Open banking: The fintech view

Published on the 24/05/2024 | Written by Heather Wright

Open banking: The fintech view

Brave new future for NZ, or primed for failure?…

In the midst of all the buzz around open banking, Josh Daniell has a far more pragmatic view: New Zealand has had open banking, in an early form, for around 20 years, we just didn’t call it that.

Daniell, co-founder of Kiwi open finance intermediary Akahu, says while there’s still debate about what open banking is, in his mind it’s simply the ability for a consumer to interact with their financial accounts in a third-party product.

That’s something that’s been happening for around 20 years now – Xero was an early pioneer. SAP Concur’s credit card expense management software includes bank feeds into it. Online Eftpos has also been around since 2017.

“There are a number of issues that will prevent open banking from being successful here.”

Dedicated purpose-built APIs from banks ­– what some people deem to be open banking, and the first of which the big four banks are required to have available next week ­– do however provide an ‘upgrade’ over current connectivity methods, Daniell says.

They’ll enable consumers to bypass having to enter their log-in credentials to third party services in order to access financial accounts.

“There haven’t been issues with the fact that people have to enter their credentials into the third-party service, but everyone agrees that is suboptimal and everyone would prefer to be able to direct the consumer to the bank to authenticate and grant the access. That way no one has to forward the credentials to the bank on the consumers behalf,” he notes.

But that can only happen if banks provide the dedicated APIs, such as the payments initiation API the big four are required to have in place by May 30, and the account information API which banks have until November 30 to have in place.

Akahu is a Kiwi open finance intermediary. They maintain data integrations with banks and other financial service providers which they then bundle into a single API which third parties wanting to do things with connected bank or financial accounts can have a single integration, via Akahu, rather than entering contracts, and building and maintaining integrations with each individual bank.

“Part of why people are moaning/rejoicing about at least some dedicated APIs coming soon is that the banks have been talking about delivering open banking APIs for more than seven years without delivering them,” Daniell says.

“It has been frustrating for participants who expected delivery sooner, and raised capital and built products and have been waiting for these APIs to materialise.”

There are however, plenty of Kiwi fintech’s that haven’t been waiting.

Māori fintech start-up BlinkPay, which is a payment platform, already has APIs built to Payments NZ standards, enabling customers to connect with BNZ, Westpac and ASB and is currently in the throes of signing ANZ.

Adrian Smith, BlinkPay chief product officer and co-founder, admits it has been a challenging road, with the company often ‘guinea pigs’ in its dealings with banks.

Getting bilateral contracts with each bank has been “quite difficult” with a lead time of “many, many months” – with the exception of ASB, which thanks to a new process at the bank was able to conclude in just 25 working days.

“If you are a start-up that means you need sufficient capital to keep your business running while you go through all the very long lead time to close the commercial contract with the bank,” Smith notes.

That cost is further blown out by insurances banks request from the startups, ranging from the expected cybersecurity insurance and public and professional indemnities to others which have had Smith scratching his head.

The bilateral contracts are further complicated by how liability is associated and who deals with liability when something goes wrong, given the third parties, such as BlinkPay, are initiating payment on behalf of the bank’s customer.

It’s one of four big issues he sees for the sector, with local merchants also less willing to try a new payments technology unless it has all four big banks on board – “table stakes” for fintechs, Smith says – and issues around commercial pricing of the technology. Rounding out Smith’s areas of concern is the lack of regulatory oversight to ensure everyone plays together nicely – something he says would be great to see.

There is a raft of action underway around regulations and oversight – something New Zealand has been lacking. While other open banking in Australia and the UK, among others, was regulatory driven, in New Zealand it’s been industry driven.

But earlier this week the Customer and Product Data Bill began its first legislative steps with its first reading in parliament.

It sets the foundations for open banking, setting frameworks for data sharing and giving ownership of data back to consumers, along with introducing things such as fines for not participating appropriately.

“We feel like the CPD bill will hopefully wrap up what we are doing with open banking within that entire construct and support us to carry on with what we are doing,” Smith says.

