Third-party fintech companies have transformed financial services and accelerated the rise of open banking, but their access to sensitive customer data continues to introduce significant risks.
While the U.S. has largely allowed industry participants to address these challenges on their own, countries like New Zealand have adopted a more regulatory approach. After instituting open banking rules in December, New Zealand’s regulators have indicated they plan to move forward with more extensive reforms.
The objective of these efforts is to secure open banking interactions, drive competition among domestic financial institutions, and imrpove payments efficiency.
“It is great that New Zealand is approaching open banking from a regulatory perspective,” said Don Apgar, Director of Merchant Payments at Javelin Strategy & Research. “Mandating compliance forces the banks to invest in the technology and creates a level playing field. Of course, retailers are excited about the potential for lower fees compared to card-based transactions, but enabling the technology is only the first step to making direct bank payments a reality.”
Developing the Standard
One of the main steps New Zealand’s banks have taken is the development of standardized application programming interfaces (APIs), which allow authorized third-party firms to access data and perform services—provided customers give consent.
Similar to the revised Payments Services Directive (PSD2) implemented by the European Union, New Zealand’s framework also aims to reduce the practice of screen scraping, in which non-bank providers extract financial data for use within their own platforms.
Secure APIs help mitigate the need for screen scraping, along with the associated security and privacy risks.
Challenges and Advantages
In addition to enhanced security, pay-by-bank options offer consumers an alternative payment rail at a time when many are burdened by debt from credit cards and buy now, pay later loans.
For merchants, adding account-to-account payments means they also have an alternative to card networks and their associated interchange fees. However, implementing pay-by-bank functionality presents its own set of challenges.
“Merchants must also make the investment to connect to the new payment rails being built by the banks, and consumers need to see a clear value proposition to paying via open banking versus using their cards,” Apgar said. “Card payments have become remained popular with consumers because of rewards structures and easily accessible dispute mechanisms with zero liability.”