An opinion by Allister Hunter
Allister Hunter is a payments expert and has worked in the banking industry as well as Merco Ltd, the New Zealand distributor of the POLi Payment service where he is Chairman and Director of Payments Strategy. Merco Ltd is a registered third-party Standards User of the Payments NZ API Centre and Allister is a member of the API Centre governing committee, the API Council.
“Open banking is the practice of allowing a third party to contact a bank on your behalf and instruct it to make a payment, or to release your financial information. In both cases this is done electronically, securely and only when approved by you.”
A brief history banking in New Zealand
Banks were established in New Zealand in the 1840’s. Initially bank services were commercially focussed and restricted to primarily cheque accounts for personal banking. Having a cheque account was a hallmark of the upper classes – savings banks existed for everyone else. A change of regulations in the 1970’s removed the distinctions between the then Trading Banks and Savings Banks with all banks becoming Registered Banks. Increasingly as payments delivery services transitioned from paper to computer through the 1970’s and 1980’s, the range of personal banking services offered expanded as did the addressable market.
Today, virtually everyone needs a bank account to participate in any form of commerce. Gone are the days when we were paid in cash and we deposited any surplus of our hard-earned cash into a bank account. Gone are the days when paying for goods and services from our bank accounts was either by going to the bank and withdrawing physical cash or by writing out a cheque.
Electronic funds processing means you can pay for goods and services without having to visit your bank or a cash machine. But fundamentally your bank hasn’t changed. Your bank still predominantly stores your money and the bank provides a core transactional facility (payment services) shifting value from one account to another within a bank or between banks.
To support efficient payments processing, during the 1970’s and 1980’s NZ introduced many world class payments services.
Outside of banking, the Internet and changing technology since the 1990’s has seen information technology companies providing an ever-increasing range of new and convenient services via the Internet and applications (apps) which allows us to embrace a distributed lifestyle (work and pleasure) yet stay connected.
The Banking Industry has not been able to fully utilise the latest technologies. The services developed in the 1970’s and 1980’s still largely underpin many bank services available today.
Computerisation, a broader range of payments delivery services along with a virtually fully “banked” adult population means the banking industry has increasingly become part of many of the things we all do every day. This could be buying a house or an ice cream.
This combination of aggregated information and new technologies should increasingly be creating opportunities for you to maximise the value you get out of your bank. The banking industry globally is lagging other sectors in capitalising on these opportunities to improve service levels for the benefit of their customers.
The European Union recognised this and in November 2015 issued a directive known as PSD2 which sets out a framework for an “integrated internal market for safe electronic payments” and “ to ensure that consumers, merchants and companies enjoy choice and transparency of payment services to benefit fully from the internal market”. In this context “payment services” also means information services.
The framework defined in the PSD2 directive has become known as open banking.
Introducing Open Banking
Open banking is the practice of allowing a third party to contact a bank on your behalf and instruct it to make a payment, or to release your financial information. In both cases this is done electronically, securely and only when approved by you.
Application programming interfaces (APIs) allow third parties to access financial information or to deliver payment instructions efficiently, which promotes the development of innovative customer-friendly apps and services. Improved ease of access and improved services ultimately stimulates increased economic activity which is generally considered good for everyone.
Thus open banking will enable third parties i.e. someone other than you or your bank to provide you with services that will help you save money, borrow money, manage your financial affairs and pay other people painlessly.
Third parties are typically service providers known as fintech’s. A fintech is part of a new financial industry that applies technology to improve financial activities.
Open banking will result in a better experience for consumers. Open banking will also lay down the platform for massive innovation and development of services we haven’t even imagined is possible. For example, who thought of Uber before the nexus of different technologies such as the Internet and global mapping data allowed it to happen?
You may already be using a service that open banking would improve on. For example, POLi, the online payment service used by more than 4,000 merchants and 1,300,000 Kiwis has been providing online payment services for over a decade. This is an example of a fintech taking the initiative to meet market demand the banks have been unable or unwilling to satisfy.
