Commerce and Consumer Affairs Minister Kris Faafoi wants to see “more momentum” from Payments NZ as it moves to pave the way for open banking.
Speaking to interest.co.nz, Faafoi says he’s “happy” with the work the bank-owned organisation has done; piloting a piece of technology that banks and third parties can use to connect to their systems, and starting work creating standards around the use of this technology.
Nonetheless he wants more momentum, warning he hasn’t ruled out forcing banks to proceed with open banking if they don’t do so by their own accord.
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 open banking 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.
Faafoi’s predecessor, Jacqui Dean, before the September 2017 election wrote to Payments NZ asking it to outline what it was doing to increase competition in retail payments and specifically advance open banking.
She asked the organisation to respond to her letter by April 2018, or risk facing regulation as banks in Australia and the UK do.
Payments NZ on March 29 responded to Faafoi, who has taken the same position as Dean. Payments NZ says it's developing a shared API (application programming interface) that banks and approved entities can use to connect their systems.
It is also writing open banking standards, based on those in the UK, addressing issues around licencing, security, privacy and liability.
Payments NZ hasn’t specified exactly when the API and standards will be ready, but says the results of the pilot it started running with ASB, BNZ, Westpac, Datacom, Paymark and Trade Me in March, will feed into their development. The pilot will be done by the end of the year.
Focus on nature of banks’ contracts with fintechs
Faafoi recognises the end of the year “isn’t that far away”.
“We’ve told Payments NZ that if they’ve said the end of the year’s when they think they’re going to be ready, that there is pressure on them now to make sure that they are ready, and that everyone is on board and playing by the rules and understanding exactly how the market will operate,” he says.
“If they’re not, then… we may have to step in to make sure that we’re happy that the fundamentals we are concerned about with open banking are met.”
Faafoi hasn’t put short-term timeframes around when he would like to see certain parts of Payments NZ’s work completed by, but says he’ll keep in touch with the organisation to see how it’s progressing.
He notes the Ministry of Business, Innovation and Employment is in “pretty regular contact” with Payments NZ.
Faafoi is watching “very closely” to ensure the contracts banks have with third parties are fairly standardised. He says banks are going to have to come to some sort of agreement around the shape of these contracts so that the fintechs have “fair and reasonable” access to their data.
“They [banks] will have to have individual selling points of course, and that will be in the detail. But I think making sure that one isn’t more onerous in a technical aspect or a commercial aspect, is going to be one of the key things to making sure that there is that fair and even access to the framework.”
Ultimately, Faafoi says he would like to keep working collaboratively with the banks, as he recognises that it’s still their data that will be shared.
“Whether they [banks] like it or not, this [open banking] is where the market is moving,” he says.
“I think it would be less than ideal for a bank if they decided that they were out, when the rest of the industry was moving in this direction.”
Competition created by open banking expected to lower merchant fees
The other thing Dean asked Payments NZ to do was enhance transparency around the fees retailers pay to process card transactions.
Merchants pay 1.6% in fees for accepting credit cards and 1.2% for contactless debit cards. So for a retailer transacting $1 million in a year, around $14,000 will be spent on fees. This is twice as much as what Australian merchants pay, and depending on the type of card, around five times more than what UK merchants are charged.
Payments NZ has responded to the Government’s concerns around this saying banks, Visa and Mastercard are going into more detail around the way they report merchant fees.
Asked whether this is enough, Faafoi says transparency is “ideal”, however more competition in the retail payments space will pressure the large incumbents to lower their fees.
“This is where more momentum and more movement towards an open banking framework or platform… will (and I hope) increase the ability of merchants to shop around.”
Faafoi says capping merchant fees would be “a bit sudden”.
Pressed on how quickly he believes viable alternatives will be able to enter the market and grow to the point where they pose legitimate competition to the likes of Visa and Mastercard, Faafoi admits upscaling may take some time.
Yet, referencing the Kiwibank Fintech Accelerator, he’s confidence alternatives are out there.
“I think it’s about getting them [fintechs] out to market, getting on the [API] framework, and then seeing on their own merits, whether or not they fly.”
Faafoi hopes new products will not only appeal to merchants and their customers in New Zealand, but that they can also be exported.
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