An open mind on open banking

This page contains information on an open mind on open banking from the May 2018 Financial Stability Report.

‘Open banking’ refers to a standardised and secure framework for sharing bank customer data with trusted financial service providers (‘providers’), such as technology companies (see diagram B1). It will enable providers to offer a wide range of new financial services. For example, retail payment mechanisms could be developed to allow restaurant bills to be split and paid automatically using mobile phone applications. Or applications could offer timely and personalised budget advice, for example when a customer enters a shop.

The development of open banking is in its infancy but a number of jurisdictions, including the UK, EU and Australia, have taken steps to promote its growth. New Zealand banks and providers are currently trialling software that will enable providers to make retail payments on behalf of their customers. The trials have been coordinated by Payments NZ and are expected to be completed late this year. They will help Payments NZ to establish common standards that banks and providers can use to share customer data.1

Open banking could improve the soundness and efficiency of the financial system. It could increase competition and reduce concentration in the provision of financial services, reducing the systemic importance of large banks and reducing the cost of financial services. Greater sharing of customer data could also help financial services to be better tailored to customer requirements, improving the efficiency with which the banking sector’s resources are allocated and reducing the risk that customers obtain loans that they cannot repay.

Diagram B1 Open banking involves the sharing of customer banking data

Diagram B1 - Open banking involves the sharing of customer banking data

However, open banking could also create risks. Some risks are likely to be temporary, as the financial system adapts to the new entrants. For example, greater competition could weaken the profitability of banks that are slow to adapt to the changing financial system landscape.

Other risks are likely to be longer lasting. Increasing the number of firms that handle sensitive customer data may increase the risk of data mishandling. Customers may also hold banks responsible if their data are compromised, even if customers approved the sharing of their data, creating reputational risk for banks. Open banking could also increase banks’ liquidity risk, by making it easier to move deposits between banks. And creating more ways for customers to access banking services could make it more difficult to monitor for money laundering.

The Reserve Bank is monitoring the development of open banking. If necessary, it will act to minimise potential threats to the soundness and efficiency of the financial system, and to amend regulations that unnecessarily hinder the development of open banking.

1 For more detail, see Payment NZ’s webpage on the API framework project.