How Far Away Is Open Banking In New Zealand

With the banks recently announcing more record profits there has been more talk of seeing open banking in New Zealand, but how this has been spoken about has given a very limited view to the benefits.

The comment we have been hearing is that “open banking will make it easier to change banks” and while that may be true there are a lot more benefits and there are real reasons that banks do not really want open banking in New Zealand.

Banks in New Zealand have worked hard for many years to try and make sure that customers had more than one product with the bank as it (a) makes it seem harder to switch banks and (b) ensures the bank makes more money from each customer.

It’s estimated that there are over 3 million customers at the banks, and if the banks can get a few dollars more from each customer then that adds up quickly. Each of these customers is probably already giving the bank “free money” by having money sitting in accounts that don’t earn interest. Then consider the fees for various accounts and management fees on investments including KiwiSaver. These are areas where the banks make money, and that’s before we even look at the money they make on lending including overdrafts, credit cards, personal loans and mortgages.

Even if the banks only make an extra $10 a month from every customer, then that’s an extra $36 million.

It’s no wonder that banks are announcing record profits!

It’s interesting and disappointing to see Canstar reporting that most Kiwis (65%) are shopping around for the best financial products (savings, term deposits and mortgages) between banks – but that the data also shows that very few are actually changing banking providers with just 4% making the change in the past year. It was also quite telling that 35% of people surveyed still had all of their banking with just one bank, and also that 35% of people had their KiwiSaver with the same bank too.

Too often people just stay with a bank as they think it is too hard to switch.

The banks have done a great job to promote this as “truth” and yet it shouldn’t be too hard to switch now, and open banking will make that easier.

Let’s Discuss The Benefits Of Open Banking

So we know that banks in New Zealand have not been pushing for open banking, and that’s understandable as there is no benefit to the individual banks, or at least the four main banks which have over 80% of the market.

We are also hearing in the media discussions and reports which are focused on the ability to switch banks more easily, which is a small benefit but alone does not make a compelling argument. They compare this to the telecommunications industry which was opened up about 20-years ago.

There are some “real benefits” that every Kiwi can benefit from, and that’s really what I wanted to discuss.

There Are Other Benefits To Open Banking

There are some real benefits of open banking and it is likely to revolutionise the way we bank and do business in New Zealand. I’m touching on some of those here, but I’m sure that this will evolve over time too and there will be things that come up that we’ve not even thought about yet.

Let’s start with looking at what open banking actually is.

Traditional vs Open Banking

In traditional banking (as we have now) the bank will develop a range of products and services and make those available to their customers.

With open banking the banks may individually still operate with a set range of products and services which they make available to their customers, but they also allow the customers to allow their data to be provided to other regulated providers to access, use and share through web based technology called API’s .

This means that with open banking a customer will finally see and be able to access more options.

There are already some financial platforms that are integrated with banks and can access specific banking information like the accounting system Xero, budgeting system Pocketsmith and payment gateways. These are known as Payment Initiation Service Providers (PISP) and the next step is for Account Information Service Provider (AISP) which allows greater access to data so that third party providers can access, use and share and of course create more innovative applications and services.

What Innovative Applications Might We See?

Once open banking becomes a reality, we will no doubt see a huge range of new innovations and there are already some that have been developed and are just waiting on being able to access the data.

Innovations with Internet Banking

Most Kiwi’s will have a main bank and use that banks internet banking or banking App to manage their transactions and have visibility to their accounts. We generally think this is okay, but it’s only because that is all we know. If you have your banking with ANZ then you can view all of your ANZ bank accounts on your App, but if you also have a bank account with BNZ then that is not available on this App and you can not manage it from the same place.

Imagine if you could have internet banking or banking App to access and manage any bank account from the one place.

This would allow you to select the most suitable accounts available regardless of the bank that provides them.

