What is open banking?

The Government has announced its intention to increase bank competition and deliver a better deal for New Zealanders, with the introduction of open banking.

“Open banking allows customers to shop around for better deals,” said Dr David Clark, the Minister for Commerce and Consumer Affairs. “That means banks will also have to work harder to retain their customers, leading to savings for consumers.”

For most people, once they sign up with a bank they tend to stick with it. Consumer NZ’s latest banking survey found a meagre 4% of customers switched banks in the past 12 months, with just 14% likely to change in the next 12 months.

And this isn’t necessarily because we’re all delighted with our bank. When we asked people what would deter them from switching 39% said there was no obvious benefit while 27% said there was a lack of difference between banks.

Dr Clark said: “At a moment in time where the cost of living is high around the world, consumers should have the power to shop around for better deals and make sure they’re getting the best bang for buck out of their investments.”

Open banking offers a potential solution.

So what is open banking?

Open banking gives consumers greater access to and control over their banking data. Consumers can share banking and credit card transaction data securely with trusted third parties, which provide applications and services that save time and money.

Open banking was initiated in the UK in 2017 by the Competition and Markets Authority (CMA), following an investigation into retail banking. The UK banking sector was dominated by big, established banks, with a lack of difference in services – and a reluctance by consumers to switch providers. This undermined the power of competition to drive improved service.

Sound familiar?

The UK legislation underpinning open banking forced the big banks to give consumers greater control of their financial information to increase competition in banking.

Alongside changes to the Current Account Switching Service, open banking has made it easier for consumers to switch their bank. It means a customer’s new bank is better able to access their financial information at their original institution.

But the impacts go well beyond switching.

Prior to open banking, if consumers in the UK wanted to develop an understanding of their overall financial position, they would need to gather a wide range of information from banks, credit card providers, utilities and telco providers, among others.

Today, this disparate information can be gathered in one place, with changes monitored in real time. This has made financial management better and easier.

Our counterparts at Which? in the UK have outlined some of the best applications of this technology, including:

Emma: An application which links a customer’s bank accounts and other financial products, analysing the information to help make suggestions on ways to budget.

Plum: An artificial intelligence-driven financial assistant which analyses spending on your current account, calculates how much you can save and automatically sends it to your savings account, or even to an investment portfolio.

Open banking in New Zealand

New Zealand has been slow to implement open banking but it has been putting the foundations in place since it was launched in Britain.

In 2017, the payments industry in New Zealand started to work on developing a series of standards, based on those used in the UK, which would allow third parties and banks to securely share consumers’ financial information. These standards – known as application programming interface or API standards – are vital to the operation of open banking.

In 2019, the Minister of Commerce and Consumer Affairs asked the banking industry to develop industry-led open banking initiatives, and expressed concern at the slow pace of progress.

On 5 July 2021, the New Zealand Government decided to implement a new legislative framework for a consumer data right (CDR). This would “allow consumers to securely share data that is held about them with trusted third parties, using standardised data formats and interfaces.”

A year ago, Deloitte described these developments as “marking the change in direction for open banking in New Zealand from the original industry-led approach to a regulated one that aligns with Australia and the United Kingdom”.

This month, the Government announced that banking will be the first sector to implement the principles of the CDR framework.

“The banking sector is a natural starting point for rolling out consumer data rights, as the industry has already made significant progress towards open banking on their own,” Dr Clark said. “Banking was also the first sector designated in Australia so we can learn from them.”

The principles of open banking are applicable to a range of industries. The development of a consumer data right would look to harness these principles and apply them to other industries which hold significant amounts of consumer data, such as the telecoms or energy sectors.

In theory a consumer data right, including open banking, could make it possible to manage all of your finances, including your bills, from one application, easily switching between banking, energy, or telecommunications providers in order to get the best deal.

What impact has open banking had overseas?

After a slow start, open banking has been highly successful. Following its implementation in 2017, it is estimated that 60% of the UK population will be using open banking by September 2023, and the principles have been applied in 30 other jurisdictions.

Australia launched open banking in July 2020 as the first stage of its Consumer Data Right, with the four major banks sharing banking data from personal accounts and the non-major banks following in July 2021.

The UK Government describes open banking as a “major success in securing positive outcomes for consumers and small businesses and improving competition in retail banking”.

Global consultancy firm McKinsey predicts: “If open finance continues to accelerate, it could reshape the global financial services ecosystem, change the very idea of banking, and increase pressure on incumbent banks.”

In the UK in October 2021, a survey found 77% of consumers agreed that open banking made them better able to track their monthly spending, while 76% agreed that it made it easier to build up their savings. 74% of users of open banking who were using savings apps reported that they would probably or definitely continue to use the services.

What are the risks?

Open banking is a largely a consumer-driven piece of legislation, redressing the balance of power between consumers and banks when it comes to financial information.

However, while the benefits outweigh the drawbacks, risks remain.

While API standards have been established to increase the ability of a diverse range of banks and other financial service providers to ensure high standards of data security, breaches can happen. The more parties you grant access to your personal information, the more points of vulnerability you create.

Mitigating this risk, Dr Clark said: “The businesses and services wishing to receive this data would have to meet a number of safeguards to ensure the information could be handled safely and securely.”