NZ warned open banking in the UK isn't all it's cracked up to be, with the tech giants rather the garage start-ups best placed to capitalise on having access to banks' data

New Zealand is being warned to be careful about what it wishes for when it comes to open banking.

A UK-based digital financial services consultant and author, Dave Birch, fears it’s the Googles, Amazons, Apples and Facebooks of the world that’ll capitalise the most on open banking - not the “little garage start-ups”.

Open banking sees banks share their customers’ data with third parties, should their customers request this.

While banks in the UK are being made to allow third parties to essentially plug into their systems through APIs (application programming interfaces), the New Zealand Government is giving banks a chance to self-regulate and do so of their own accord.

One of the first examples of open banking in New Zealand involves a partnership between Westpac, Datacom and the Opotiki District Council.

Westpac customers who want to pay for council infringement notices, rates, consent permits, etc, can connect to their accounts from the Council’s website and authorise a payment from there. This way they can avoid paying credit or debit card fees or having to set up a debit payment from their internet banking.

A level playing field?

While the idea behind open banking is for it to make way for more competition in the payments and personal finance spaces, Birch says the way it has been done in the UK is only shifting the power from banks to the incumbent tech companies.

Adding bank account information to the stack of insights tech companies already have, means they have more data on their users than banks have on their customers.

“You’re ending up in this highly asymmetrical situation where you have people who have access to vast amounts of data and the financial services data, competing with people who only have access to the financial services data,” Birch says, speaking to interest.co.nz in a Double Shot Interview.

“You don’t have to be a genius to see this is why some of the European banks are starting to get very upset about the current situation…

“To put it absolutely crudely, Amazon can have access to your bank account, but the bank can’t have access to your Amazon account. That’s not really a level competitive playing field is it?”

Given open banking will enable people to access banking services via other platforms, you may be able to take out a bank loan via Amazon.

The pinch is that Amazon knows you’ve been browsing new TVs for example. It also knows that your bank account is about to dip into overdraft just as a new type of TV is released, so can target you with both TV and personal loan marketing.

Because your bank can’t access your Amazon browsing history, it can’t present you with the same proposition.

Asked whether smaller financial technology firms are also making the most of UK banks’ systems, which have been open since the beginning of the year, Birch says it’s too early to say.

“It’s a fair point to say perhaps some of these fintech challengers might yet come out of their garages.

"But on the other hand, if you look at the resources that those incumbents can put into it, plus the other people who would like access to that data - the big retailers and other service providers - it is hard to see how little fintechs really can complete against that.”

Birch points out they also have to deal with new regulations like General Data Protection Regulation (GDPR) and the Payment Services Directive (PSD2).

“Banks and other people - they complain about regulation - but to be honest, it’s a little moat around their castles isn’t it?

“In some ways, the more absurd and restrictive that regulation is, the more expensive it is to comply with KYC [know your customer], AML [anti-money laundering]... That actually defends the incumbents against those start-ups.”

Graduated regulation

Birch believes there are other ways of increasing competition in the payments and personal finance spaces that don’t involve third parties plugging into banks’ systems.

This includes graduated regulation, whereby fintechs can get licences that allow them to access certain basic banking functions and infrastructures.

He points out the Bank of England already allows non-banks or fintechs to have special kinds of settlement accounts with it. 

“So if they [fintechs] can have direct access to that infrastructure, without having to go through banks, that obviously reduces their cost base and gives them more flexibility," Birch says.

“I think in the case of New Zealand, there are other possibilities that can be considered as well as mandating API access - which has the potential to backfire in some ways.”

Further to pressure from the previous and current governments, Payments NZ (which is bank-owned) is developing a “shared API framework with a set of common payments related API standards”.

While the set-up with Westpac, Datacom and Opotiki District Council mentioned above builds on this work, Payments NZ expects the shared API framework and standards to be ready by the end of the year at the earliest.

Open data

Birch concludes: “We’re going through… another kind of industrial revolution, where data - and in particular personal data - is kind of central to the economic model…

“In the 19th century you had to break up standard oil in order to essentially protect capitalism from itself. Then in the 20th century you had to break up AT&T [telecommunications]… You could argue that perhaps the way forward is to look at an open solution for everybody.

