Open banking will give control to customers – but it comes with risks

Open banking will give control to customers – but it comes with risks

Economy

To those who have grown up with the idea that keeping our money safe means a heavy bank vault inside a big stone building, opening up access to third parties sounds scary

Comment: What is a payment? It’s more than just popping into the supermarket to buy the milk. (Latest update: it’s up a dollar this year to $3.91 for 2L of the house brand.)

Our payments system is almost all electronic now. And it’s come a long way since Western Union started the first wire fund transfer in 1871. It also includes online retail, disbursing wages, commercial transactions – even buying a house. 

It’s big, and it’s more complicated than you might expect, and on the most part it’s controlled by the banks, the credit card companies, and a little-known rule-maker called Payments NZ. Set up initially by the Reserve Bank and the finance industry, the systems Payments NZ manages transact over $6 trillion annually.

Today, those same players take the next step, with Commerce Minister David Clark’s announcement that banks will be the first sector to introduce open banking. If you ask your bank to share your information with another bank, financial institution or advisor, they will have to do so.

Last year, Cabinet asked the Ministry of Business and Innovation to look into a “consumer data right”; the bill was meant to be introduced into Parliament this year but, like much else, it’s going to tip over into next year. It will require first banks, then others such as financial services, telecommunications, insurance, energy, and health, to allow their customers to authorise third party access to their data.

To those who have grown up with the idea that keeping our money safe means a heavy bank vault inside a big stone building on the main street of our town, opening up access to third parties may sound scary. 

But essentially it hands ownership of your bank account data to you, rather than your bank. You can authorise someone else, such as a financial advisor, to access your bank account data to instruct and authorise payments on their customer’s behalf. And, much like shifting power or broadband providers, if you think someone else can manage your bank account better, you’ll be able to easily move to them.

Clark says that will make it easier to compare mortgage rates, apply for loans and switch banks. It’s already a requirement in Australia, the UK, and many other countries where it helps increase competition and, in Clark’s words, makes it easier for customers to get better deals.

(According to a Centre for Economics and Business Research report, the real-time payments in Australia conferred a total estimated efficiency saving of AU$205m for businesses and consumers; they were estimated to translate to economic output equivalent to AU$932m a year.)

Banks will now have to work harder to retain their customers, Clark says. “At a moment in time where cost of living is high around the world, consumers should have the power to shop around for better deals.” 

A report this year from the World Bank highlights the value of open banking. It says emerging markets and developing economies can reap the benefits of payment innovations in terms of costs, accessibility and inclusion, and allow them to leapfrog development of their payments markets and effectively support economic activity.

But NZ Bankers’ Association chief executive Roger Beaumont says it’s important we get it right. With so much new regulation and compliance, banks have told the Government they need time to implement challenges such as customer privacy and data security.

The association has conducted research showing about two-thirds of NZers think sharing their banking information with third parties to access other financial services is a bad idea or they don’t understand it – so Beaumont is calling for a public awareness campaign.

One player will be Payments NZ. It’s helped keep the economy moving through two years of Covid restrictions – yes, it’s helped with those online AliExpress shopping sprees when you’ve been working from home in your dressing gown.

So it’s somewhat amusing to see its rapid shift out of pandemic mode – day one of its annual conference at the Auckland War Memorial Museum this week must surely have been one of the first in the world to fail to set in place a livestream for those, like me, who couldn’t make it in person.

No matter. The Reserve Bank kindly released a copy of the speech given by Assistant Governor Karen Silk that highlights the critical importance of opening up banking.

In the days before electronic transfers, you could just hand over a dollar to your local dairy owner to buy your milk and bread. But as Silk points out, we don’t yet have scalable electronic, instant, peer-to-peer payments. Unless you’re using Bitcoin, payments all go through banks. And our lack of real time systems for retail payments positions us as an outlier among OECD countries. 

According to Silk: “Once fully implemented, open banking has the potential to support innovation and inclusion by opening up consented access to both existing payments capabilities and to the customer’s financial data.

“As a society, we may see significant benefit through increased domestic competition and efficiency savings in the payment space and in the wider financial system.”

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