Opening up on open banking opportunity

If properly introduced, Open Banking stands to give consumers better control of their money and data. It would see them benefit from the innovative uses that data allows, creating a more productive, competitive, and innovative economy more focused on non-bank financial services providers. New products could emerge that offer easier access to lending and personal finance, such as tools that enable the instant transfer of funds or impart advice that is normally only available to wealth management clients. New Zealanders would have more financial freedom. 

However, the reality is that true Open Banking only exists when there is a mandate and direct support from the Government to share data. The European Union’s Payments Service Directive legislation (PSD2) has been supported by national organizations founded to drive standards and adoption. Open Banking has been live for three years in the United Kingdom (UK), and after a slow start, has steadily grown - there are now 72 account providers and 231 third party providers. Uptake has been driven by the Open Banking Implementation Entity (OBIE), an independent body set up by the UK’s Competition and Markets Authority to implement Open Banking

Singapore has a lighter level of legislation on mandatory data sharing, but stronger (government backed) collaboration between banks, such as the Bank Association (ABS) Data Sharing Handbook and The Monetary Authority of Singapore (MAS) provided API exchange platform for bank and fintech collaboration. For example, it is now easy for a Singapore consumer to have all their account statement data provided from any of the main banks to their preferred bank. The result is a consumer having a more a holistic view of their finances. The importance of the digital experience has never been more obvious. Yet, this remains a benefit within the banking industry and government entities. Fintechs remain reliant on bilateral agreements with Banks to access their APIs, but with industry standards the costs are constrained and commercial incentives available

In New Zealand, this is proposed under the Consumer Data Right (CDR), which is an MBIE-driven initiative designed to give consumers freer access to and control over their data and certain actions performed on their behalf. The Government is essentially looking to drive better services and increase competition within the banking sector, which is great. However, without clarity around the legislation and what constitutes ‘shareable data,’ (it’s not yet clear if banking is the first industry in scope) current progress may slow. Banks will be watching closely to see how prescriptive the resulting legislation is, including the steps they must take to achieve compliance. Before then, the next stage on this path for NZ is the new Digital Identity Services Trust Framework Bill (currently in Parliament). This lays a stronger foundation via an accreditation regime for identification and digital authentication of people and organizations, with clear opportunities for banks. This framework can be used by providers to determine ‘who’ is sharing data, while the CDR legislation will add the ‘what’ data and ‘how’ to share it. 

The exception to the rule of government leadership might be the wide-spread use of banking API connectivity in China, which is driven by highly successful payment app providers already expanded into super-app offerings. Here, unmet customer demand, fragmented banking market, and highly capable technology firms, have created a market driven form of Open Banking. While this is now facing heightened regulatory oversight and actions, it demonstrates commercial value for participants in a data-sharing eco-system. 

Transformation starts earlier than regulation, and banks are already deploying technology capabilities around external APIs. In fact, banks could open their API infrastructures right now. However, right now, it is perfectly reasonable for banks to avoid investments that might assist competitors. 

Simply put, the incentives are not there for banks to bring about wholesale change independently and immediately. This is not surprising when they have other things to worry about. This includes compliance issues, such as those around the Credit Contracts and Consumer Finance Act and BS11, alongside the challenge of upgrading aging infrastructure. Banks are also having to contend with the increasing damage of cyber-attacks and financial crime. And then there are the new areas of risk that Open Banking ushers in. These range from data loss by third parties, which create a reputational contagion, to the costs of API provisioning, onboarding, and servicing – all the while maintaining compliance with evolving standards. So, if the incentives are there for incumbents, what are they?

Collaboration is important because, done well, it leads to standardization and lower costs for the industry. It enables a fairer playing field, so everyone (banks and other companies) plays by the same rules with access to the rewards. The challenge is that incumbents can be hesitant to get into a room together and discuss a path forward, out of fear of appearing to be anti-competitive. Redefining the collaborative space distinct from the commercially sensitive applies for any of the other high-risk, high-cost industry wide challenges such as fighting financial crime or cyber-defence.

To get the ball rolling, Open Banking should be viewed as an economy-wide issue, not one that is applied separately to each individual bank. Doing so could prove beneficial, paving the way for solutions that allow Open Banking to realise its potential to reduce costs and accelerate productivity nationally.

This would go some way to ensuring that incumbents are front and centre of the open banking revolution and allay fears of being overtaken by fintech companies even while releasing that innovation. The idea should be to work alongside them in unison, to help create a better banking system. Maybe then they would have sufficient motivation to free up data access and release their services to other businesses via APIs.

As the CDR ecosystem is expected to expand into energy, telecommunications, and eventually other industries such as health and retail, banks could then consider cross-sector collaboration to further drive innovation. Progressive participants can leverage their brand beyond finance to offer consumers an entire suite of “lifestyle” services, monetizing their data strengths from a position of high trust. This is similar to models adopted by some of world’s biggest airlines and retailers, which has also proven successful in other Asian markets. A whole range of new business models can emerge with banks leading facilitation of commerce and efficient economic growth.

For major banks, Open Banking presents a strategic dilemma about where they would like to position themselves in this new ecosystem. Will they merely comply and risk becoming relegated to the status of a utility provider? Or will they move to own the customer experience and add value through partnering? Can they innovate and pioneer the next game-changing ecosystem with frictionless access to financial products and services negating the threat from new competitors? And does the Digital Identity Trust Framework provide an early opportunity to claim this space? Do they want to become the go-to institution for customers, not just for financial services, but in many aspects of their lives? Otherwise, how they can be rewarded for the trust they provide?

The answers to these questions will become clear with the passing of time, but by that point it will be too late to take advantage of the opportunities demonstrated in other markets. Regardless of the strategic direction they choose, maintaining consumer trust must be a priority. Without it, banks simply cannot move forward and leverage the opportunities presented by New Zealand’s evolving Open Banking transformation.