It’s not just the upcoming ComCom banking inquiry; three announcements in the past month are intended to nudge NZ towards a more competitive, more innovative, consumer-focused banking system. But it’s taken far too long, and there’s a long way to go.
In late 2017, then Commerce and Consumer Affairs Minister Kris Faafoi gave the banks a warning kick. Faafoi, a new minister in a new government, urged banks to get on with ‘open banking’ – a "revolutionary” space where non-bank companies can launch finance products and services alongside or in competition with banks.
“My preference is everyone realising there is an opportunity here,” Faafoi said. “Anyone being overly obstructive may find themselves being left in the dust.”
Faafoi warned the banks he’d be watching them closely and would be following up on deadlines set by his predecessor, National’s Jacqui Dean. He’d also be keeping an eye on what was happening in Australia, where politicians, not industry, were leading the drive to open banking.
Australia was largely following the UK, where open banking was unleashed in 2017 by the Competition and Markets Authority, following an investigation into retail banking. The UK banking sector was dominated by big, established banks, with a lack of difference in services – and a reluctance by consumers to switch providers, the investigation found. This undermined the power of competition to drive improved service.
Faafoi knew what was going on overseas and had a warning for the banks. Get on with it, or we’ll regulate.
It all looked pretty optimistic, and media stories from 2017 talked about new fintechs (financial technology companies) preparing to hit the market. The companies had cool names – Revolut, Jude, Douugh – and would provide competition, particularly around payments.
And then, not much happened. Things moved at a glacial pace. Eighteen months later, in early 2019, New Zealand’s banks announced the formation of the API Centre, the organisation tasked with developing the structures and protocols for open banking.
(API stands for application programming interface; basically it’s the nuts and bolts needed to be able to transfer data easily and securely between banks, their customers and third parties.)
At the API Centre launch, in March 2019, Faafoi defended his self-regulation-is-the-way-to-go stance. As he told Stuff reporter Rob Stock at the time, he was aware some people thought the Government had been "sitting on the sidelines" and needed to regulate. Actually, it was going to be okay.
"I'm genuinely focused on giving industry-led open banking a real chance to succeed."
By 2019, Revolut, Jude and Douugh hadn’t succeeded in launching in New Zealand – and they still haven’t. But there was a new fintech poster child in the wings: Zeal, a person-to-person micropayment idea being trialled by Westpac and ASB. The app could let people split rounds at the pub without going through their banking app, and was going to prove open banking worked fine.
"What we're doing is enabling people to do cool things," Steve Wiggins, chief executive of bank-owned body Payments NZ said at the time. "There's huge potential for where the industry can take their innovations using these standards as a foundation, especially with some creativity and the Kiwi way of working together."
More on Zeal later.
Open letter to banks
Nine months later, even Faafoi was getting annoyed about progress towards a more innovative system. In an open letter in December 2019 to banks and others involved in the API process, Faafoi said progress was “both uncertain and slow”. Even where things were happening, there was “inefficiency and fragmentation in the ecosystem”.
“My primary concern is the pace of progress will be too slow for the ecosystem to flourish and may cause considerable cost and barriers for third parties. This in turn restricts the development of the market as a whole and the delivery of products and services to end customers.”
It wasn’t just industry needing to get moving. Faafoi said as a first step to giving consumers control over their own data (including banking data) he’d be asking officials to prepare a discussion document on 'consumer data rights' – a law to improve customers' access to and control of their own data.
Data rights are a crucial precursor to open banking, as customers need to be able to access their account and payment information and release it to other parties if they want to use fintech apps or other services. But that data is valuable and banks have been reluctant to give it up; it might mean them losing business - and money.
New Zealanders would see data rights legislation to have a look at “in the first half of 2020”, Faafoi said.
In fact, the draft Customer and Product Data Bill was introduced not in 2020, or even 2021 or 2022.
“Customer data holds enormous value and opportunity, but only if customers are able to make full use of it and connect it with digital applications,” the consultation document says. “The aim is to help innovators in our economy create new products and services and increase competition. This in turn will benefit customers by leading to reduced prices, improved product offerings, and greater productivity.”
Banking will be the first sector the rules apply to.
The draft bill is one of three initiatives announced over the past month designed – belatedly, many would say – to get competition working in the banking sector. The earliest to be announced was an open banking implementation timeline, launched by Payments NZ on May 30.
