumers could just be handing over more power to tech giants such as Apple, Facebook and Google. These guys could use their existing dominance to corner the financial services market. New players would struggle to get a foothold.
What happens with your data is another big issue. There’s the risk that, with more firms getting access to your data, information could simply be mishandled or shared with a third party with which you’d rather not do business. While only regulated parties will handle your information, you also can’t rule out a cyberattack.
Then there’s the question of whether consumers will trust the technology – if they don’t, open banking could be a huge flop.
The first tentative steps towards open banking have been taken in the UK and it's being considered by other countries.
Changes in the UK were spurred by a 2016 report by its Competition and Markets Authority (CMA) that concluded the big and long-established banks there had it too easy. Switching figures were low, which disincentivised major players from competing on price and services, while also making it harder for new, smaller businesses to join the market.
Among the CMA’s solutions to get better outcomes for consumers was open banking. So, from the start of last year, it made nine of the largest consumer banks share their customers’ details with regulated providers. There are now scores of companies in the UK using open banking to provide services, from online investment programs to finance management apps.
Consumers decide which organisations have access to what information and for how long. There are rules to ensure all shared data are encrypted. You don’t share login details with third parties – you give permission for your bank to pass on your information to them.
Australia is following the UK’s lead. The four major banks there will soon be required to share customer data. They must open up credit, debit, deposit and transaction information by July. Mortgage data will be released early next year.
While open banking hasn’t landed here yet, steps are being taken to get this technology up and running.
The first hurdle was setting up the application programming interface (API) standards that banks and providers will follow. What are APIs? They’re the technology used to transmit your data securely from your bank to a third party.
Imagine a waiter taking your lunch order to the kitchen. In the open banking world, an API performs this function – it doesn’t provide the service, it just passes on your request. For open banking to work, consumers and businesses need to have confidence the APIs used are robust and secure.
In March, Payments NZ, owned by the major banks and the governance body for eftpos and other payment systems, finalised the standards.
The next stage is for API providers and third parties to create open banking services here. This step will dictate how quickly consumers are able to make the most of a more “open payment environment”, Payments NZ chief executive Steve Wiggins said.
We’ve seen major data breaches among the big four tech companies. That kind of thing will definitely inform how we develop open banking frameworks in New Zealand - Roger Beaumont, New Zealand Bankers' Association.
How will it work in practice? A company wanting to offer a service has to register with Payments NZ. It then partners with a bank to set up the systems needed to roll out the service to customers.
“A couple of local authorities are already using the tech,” Mr Wiggins said. But there’s still a way to go before it’s widely available to consumers.
New Zealand Bankers’ Association chief executive Roger Beaumont said it made sense for banks to embrace open banking, but also urged caution.
“We’ve seen major data breaches among the big four tech companies. That kind of thing will definitely inform how we develop open banking frameworks in New Zealand. Customers concerned with the security of their information will also want an assurance that their information will be safe if they choose to share it with third parties,” he said.
“The great thing … is that we can learn from the experience of other countries to make sure we get it right.”
Commerce and Consumer Affairs Minister Kris Faafoi said the government hasn’t ruled out intervention if things don’t pan out.
The Reserve Bank is also monitoring the development of open banking and, if necessary, will weigh in if it believes progress is too slow or the rules aren’t working.