The idea of open banking is back on the table in light of reports of multi-billion dollar profits from Westpac and ANZ. If that actually happened, it would be the biggest change in our financial industry in decades, writes Duncan Greive.
The Prime Minister expressed his feelings perfectly. “We’ve seen them consistently make record profits,” Jacinda Ardern said, in response to reports of multi-billion dollar profits from Westpac and ANZ. When asked if she thought there was anything wrong with what was happening in the context of a wider cost of living crisis, she answered unequivocally, “yes”. At the center of it all was a question of his own. “Are they showing social license and commitment to communities taking the benefits they are?”
It is worth unpacking the concept of social license here, as well as understanding why it is difficult to apply it to banking. It refers to the idea that while there are regulations that provide a legal framework for how a business should operate in a country, there is actually a broader dimension of public and political approval on which this rests.
The concept of social license was established in 1997, born in the mining industry, which faced considerable pressure to reduce its negative environmental impacts. In this context, this makes obvious sense: if mining in a country or region becomes sufficiently unpopular, it becomes plausible that a government could curb or even ban it. from new zealand deep sea oil drilling ban can be seen as the loss of a social license that ultimately led to the loss of the actual license to drill more oil.
Why banks don’t need a social license
Here’s the thing, though: there’s no social license to operate a bank. You can ban mining and switch to importing the commodity from elsewhere (whether that’s a net positive for the world is another story). But our whole society is organized through our banking system as a facility for the exchange of goods and services, and while we may resent some aspects of it, we also rely on it to prevent a rapid descent into chaos. Simply put, if you want to live in New Zealand, whether as a private citizen or a multinational, you have no choice but to use the banking system.
(Incidentally, this is part of what drives the libertarian/utopian elements of the DeFi Crowd in crypto – the lure of a new decentralized financial system, beyond the control of banks. Considering crypto’s disastrous year, not to mention the last hair-raising days, that still seems a long way off.)
Currently, one of the great advantages of banks is that it is difficult to leave. All payments made of you’re set up and will need to be canceled and then relaunched, which is a hassle. Any payment made at you need to smoothly access a new account – which is both tedious and vitally important. It’s hard enough for an individual – for an institution, it’s much harder. This may partly explain why the government doesn’t even use its own bank – it’s still with Westpac, even after 20 years of Kiwibank.
This hits one of the biggest hurdles to social license theory applying to banking. Not only is the system impossible to quit, and the big four players largely interchangeable, but moving around is extremely difficult. So even if you were appalled by what was found in the Australian Royal Commission on Banking, it takes both great courage and great commitment to switch banks.
The promise of an open banking system
So, if not the ultimately futile attempt to rescind its social license, what could bring meaningful change to our banking industry? Hours after the Prime Minister’s comments, Newshub had a scoop who could show the way.
It’s called open banking, and it’s become a global movement since it originated in the UK and Europe. It connects your data to portable APIs and theoretically makes switching banks as easy as switching mobile phone providers, while enabling startups to innovate with new technology-enabled services. Telecommunications deregulation is essentially the model – real competition only really arrived with number portability and the creation of Chorus in the 00s.
This means that you stopped letting go of all your relationships and connections when you moved from Telecom to Vodafone, which also enabled the rise of 2Degrees. Today, all of our digital service providers are constantly announcing different plans, competing on price and service – fostering innovation, allowing consumers to choose the brand that matches their values and needs, while controlling profits. The likes of Kiwibank, which differentiates between values and ownership, have long believed this was the only way to significantly disrupt Australia’s well-established big four banks.
Simplicity’s Sam Stubbs, one of the great disruptors of our time, crunched the numbers and thinks open banking would save New Zealanders around $2 million a day. For scale, that’s double what the Commerce Commission thinks supermarkets make excess profit.
This isn’t just an interesting piece of esoteric international politics – Newshub says a government announcement is imminent. The crucial thing is real legislation to force it through, as the idea has been in the air since National took office. In fact, it’s almost exactly five years since then Trade Minister Kris Faafoi has spoken of it as a “huge opportunity”. Today, Faafoi is a lobbyist, and the big banks (which have strong incentives to maintain the status quo) have made no tangible progress in voluntarily introducing open banking to the market.
If the government is able to force the banks open, it would be the biggest change in our financial sector in decades. And do more for the customers of New Zealand banks than the vague threat of a loss of social license ever could.