For instance you might decide:

• Your main transactional bank account might be a Kiwibank Free Up account as you are keen to support a Kiwi bank and this is an account with no account or online transactional fees. It doesn’t pay any interest on credit balances, but you do not plan to have much money deposited – just enough to cover your daily needs.
• You want a savings account that pays a reasonable interest rate but allows daily access, and so you decide that the Heartland Bank Direct Call account is the best option. This account pays a good rate of interest but also allows you to make any number of deposits and withdrawals.
• You also want some longer term savings and decide that the Rabobank Notice Saver suits as you can make regular deposits but cannot access immediately.
• Plus of course you want your investment account and KiwiSaver with NZ Funds as they are known to be one of the best fund managers.
• With your mortgage you have decided that Sovereign Home Loans is the best option as they have competitive home loan interest rates, but more importantly they have the most flexible payment options that allow you to pay your mortgage off faster.

(this is to illustrate the point – we are not giving advice on these products here)

With the current (traditional) banking arrangements this type of set up is a bit difficult to manage, and the banks have tried to ensure that it has been difficult as they want you to keep all of your banking with the one bank, regardless if they are offering what you really want.

With open banking you have the ability to have internet banking and/or a banking App that is provided by a third party developer, and then you can access whatever bank accounts, investment options and mortgages. Any of the options that you chose can be linked through this one internet banking and/or a banking App which enables you to view and manage things from one place.

We’ve seen a demo from one provider and they have some smart features that would be a great help. A few of those, and other suggestions that were discussed are:

• Automated sweeping – you might want to keep a low balance in your transactional account as it earns no interest, but you also do not want to have the account go into an unarranged overdraft. You could therefore set up a minimum balance and every day your banking App will transfer money from your savings account to top up the transaction account back to that limit you set. This can be set up even though these two bank accounts are with different banks.
• Automated savings – in most cases banks have only allowed you to set up an automatic payment to a savings account and especially if the savings account is with a different bank. This may be okay if your income is always the same, but if your income changes then having a set amount is not ideal. With your banking App you should be able to set up a transfer either as a percentage of your income in a similar way to your KiwiSaver contributions, or retain a set amount and transfer anything over that amount. The point is you have more options on how you can contribute to any account when you get paid.
• Alarms – rather than having to monitor your account balances, you can set alarms that will let you know when your account balances reach certain levels. You may set a minimum level to ensure that you are advised that it’s time to top up an account which might be useful to ensure that you don’t miss a payment, or you may set a target amount which will trigger you to do something with your savings when you are getting close to or have achieved that target / goal.
• Budgets – you may also have a budget set within your App. You can then monitor your progress and have automated reporting or alarms to let you know how you are going.
• Foreign Exchange Transfers – a lot of people currently use their banks for currency transfers; however there are specialist companies that do a better job at this, have options like the ability to pre-set an exchange level and of course charge less fees. Having access via open banking will make it easier to take advantage of these options.
• Comparisons and software – with many products you can find websites and Apps that compare what is available and make it easy to switch. With open banking this makes it easier to create these for the financial services so you can find the best product and switch easily. You might want a term deposit, so you can find the best deal via your App and then set up and fund the term deposit without leaving your App.

The opportunities are unlimited, and as a customer you will have a choice of internet banking and App’s which you can chose from. We would expect there will be some very simple options similar to what we have now, and for the more analytical people there will be some with extra features.

Open Banking Offers Many Benefits

Banks have not been keen to see the introduction of open banking, but with the talk about this it might happen soon. Let’s hope it does as there are many benefits for you – the customer.

When open banking is finally regulated we expect that we will see a range of third party providers come to the market with some very innovative services and products.

We also expect that the banks operating in New Zealand will need to review what they offer and we could see them starting to come up with more competitive products, and/or more niche or specialist products.

As customers we will start to see the benefits of true competition in the banking and financial services sector, and as financial advisers we are really looking forward to being able to offer many of these options too.

We have touched here on a few things that we know about open banking, but there is a lot more that we don’t know yet and/or that has not been thought of yet. Think about crypto currencies as an example – 20-years ago we had never heard of crypto, and now it’s a thing but we’re still unsure how it will become mainstream; however we’re not sure how this might evolve over even just the next 5-years.

We believe that open banking in New Zealand will offer Kiwis access to better financial products and services, which can give help everyone. Let’s see if this becomes a reality for us soon.