POLi’s success has come about largely without bank cooperation or bank participation.
Open banking will potentially improve the POLi user experience further for customers and accelerate the development of new payment features for Merchants. This in turn improves efficiencies for both customers and merchants which reduces the end-to-end cost of payments processing.
The potential for open banking APIs and fintechs to oil the wheels of commerce and reduce costs for consumers and businesses is substantial. Significant enough, in fact, for the Minister of Commerce, Kris Faafoi, to give it his full support and publicly give the banking industry a serve in December 2019 for dragging its heels on its implementation.
While any Kiwi who has done time in the United Kingdom would not point to that country’s banking system as a beacon of enlightenment, open banking there is years more advanced than it is here in New Zealand, a country that is routinely lauded, by ourselves incidentally, as an early adopter of technology.
So why the time lag here and why the hesitation in New Zealand?
Firstly, in my view the banks have nothing to worry about. We hear a lot about privacy concerns these days with banks citing security and privacy as major issues.
Open banking relies on sharing data but customers using an open banking or an API-based service would have to approve to their banks satisfaction information sharing with, or, payments to, specific other parties. Open banking should not automatically reduce security or privacy. Third-parties, banks and APIs would all use robust security measures to encrypt and protect confidential information.
In the UK, regulations require banks to co-operate with approved third parties and require customers when dealing with a third party to consent to payments or data sharing. The bank is then required to independently identify and check with the customer the consent is a valid instruction the bank can rely upon. Only then can a bank release information or make a payment.
The UK system design is being used as the base for our standards in New Zealand.
Certainly, your data will be processed via an intermediary, a third party, but this happens now, an example being domestic EFTPOS transactions. As in the UK, third parties here will be subjected to an approval process. Further, as with existing on-line bank account originated payments, the recipient of the data via an intermediary or third party will be subject to contracts which will exist between the parties processing the transaction. Those contracts will specify security and other obligations.
Evidence in New Zealand and from overseas points to these systems being very secure and low risk.
There will be significant changes for banks. Many banking services will be delivered by third parties which means banks will increasingly be left with their core services such as account, payment and information management. Afterall it was those core services which fifty or sixty years ago and prior to computerisation defined a bank.
While the banks’ range of services may decline, more diverse and user aligned services offered by third parties will generate a massive increase in “new” transactions and revenue opportunities. We’ve seen this in NZ over the past 30 odd years with customer friendly ATM and EFTPOS serviced transactions now generating more than a billion “new” transactions annually. Open Banking will be no different. The fintech POLi is today processing tens of thousands online EFTPOS type transactions a week.
Banks will have to think differently about where their transactional revenue will come from. The PSD2 directive is clear on this in that bank revenue should be derived from their customers who are users of the services provided by third parties. A change indeed for NZ banks? If banks choose not to generate revenue from these services by way of customer transaction fees (for competitive reasons as is often the case with the existing EFTPOS services) so much the better.
The Open Banking model globally positions the API’s as core bank payments infrastructure not a service of itself. Payment for access to these API services by third parties should be at the same cost as if the customer were accessing the service directly i.e. without cost.
As aforementioned most banking core payments processing is transactional. If banks choose not to offer their customers enhanced payments services beyond the custodial management of their money, that is no reason to penalise their customers and other financial services providers by putting up illusory barriers to open banking.
Minister Faafoi was quite right to be frustrated about the lack of progress on APIs. His public statement was virtually unprecedented. He had given the banking sector plenty of time to come up with a “market solution”. It has not yet happened.
Maybe it is time to take a leaf from the United Kingdom’s book and consider why we appear to be unable today to easily deliver the levels of innovation we have in the past. An efficient payment service underpins much of what we do commercially. We have previously developed world class payments systems in a virtually unregulated market. A mandated and regulated open banking solution is not the New Zealand way.
As a priority, the banking industry needs to ensure a viable and unregulated Open Banking solution is now quickly delivered for the benefit of all Kiwis.