Consumers still need due diligence as new deposit takers emerge.
There was a little-noticed piece of legislation introduced to Parliament last month – little-noticed but with a potentially impactful influence upon New Zealand’s lending environment.
“This bill sets up a framework which will make it easier and more attractive for entrepreneurial start-ups to challenge big established players, first in the banking sector and secondly in the electricity sector,” said Andrew Bayly, the Minister of Commerce and Consumer Affairs, as he asked the Economic Development, Science and Innovation Committee to examine the Bill.
The Customer and Product Data Bill’s first reading is the first step in legislation to make it easier for customers of banks to share their data with TPPs (third-party providers) and follows in the footsteps of protective consumer data right laws in Australia, the United Kingdom and elsewhere.
Fintech companies are cheering on these moves loudly. Currently they face convoluted and expensive processes often involving screen-scraping, a method of automatically extracting data from a screen using a bot, to get useful customer data from the big New Zealand banks.
Anticipating the new legislation, the banking sector is developing application programming interfaces (APIs) that allow banking information such as account lists, balances and transactions to be shared with trusted third parties, with the customer’s consent.
It’s a positive development, but could have unintended side-effects, says Brent King, the managing director of NZX-listed General Capital - owner of finance company General Finance, which currently offers some of the most competitive term deposit rates available to Kiwi investors..
“Open banking may actually benefit the big banks more than anyone, as they can use the increased data transparency to offer lower rates to their best customers, while charging higher rates to riskier borrowers,” says King.
In the open banking environment, data from banks, credit unions and finance companies that hold customer accounts can technically be shared in real-time with TPPs. The argument is that this will improve financial inclusion and accessibility. When a TPP can automatically take a detailed look at a customer’s utility bills and rent history, they may be more likely to offer financial services.
“But it’s a double-edged sword,” King points out. “We will likely see the existing banks and the TPPs sifting through the data to identify the most lucrative customers to go after. The use of artificial intelligence will soon supercharge this activity.”
Whether open banking is likely to increase financial inclusion in New Zealand remains an open question – but the increased flows of data going to emerging fintech companies will certainly increase the risks of data and privacy breaches, cyberattacks and unauthorised access, King says.
“Consumers should be wary of sacrificing safety and security for speed and convenience when it comes to banking services. The big banks may not be perfect, but they have a proven track record of keeping customer funds secure.”
A number of app-based fintech startups are already in the market, offering bank-like services like money transfer and savings account products. King points out most have little in the way of a track record in financial services, or significant capital backing.
“Consumers need to be cautious about new fintech entrants as they may not have the same level of security and stability as the major banks,” he says. “Without a credit rating or track record, these new players aren’t able to provide the same level of assurance that their customers’ money is safe.”
Convenience…at a price
Many of these new entrants accepting cash deposits from customers are currently not included in the Depositor Compensation Scheme (DCS), which will launch in mid-2025. It safeguards each depositor up to $100,000 per licensed deposit taker in case of a deposit taker failure.
“That may change in future, but it’s important for customers to do their due diligence about the fintech offering lower fees or faster transactions,” says King. “That convenience may come at a price.”
The fundamentals remain the same in an environment that is more welcoming to new entrants, he adds, particularly those offering savings and term deposit services. Is the company regulated? Who is running the company and do they have a successful track record? Does the company have to file accounts and meet capital adequacy ratios with the Reserve Bank? Does it have a Trustee, regular audits, and an experienced board of directors?
These are some of the questions King says prospective depositors should always ask when researching companies to deposit their money with: “You should start with looking at a company’s credit rating and by reading their product disclosure statement, or prospectus”.
Australia’s open banking regime has yielded mixed results at best. A review by the Australian Banking Association published in June revealed that only 0.3 per cent of bank customers are using the government-mandated consumer data right.
That’s despite the banking sector claiming it has spent around A$1.5 billion since 2018 to develop technology and the API infrastructure to enable open banking.
“Ultimately bank customers pay for that in the form of higher fees,” says King. “We need to foster a more innovative and competitive banking sector in New Zealand – but we need to avoid open banking becoming a white elephant that has the perverse result of aiding the big banks and reducing the safety and integrity of our highly-stable banking system.”
For more information visit:
generalfinance.co.nz/service/how-to-invest/
generalfinance.co.nz/service/deposit-rates/
generalfinance.co.nz/service/credit-rating/