The Commerce Commission also has several pieces of work that touch on open banking underway, including some around designating account-to-account payments as a network which would provide them with powers to set pricing models, among other things, and potentially mandate participation.

Payments NZ, the banking owned organisation which runs the API Centre working on APIs, has also applied to the Commerce Commission to be authorised to jointly develop APIs and apply a partnering framework for an initial five years.

Smith believes that accreditation would be good, enabling all the parties to get in the room – without suggestions of collusion – and work out best practice, while easing the current negotiation headaches.

“It’s only once that accreditation regime comes in and is ratified and verified that you will be able to hopefully sign up to the scheme, rather than having bilateral agreements with eveyr individual bank.”

Others aren’t so happy with Payments NZ’s involvement.

Georgia Grange, head of UK fintech Revolut’s New Zealand operations, says there’s a ‘power imbalance’ and conflict of interest when it comes to the structure of the API Centre and how APIs are being implemented.

Payments NZ’s board is made up of banking executives. She argues that those executives have the power to slow industry API development and rollout down to suit their interests.

“I hope that attitude isn’t going on, but it does worry industry,” she says. (You can read the API Centre’s views on the issue here.)

“We will only move as fast as our slowest horse so we would like to see faster, more nimble innovation and we think that needs to be a separate body that helps to govern the timelines and implementation of APIs.”

But separating the two, or changing the board structure of Payments NZ could potentially slow things down further. Grange says there are, however, interim measures, such as regulatory bodies being involved in decisioning alongside Payments NZ in the interim.

“Don’t get me wrong – it’s fantastic that Payments NZ and the API Centre have got us to where we are, but I don’t think it lends itself to longevity when it comes to innovation.”

Shane Marsh, co-founder of Kiwi fintech Dosh which provides digital banking services, is also among those calling for the API Centre to be separated from Payments NZ.

But he’s also got bigger issues with New Zealand’s open banking path, saying there are several issues that will prevent open banking from being successful in New Zealand.

Key among those are the high barriers to entry for new entrants to the banking industry. To start a ‘bank’ in New Zealand requires $30 million in capital, and a lack of capital for fintechs with only around $22 million raised across all Kiwi fintechs last year.

Dosh is among those who have been successful in capital raising, with Marsh saying the company is ‘well funded’.

“But for a lot of fintechs the opportunity open banking brings won’t be realised because they don’t have enough capital to grow their business,” he says.

“It is great open banking is arriving, new services are being forced upon the banks and new entrants and existing providers will be able to access those.

“But given the broader environment and the other challenges across the industry it is unlikely, unless there are changes made reducing the barriers to entry and increasing the capital available for competing companies, that we will see any significant change for consumers and businesses in the coming years.

“I’m not optimistic that the open banking objective of improving competition will be met.”

Marsh isn’t alone in sounding that note of caution.

“Open banking holds a lot of value for Kiwi consumers,” Grange says. “It is not going to be a one and done in that it is going to be a slow burn and for kiwis to realise the full value of open banking and the APIs and everything, it is going to take years to be honest. But it has a real potential to democratise financial services and will give Kiwi consumers access to their own data.”

Smith meanwhile says the technology has the potential to ultimately enhance New Zealand’s productivity.

“There will be a lot less time spent in back-office operations trying to hunt for payments and reconciliation, recoveries, collections and misdirected payments and a whole bunch of things that are hidden costs but create operational drag on businesses,” he says.

For businesses though, open banking offerings may be even further away than for consumers. At a Payments NZ showcase this week, Michael Maclean, ASB tribe lead for everyday banking, noted that most early initiatives in open banking are focused on simple use cases – read personal customer use cases.

“There is really rich territory for small and medium businesses in New Zealand which are probably underserviced whether in payroll, accounting or financial management tools, where better channels for integration thorugh integrators, fintech partners or direct to banks is going to be incredibly important.”

But there are complexities there, including around authorisations, the complexity of products and accounts and the more complex needs businesses have, such as bulk payments, he says.

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