“So if you hold people’s data, once you’re above a certain size, maybe everybody should have the right to plug in and use that data (with the customer’s consent of course).

“That might be a way of creating this more open and competitive landscape where it’s easier for new people to come in. Because right now, the truth is, if you want to come in and compete with Amazon or Facebook or Google; I mean you haven’t got a prayer have you.”

Birch believes New Zealand can capitalise on being a bit behind the ball on open banking by learning from the UK’s experience.

Speaking to interest.co.nz in November, Commerce and Consumer Affairs Minister Kris Faafoi said he was paying particular attention to developments in Australia, which is behind the UK, but ahead of New Zealand.

The Australian Bankers’ Association has called on the Australian Government to set an economy-wide framework to “underpin data sharing across the economy with minimum standards on customer protections like privacy, liability and security”.

Quizzed on this, Faafoi said he saw banks as the “first batter up” in a move towards a world with more data sharing.

Coming back to Birch, he says we face a "different kind of future," so need a "different regulatory mind set".

“Taking what you might label industrial age solutions - monopolies and mergers, commissions and competition authorities and this kind of thing - and trying to apply them to this new data economy, doesn’t seem to work." he says.

“I’m not smart enough to know what the answer is, but I can see it needs a different kind of regulation."

Dave Birch was sponsored by ASB to speak at Payments NZ's biennial conference. 

*This article was first published in our email for paying subscribers early on Wednesday morning. See here for more details and how to subscribe. 

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8 Comments

Ha, Open banking is only open if you have the money to push yourself in to the closed circle.

The only way to fix this would be to make all data anonymous or owned by the user who can then decide for themselves who has access to it and how to use it.

How long will it be before the incompetent incumbents leak the data to hackers or worse use the data against the unsuspecting customer?

The data will be used to the benefit of anyone who pays for it, in anyway that is vaguely within the realms of the law. Until the boundaries and grey area of that law are tested to obscenity and some terrible corruption is revealed where customers have been raped and pillaged, privacy sold cheap and then some tweaking of the law.
People will sleep walk in to Open Banking because they think they are saving a few cents and pennies from the banks and the convenience. Even though they already know that amazon, facebook, etc do not give one solitary shit about their privacy, safety or well being.

And before we know it, amazon,facebook, google etc will no longer accept any other type of payment than the Open Banking type, so that they force you to give access to your bank account data.

Anyone reading articles in international finance magazines knows this is going to be a mixed blessing. It will allow financiers to better assess your true credit worthiness. Some will benefit from lower interest rates and others will have higher rates or be credit rationed. The propeller heads will look for predictive data in things you think are innocuous e.g. purchase of medicines, nappies, alcohol, fines. If a defaulter displays a certain spending behaviour then others with the same behaviour will be assessed as higher risk. It's progress, but not as we know it.

Well that has already been happening in the UK for well over a decade. All loyalty cards sell their data on for that very purpose.

And credit profiling in the UK is so detailed compared to NZ. In the UK your credit file contains every bank and credit account you have had over a 6 year period, every payment detail for every month of each of those 6 years (with a number for each months payment to state how late any payment has been- a payment on time receives a zero), every credit application you have made and what the result was, every credit limit and every debt amount, every financial association you have had (house mates, ex partners etc), every address you have ever lived at, and every associated address and then the actual credit score which is some kind of algorithm/calculation based on all these factors, plus your age, how much your earn, your address etc.

That's old hat. This will take that to another level. If I had a mortgage and wanted to top it up to cover maternity leave income shortfalls I wouldn't be buying a cot using my card or bank account before I applied for the increase.

Agreed. Open Banking will bring a new level of data mining.

But NZ doesn't have this level of credit scoring or referencing yet, and I fear that the change will come thick and fast.

I'd assume someone will take advantage of this to sign people up for something and then re-sell their personal data in one way or another.

This is an awesome commentary thread.