What is open banking, how does it work and what are the risks?

Explainer: If you've heard talk of open banking in recent weeks, you might have wondered exactly what it is.

It's been a topic of discussion in the finance sector for years, and is often touted as a way that New Zealanders could get a better deal on their banking.

But how does it really work?

What is open banking anyway?

Basically, open banking means data is shared easily between banks and other financial services providers.

This means transactions can happen more freely and it's easier for customers to use services from different places.

The exchange of information happens via application programming interfaces (APIs).

Payments NZ has been developing API standards with the industry.

At the moment, there are three key standards to be aware of. The payment initiation API allows customers to set up payments from their accounts through a website, app or registered third-party.

The account information API allows third-party users to access specific information about the customers' account, and the event notification API allows third parties to be told about changes in the status of a customer's consent - such as when they no longer want their information shared.

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Why do we want this?

The hope is that it will create more competition because it will be easier for consumers to shop around for better products and services.

Commerce and Consumer Affairs Minister Scott Simpson said it could help develop more useful budgeting tools, options for fast mortgage comparisons and new payment methods.

People might be able to receive more accurate information from comparison sites, using their actual data and could switch banks almost instantly.

Mortgage applications could be a lot easier if the data could be automatically gathered in one place.

"Budgeting becomes easier too. Instead of trawling through statements, secure open banking tools can highlight spending patterns, help you stay on top of bills, and identify ways to reach your savings goals," Simpson said.

"Small businesses will also benefit from more choice in financial management and invoicing tools, helping them get paid faster and access innovative, lower-cost payment solutions."

Claire Matthews, a banking expert at Massey University, said a lot of the innovations were already available. BNZ's Payap was an example of new payments systems for businesses, Volley allowed people to make payments securely, Dosh and Revolut were fintechs coming into the market and SortMe and BudgetBuddie were offering easier personal financial management.

Payments NZ noted that Volley recently partnered with Givealittle as a payment option.

"Seeing New Zealanders embrace open banking so quickly through Givealittle has been really encouraging. Donations are such a powerful human expression of generosity, and people are likely to give more when the process is simple, fast, and trustworthy," Jack Callister, Volley co-founder said.

"With Volley, all someone needs to do is tap or scan a QR code, approve the payment in their banking app, and they're done. Making payments easy and secure is exactly what open banking is designed to achieve."

What's open banking been used for overseas?

Open banking is used in a number of ways overseas.

Australian customers of Sharesies allow it to access their bank accounts and round up every transaction to a pre-selected amount and invest the difference.

In the UK, Little Birdie is a subscription and bill management app that spots unused subscriptions. The Snoop budgeting app helps provide information on upcoming bills so people know how much they need to set aside.

What's changed now?

From 1 December, regulations took effect that mean ANZ, ASB, BNZ and Westpac are required to have open banking systems in place.

The regulations require that data can only be shared with the customer's explicit authorisation, and all businesses that access the information must be accredited by the Ministry of Business, Innovation and Employment (MBIE).

MBIE is now accepting applications from organisations wanting to become accredited data requesters. Accredited data requesters will be identified with MBIE's "trust mark for accreditation".

What concerns are there?

A big concern has been how slow New Zealand has been to adopt open banking.

Consumer NZ investigative writer Ruairi O'Shea said the organisation was a big fan of open banking technology.

"Open banking puts consumers - not their banks - in charge of who can access their financial information, opening the door for third parties to provide a range of new services from budgeting tools and subscription management apps, to being able to instantly demonstrate the affordability of a loan.

"As consumers are better able to understand their money, and to shop around for services, banks will be forced to up their game if they want to maintain customers, leading to greater competition and better service.

"Consumers in other jurisdictions have had access to open banking for years, and improved financial wellbeing as a result - New Zealanders deserve this too."

O'Shea said open banking was safe.

"Service providers must meet security requirements to be accredited to provide open banking services. The risk is that consumers, who are now being told that it is okay to give new businesses access to their financial data, could be tricked into providing access to scammers. If you have any doubts about open banking, or a business providing open banking services, contact your bank before providing access to your financial information."

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