The New Zealand Government declared last month that open banking is coming to the island nation. This much-needed reform is the first step in making New Zealand's financial ecosystem livelier and more competitive.
As the nation gets ready for this new banking model, it must learn a lot from what Europe and the United Kingdom have gone through, especially with regard to worries about governance and data protection.
Advantages of open banking
A consumer data rights (CDR) framework, a system for safely and securely transferring personal data across multiple service providers, facilitates open banking. It means that Kiwis will be able to compare mortgage rates and other financial products more readily.
Open banking is gaining popularity around the world because it assists in the integration of new financial service providers into the financial ecosystem, making it more sustainable, efficient, nimble, and inventive.
It allows people who have many accounts at different banks to view all of their transactions in a single interface using account aggregator software. The customer will subsequently be able to swiftly transfer funds between accounts. The same application, with the use of artificial intelligence, can assist customers in organizing their finances by recommending financial products with better rates and terms.
Additionally, it enables small and medium-sized businesses to better monitor their cash flow, reconcile payments, and manage inventories. Business owners can also combine their financial information with their accounting service provider through open banking.
Learnings from Europe
But what can New Zealand learn from the experiences of those nations that have already implemented open banking as it enters this brave new world? There are two recent reports from the UK and Europe that demonstrate some of the process's benefits and drawbacks.
The European Commission's amended Payment Services Directive 2 (PSD2) proposal included open banking in July 2013. Open banking is now a global endeavor, with the United Kingdom and continental Europe viewed as global leaders. There are at least 410 third-party providers in Europe alone.
The UK's Competition and Markets Authority announced the findings of an investigation of their open banking experience in May 2022.
The authority's examination revealed issues about corporate governance problems, late account delivery, conflict management, procurement, and value for money, as well as the need for human resource changes.
The problems were mostly caused by governance failings at the Open Banking Implementation Entity (OBIE).
The nine biggest banks in the UK were required to implement open banking, and the OBIE was tasked with monitoring their success. Because there were not enough checks and balances on the trustees' decision-making, too much authority was given to one of them. Internal controls and the risk management system were also deficient.
The UK government has recognized the issue and is working to strengthen OBIE's governance structure.
The European Commission recently held a public consultation on its 2013 directive as well as the commission's work on open banking. Because of worries about privacy, data protection, and digital security, the majority of respondents were hesitant to share financial information. There was a pervasive impression that they had little control over how their data was used.
Giving service providers access to their data, according to 84% of those who responded to the public survey, poses security and privacy hazards. Furthermore, 57% of respondents stated that financial service providers who store their data only occasionally seek approval before sharing it with other financial or third-party service providers.
Requirement of unambiguous regulations
The European and British experiences demonstrate the challenges associated with open banking adoption and public perception. The two papers' concerns about governance and data security should be carefully considered by the New Zealand government.
The development of an effective board oversight and risk management plan is critical. To foster trust and transparency, a consent management mechanism should be implemented. There should also be a high-level structure in place to monitor and supervise all data holders and users.
The implementation of open banking in New Zealand should result in a power shift away from traditional banks and toward a thriving financial technology sector. It should also provide traditional banks the opportunity to innovate and become far more responsive to customer wants.