Payments NZ has briefed the Government on what it’s doing to pave the way for greater retail payments competition, partially in a bid to ensure New Zealand’s push into open banking remains industry-led and not government regulated.
By the end of the year at the earliest, the industry group plans to have a standardised piece of technology ready that can be used to facilitate open banking. It also plans to have written some standards around how this technology can be used.
Open banking requires banks to give third parties access to their systems. It therefore gives bank customers the ability to access their bank account information and make online payments without a credit or debit card, via platforms other than that of their bank.
The idea behind the concept sweeping the globe, is that it decentralises the power banks have by enabling financial technology firms to give consumers more options around the way they manage their money.
In other words, it enables consumers to shop online without paying credit or debit card fees, or manage their money via apps on their phones, rather than their banks’ mobile banking apps.
The pinch of course is that open banking carries a number of security and privacy risks.
An Australian government-commissioned report has recommended open banking should be legislated, with the Australian Competition and Consumer Commission its primary regulator. A July 2019 launch is targeted for the Australian parents of New Zealand's big four banks, with other banks adopting open banking a year later.
The Westpac Group maintains the introduction of open banking could cost it more than A$200 million in upfront costs, and its customers up to A$250 million in annual fraud losses.
In New Zealand, the previous National-led government, just before the September 2017 election, wrote to Payments NZ (which is owned by banks) requesting it report back on what it’s doing to pave the way for open banking and greater retail payments competition by April 2018 or face regulation.
Laying the foundations for open banking
Payments NZ responded to the new Minister of Commerce and Consumer Affairs, Kris Faafoi, on March 29, confirming its plans to establish a “shared API framework with a set of common payments related API standards”.
An API, or application programming interface, is the technology that connects different entities’ systems.
So a shared API framework is basically a standardised piece of technology banks and approved third parties can use.
Payments NZ, in a 14-page letter to Faafoi, notes that having this API ready to go, will enhance efficiency and mean open-banking innovations can be brought to market quickly.
It says the standards it’s developing will address issues around licencing, security, privacy and liability. These will be based on the UK standards.
Payments NZ doesn't specify exactly when the API framework and standards will be ready to go, but says the results of a pilot it started running with ASB, BNZ, Westpac, Datacom, Paymark and Trade Me in March, will feed in to their development. This pilot (which interest.co.nz wrote about here) is due to wrap up late in the year.
Payments NZ notes New Zealand and the US are among the few countries in which industry is laying the foundations for open banking.
Despite the work it’s doing, banks will still not be obliged to partake in open banking.
Speaking to interest.co.nz, Payments NZ CEO Steve Wiggins says banks are “supportive” of it.
“We’ve also got an industry moving into a fairly high level of capacity constraints coming up with the [Reserve Bank] BS11 regulations [around outsourcing], and so there’s going to be a lot of strain on capability, capacity and capital over the next five years…
“Some will be ready [for open banking] before others. That will depend on their other projects on at the time.”
Faafoi won’t discuss Payments NZ’s letter until he meets with representatives from the organisation to talk about it with them on Thursday.
Yet he says: “In the new world of open banking, while we need to ensure privacy and security is addressed, we ultimately need better services for consumers, an ability for new entrants to enter the market and for innovation to move the system forward.”
More transparency around merchant service and interchange fees
Faafoi and his predecessor, Jacqui Dean, also wanted Payments NZ to report back on how to improve the transparency of merchant service and interchange fees.
Payments NZ in its letter says banks are “continuing to develop more detailed merchant reporting”.
Mastercard and Visa are also starting to report their “weighted average interchange rates on a six-monthly basis”. Mastercard has already published its first report here.
While interchange rates are set by banks, they are subject to maximum rates set by Visa and Mastercard.
Retail NZ’s head of public affairs, Greg Harford, says that with banks currently charging the maximum interchange rates they are able to, the fees merchants pay are “substantially higher” than they are in other jurisdictions.
“In itself, transparency is a great step forward, but what we do need to see are moves to bring merchant fees in their entirely down to bring them more into line with fees that are charged in other markets,” he says.
Harford notes Visa and Mastercard made some reductions to fees in recent weeks, yet says regulation (as is the case in Australia and the UK) is “ultimately required”.
Wiggins says the early signs are pretty positive on the fee reduction front, but it would be a matter of waiting to see what the outcome would be of having more granular information.
Daily settlements on the horizon
Payments NZ in its letter also tells Faafoi that by the end of the year the industry will endorse core retail payments being settled every day, rather than only five days a week, as is currently the case.
The change will be made to the Settlement before Interchange (SBI) payments clearing and settlement system, governed by Payments NZ.
The SBI processes over $1.1 trillion of transactions a year, including bulk account to account electronic credit and debit payments such as bill payments, automatic payments, payroll, tax payments, direct credits and direct debits.
Payments NZ says the change will “improve the service offered to customers and businesses, increase system efficiency, speed up the velocity of money moving through the economy and reduce risk in the payments pipeline”.
While Payments NZ sets the rules for how participants access and interoperate the clearing system, the Reserve Bank manages and runs the settlement account system.
Because the Reserve Bank is making some changes to the system, Payments NZ says it has to align the timing of the extension of its service with the Bank’s timeline.
It says: “There is a strong indication of industry support for this initiative and we are currently in the process of consulting with key stakeholders around impacts and timing.”