The plan sets out the minimum that must be achieved, with a stipulation the four biggest banks – ANZ, ASB, BNZ, and Westpac – must be “ready by May 2024 with the v2.1 Payment Initiation API standard, with the v2.1 Account Information API standard to follow by November 2024”.
That’s 18 months away.
NZ’s fifth largest bank, government-owned Kiwibank, is also included in the plan and has an implementation timeline to be live with the payments and account information standards by May and November 2026 respectively. Three-and-a-half years.
That is not what Kris Faafoi intended. His open letter from 2019 wanted to see all API providers (not just the big five) having implemented version 2.0 of the API standards “or any further updates” by May 2020.
What’s happened since then is unclear. API version 2.0 came and went, being superseded by v2.1, which included credit cards. But only BNZ has actually implemented v2.1, and you can hardly have an inter-bank data and payment structure working with only one bank on board.
Which leaves New Zealand fintech companies – and their potential customers having waited four-and-a-half years between Faafoi’s original deadline (May 2020) and implementation. And that’s just for the four Australian-owned banks; it’s a six-and-a-half year delay for Kiwibank, and there's no API timeline at all for the other banks.
Does it matter?
It's kind of a big deal, given how important everyone seems to think open banking is.
“Open banking is a powerful tool for enabling economic prosperity and financial wellbeing for consumers in Aotearoa,” Payments NZ’s Steve Wiggins said when he announced the timeline last month. “It enables consumers to have more choice in who they want to share their financial data with and how they want to make payments.
“It encourages greater competition and customer innovation by allowing consumers to access a wider range of products and services from different providers. Over time, more new players will join the ecosystem and I look forward to seeing innovation thrive as a result.”
Ah yes... innovation. Those nimble fintechs which were on the verge of taking off in 2017 and 2019. A quick update:
Revolut: The company was launched in the UK in 2015 “in response to the unfair and hidden fees associated with money transfer and exchange”. As of January last year, it has 18 million customers in 28 countries, and a banking licence in 10 European states.
In New Zealand, you can “join the waitlist”.
Same message if you check out wealth management app Douugh, run by the struggling ASX-listed company of the same name. Though to be fair, Douugh has had problems in the US and Australia too.
Then there’s Jude. Described by founder Ben Lynch in a 2018 RNZ article (written by Newsroom’s own Emma Hatton) as a “private banker in your pocket”, the company was started in response to Lynch’s own frustrations with bank fees, and the multiple password and payment portals he had to negotiate just to keep on top of day-to-day expenditure. He wanted a product “to amalgamate all of a person's data - banking, insurance, Trade Me or Netflix - and make sure bills are paid on time”.
Sounds good? Without rules around open banking and data ownership, Jude didn’t get off the ground. Ben Lynch is now the founder and CEO of Dolla, another payments fintech.
He tells Newsroom the consumer data rights legislation has taken too long to be introduced, and government needed to fast-track open banking. “We believe open banking will be a key driver in promoting competition in the retail banking industry and ensuring Kiwis have better transparency around their finances.”
Too many roadblocks
Lastly, Zeal, a real-time peer-to-peer payments app described in an article in 2019 as “among the first tangible evidence that open banking is arriving in New Zealand” and set, at that stage, to launch in 2020.
Spoiler alert: it never did.
But Zeal is a good example of just how New Zealand’s banking and regulatory system has worked to prevent innovation and competition in the banking sector.
Zeal wasn’t a start-up; it’s first iteration came out of the Westpac Bank’s innovations team and was called “Settle” – a way for friends to ‘settle’ up bills with each other at the end of a night without having to go through the complications of their banking apps.
“If I dig down into why this app didn’t make it into the market it’s because the value of a banking licence in New Zealand is $1bn or more, and what you have to do to continue making $1bn a year is not f*** up." – Will Cooper, former CEO Zeal
Settle was cool, says Will Cooper, who was in the original Westpac innovation team and two years later was CEO of the app’s next iteration, Zeal. These days he’s part of business growth consultancy Point16.
“We prototyped, 20-30 people in our team sending each other money with a smiley face. We were going to be the next Silicon Valley.”
The technology worked, Cooper says. It moved real money between people.
But it never got sign-off from the bank.
“The risk team was worried about anti-money laundering, about the potential for fraud, and they are valid concerns.
“But if I dig down into why this app and a bunch of other things we were working on didn’t make it into the market it’s because the value of a banking licence in New Zealand is $1bn or more, and what you have to do to continue making $1bn a year is not f*** up.
