A busy August saw a number of developments in New Zealand’s evolving open banking landscape.  In this update, we cover:

• An overview of open banking and its potential benefits.
• Recommendations made about open banking in the Commerce Commission’s personal banking services market study, published on 20 August 2024.
• The 18-month conditional authorisation granted to Payments NZ Limited (Payments NZ) on 20 August 2024 to develop a partnering framework for open banking.
• The Commission’s 13 August 2024 recommendation to designate the interbank payment network under the Retail Payment Systems Act 2022 (RPS Act).
• The Ministry of Business, Innovation and Employment (MBIE) consultation on regulations to designate banking under the Customer and Product Data Bill (CPD Bill), which opened on 29 August 2024.
• What this all means: How the above regulatory developments may impact New Zealand’s financial services environment in the next few years.

What is open banking?

Banks hold a large amount of customer data, including information about individuals’ spending habits, transaction histories, income, and products or services used.

“Open banking” refers to an environment where consumers can instruct their banks to share their financial data with third parties such as fintechs or other banks, enabling consumers to make use of their financial data.

Open banking has the potential to drive competition and innovation in the financial services sector, including in the personal banking and payments spaces, through allowing both existing financial service providers and new entrants to:

• facilitate consumers’ ability to search and compare services and products;
• leverage consumer data held by incumbents; and
• facilitate fintechs in providing services that are not dependent or are less dependent on main bank relationships.

To date, New Zealand has seen relatively slow progress in the development and implementation of industry-wide, standardised open banking via application programming interfaces (APIs). APIs are the safest, securest way of sharing consumer data as they allow two different systems (for example, a bank and a fintech) to safely communicate with each other and share information within a secured channel. Standardised APIs are therefore essential to industry-wide open banking because they provide a common way to address concerns around security, privacy and customer authentication and consent.

Commerce Commission’s market study recommendations

In its final personal banking services market study report, the Commission forcefully recommended that progress towards open banking be accelerated to disrupt competition in the financial services industry which the Commission found, to date, has been dominated by the four major banks.

The Commission recommends that industry and government work together to coordinate their work and commit to delivering a series of ambitious milestones by June 2026. The Commission identified that the lead up to the enacting and implementation of the CPD Bill (currently before Select Committee) will be a crucial time for such coordination. It further stated that careful implementation of open banking will be key to achieving the desired outcomes.

As such, the Commission has recommended a designation for it under the RPS Act, to allow it to take an active role in coordinating action within and between industry and Government.

The Commission has stated that should it be designated under the RPS Act, it would convene an open banking steering group within two months. It proposes that the steering group would have:

• broad membership, including industry, government and consumer representatives;
• a wide mandate to consider what is necessary or desirable to accelerate the benefits of open banking across industry and Government; and
• planning, coordination and monitoring functions, including publishing a detailed roadmap charting key priorities and milestones in the implementation of open banking.

Payments NZ’s authorisation

On the same day as releasing its final personal banking services market study report, the Commission granted conditional authorisation to Payments NZ on behalf of its members, to jointly develop a partnering framework to progress open banking. The scope of the Commission’s conditional authorisation also includes the application of the partnering framework.

Payments NZ is a bank-owned industry body, whose membership comprises banks and other financial services providers. To date it has been leading work on developing API standards for open banking, via its API Centre. This has included the development of the Minimum Open Banking Implementation Plan, headed by the five largest banks as ‘API providers’.

The partnering framework Payments NZ members will be developing and (if successful) applying consists of:

• an accreditation scheme (including accreditation criteria) – essentially, criteria that third parties must meet to be eligible to partner with a bank or API provider; and
• default standard terms and conditions for partnering on which accredited third parties will automatically be entitled to enter into with banks.

The authorisation is for a period of 18 months and is subject to a list of comprehensive conditions aimed at addressing the Commission’s concern that there may be a conflict of interest within Payments NZ’s governance structure that could inhibit the realisation of any potential benefits arising from the partnering framework.

The Commission’s concern around Payments NZ’s governance structure relates to the risk that Payments NZ’s bank ownership may result in incumbent banks stymying the joint development of the framework. Interested parties submitted that these banks may have reduced incentives to meaningfully progress open banking – pointing to the delays in development that have already occurred – as fully implemented open banking would give third parties access to bank-held consumer data, which would enable them to more vigorously compete for those banks’ customers.  

The 18-month period has been imposed on the conditional authorisation as, after this time, the Commission expects that legislation such as the designation of banking under the CPD Bill and the designation of the interbank payment network under the RPS Act, will provide the same benefits as those expected to occur from the authorisation of Payments NZ’s conduct.

Recommendation to designate the interbank payment network

The Commission has also recommended to the Minister of Commerce and Consumer Affairs (Hon Andrew Bayly) that the interbank payment network (IPN) be designated under the RPS Act. The IPN facilitates payments between bank accounts for online and in-person payments and is an integral part of the retail payment system.

The Commission states that designation of the IPN will allow consumers and business to benefit from new ways to pay between bank accounts, by actively driving competition and innovation in the retail payment system.

The Commission recommends designation for various reasons, including that it will:

• accelerate the progress of open banking by removing some of the barriers that have inhibited its delivery and adoption such as lack of coordination, prohibitive terms of access to services, terms imposed on merchants to accept new payment solutions, and merchant willingness to continue to accept sub-optimal payment methods (such as screen scraping) because those methods are accepted by all banks; and
• complement and enhance the aims of the CPD Bill (discussed in the next section) by providing an avenue for payment system issues arising under the banking designation to be addressed by the Commission. The Commission considers that under a designation it will be able to address barriers to open banking within the payment system, including payments-specific issues that cannot all be resolved by the banking designation under CPD Bill.

The Minister is currently considering the Commission’s recommendation to designate the IPN. Should the Minister agree with the Commission’s recommendation, the Commission anticipates that designation could occur relatively quickly. However, following designation, network standards would still need to be developed by the Commission to facilitate the designation of the IPN.

Current consultation on the banking designation under the CPD Bill

Additional to the Commission’s work in the open banking space, MBIE began its consultation on the regulations to designate banking under the CPD Bill at the end of August.

The CPD Bill aims to create a framework for standardised data exchange. Under the CPD Bill, sectors that have been identified as holding data about consumers will be designated and brought under the framework through regulations. The CPD Bill therefore creates a consumer data right whereby consumers can access data that is held about them and share it with trusted third parties.

The regulations enacted pursuant to a banking designation are proposed, in the first instance, to codify much of Payments NZ’s work. For example, the scope of the designation will extend to the same banks subject to the API Centre’s Minimum Open Banking Implementation Plan, and the same basic categories of customer data and actions as the API Centre’s API standards. The designation also contemplates an accreditation regime for third parties, a similar concept to Payments NZ’s proposed accreditation scheme under its partnering framework.

MBIE is seeking feedback on:

• the scope of open banking designation regulations under the consumer data right regime;
• the requisite accreditation criteria required for accredited requestors to access data;
• the appropriate fees and relevant standards necessary for a functioning regime; and
• the costs, benefits and risks associated with an open banking designation.

Submissions close on 10 October 2024.

What does all this mean?

These important developments foreshadow a large shift in the regulatory landscape in the next few years as a result of industry and regulators’ push to develop and implement open banking in New Zealand. This is expected to result in improved competition and innovation in the financial services industry.

For financial service providers, while clear value can be harnessed through open banking, the transition will involve adapting and becoming familiar with new regulatory and technical concepts as industry and regulators work to develop and apply the numerous building blocks required for a successful open banking environment. This will involve compliance with both industry expectations as well as legislative obligations such as API standards (including accreditation), conduct and governance obligations, customer consent requirements and fee/pricing mechanisms.

For businesses and consumers, once implemented, open banking will result in increased control over which financial service providers have access to important data, and, over time – should anticipated competition play out in the sector – increased quality and choice.

If you have any questions around these developments and navigating the changing open banking landscape, please get in touch with our experienced team.