“You’ve got this cool thing that will get you the youth market and make you look innovative. But if there’s even the tiniest chance it will lead to a big fraud investigation or AML problems, you have really stuffed up. And you can never prove something 100 percent won’t go wrong.”
Two years later, Cooper went back to work on Zeal, a new iteration of Settle, but this time a joint project between Westpac and ASB, with the aim of bringing the other banks on board.
The technology worked even better, he says, with more features, but there was an additional roadblock. Could bank collaboration on a payments app actually be seen as collusion?
“I remember every meeting we had talking about anything commercial – from whether there would be a fee, to whether someone in a farmers market could use the app – you always had a lawyer from ASB and a lawyer from Westpac in the room to make sure we didn’t, through our enthusiasm for the product, break competition law; create some sort of cartel that would be unacceptable to the Commerce Commission.
“These correct and well-intentioned structures made it slow and hard to work together.”
In the end, funding ran out and the project closed down.
“Pilot participants saw value in simple peer-to-peer payments such as bill splitting after a night out,” an ASB spokesperson tells Newsroom. “ They also told us that for the app to be of value, it needed to work across all banks, rather than just be available to Westpac or ASB users. The pilot provided useful insights, but we were unable to implement an industry-wide solution at that time.”
“Following a partnership with ASB in 2019, we decided not to continue with Zeal,” Westpac says.
Two hundred years of not taking risks
But Cooper is sure it could have worked. What was needed was government to take a stand, put some rules in place, and actually tell the banks that they could, and they had to cooperate.
“If consumer banking open data had been in place and government had said five years ago: ‘this is how it’s going to be’, it would have made a huge difference and we would have a cool, customer-focused product in the market in New Zealand today.
Cooper doesn’t believe the ‘cynical-banks-kicking-open-banking-down-the-road-to-protect-their-oversized-profit-margins’ narrative is necessarily correct.
“You don’t need conspiracy and bad behaviour; 200 years of not taking risks – that’s enough of a reason.
“I’m sure there were conversations with banks saying ‘Give us more time, we want to do it, but it’s hard, and we want to do it right'.”
And that’s fair, Cooper says. But the government should have acted anyway – got on with regulating. And they should do it now.
Is the ComCom market study the answer?
There has been plenty of debate over the last few days since the announcement by Finance Minister Grant Robertson and Commerce and Consumer Affairs Minister Duncan Webb that the next Commerce Commission market study will be into competition in the personal banking sector.
“New Zealand’s banking sector is dominated by a small number of big players, Robertson said. “Four major banks make up around 85 percent of the mortgage and other lending market, and hold a 90 percent share of total bank deposits. Loans by smaller lenders are growing but remain small in comparison.”
“Banks have consistently made high profits over a number of years and their returns have outperformed their peers in other countries.”
The market study is the first step in understanding banking competition issues, Webb said.
“The Commerce Commission will focus on examining barriers to new competitors entering or expanding in the market, the introduction of innovative products and services and consumers’ ability to switch between banks.”
Reaction to the market study has been mixed.
Veteran banker David Cunningham (Westpac, Co-operative Bank, and most recently mortgage broking and investing company Squirrel) says the study will change “diddly squat”. He told Newsroom that regulation and legislation, including the Reserve Bank rules, perpetuate the status quo; banks, while providing a good service, exploit customer inertia and unwillingness to switch providers or embrace new ways of doing things.
“My view is the banking system is competitively unfair.” Hence a market study achieving little.
Others say the previous market studies – fuel in 2019, grocery in 2021, building products in 2022 and the early part of this year – have not changed the market or brought prices down, though that is something ComCom chair John Small disputes.
Market studies aren’t cheap. Commerce Commission figures show the fuel study cost around $2.5m, groceries cost $3m, and building supplies $2.6m. And that’s just the taxpayer-funded part; there’s also millions of dollars of time and cost for the private sector participants.
In the case of banking, there’s the delay caused by a market study that won’t be finished until August 2024, and will then need recommendations to be implemented, possibly by a differently-leaning government. Minister Webb says Labour will continue to progress the consumer data rights bill, separate to the market study. And the API timeline remains.
But Will Cooper wonders why government just doesn’t do what other countries, including Australia and the UK, did years ago – legislate for open banking.
“The Government needs to follow up on what it said it was going to do five years ago,” he says - get tough on banks separately and collectively moving at a snail’s pace and legislate for open banking.
“There’s plenty of evidence from overseas, what they need to do - legislate for open banking. The ComCom investigation may be useful for other things. But the ones I care about - they just need to get on with it.”
