The idea of open banking is back on the table in light of Westpac and ANZ’s multibillion dollar earnings announcements. If it actually happens, it would be the biggest change to our finance sector in decades, writes Duncan Greive.

The prime minister made her feelings perfectly clear. “We’ve seen them consistently taking record profits,” Jacinda Ardern said, in response to Westpac and ANZ’s multibillion dollar earnings announcements. When asked whether she thought there was something wrong with that occurring against the backdrop of a broader cost-of-living crisis, she replied unequivocally: “yes”. Central to all this was a question of her own. “Are they demonstrating social licence and commitment to the communities by taking the profits that they are?” 

It’s worth unpacking the concept of social licence here, along with a sense of why it’s hard to apply it to banking. It refers to the idea that while there are regulations which provide a legal framework governing how a business must operate in a country, there is in fact a broader dimension of public and political approval upon which that rests. 

The social licence concept was first coined in 1997, born in the mining industry, which was facing considerable pressure to reduce its negative environmental impacts. In this context it makes obvious sense: if mining in a nation or region becomes sufficiently unpopular, it becomes plausible that a government might curb or even ban it. New Zealand’s deep sea oil drilling ban can be seen as the loss of a social licence that ultimately led to the loss of the actual licence to drill more oil. 

Why banks don’t need a social licence

Here’s the thing, though: there is no social licence 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 a different story). But our whole society is organised through our banking system as a facility for trading goods and services, and much as we might resent aspects of it, we also rely on it to prevent a swift descent into chaos. Put simply, if you wish to live in New Zealand, whether as a private citizen or multinational corporation, you have no choice but to use the banking system. 

(Incidentally, this is part of what’s driving the libertarian / utopian elements of the DeFi crowd in crypto – the allure of a new decentralised finance system, beyond the banks’ control. Given crypto’s disastrous year, let alone the past few hair-raising days, that still feels a long way off.)

Currently one of the big advantages banks have is how hard it is to leave. All payments made from you are set up and would need to be cancelled and then revived, which is a hassle. Any payments made to you need to come smoothly across to a new account – which is both a hassle and of life-or-death importance. This is hard enough for an individual – for an institution it’s orders of magnitude harder. Perhaps this partly explains why the government doesn’t even use its own bank – it’s still with Westpac, even after 20 years of Kiwibank.

This gets at one of the biggest barriers to the social licence theory applying to banking. Not only is the system impossible to leave, and the big four players largely interchangeable, but moving is extremely difficult. So even if you were appalled by what was found in the Australian royal commission into banking, you have to be both very brave and extremely committed to change your bank.

The promise of open banking

So if not the ultimately futile attempt to cancel its social licence, what might provide meaningful change to our banking sector? Within hours of the prime minister’s comments, Newshub had a scoop which might point the way. 

It’s called open banking, and has become a global movement since originating in the UK and Europe. It plugs your data into APIs which are portable, and theoretically makes changing bank as simple as changing mobile phone provider, while allowing startups to innovate with new services built on top of the technology. The deregulation of telecommunications is essentially the model – true competition only really arrived with number portability and the creation of Chorus in the 00s. 

That meant you stopped leaving all your relationships and connections behind when you switched from Telecom to Vodafone, which also enabled the rise of 2Degrees. Now all our digital service providers persistently advertise different plans, competing on price and service – fostering innovation, allowing consumers to pick the brand which aligns with their values and needs, while also keeping profits in check. The likes of Kiwibank, which differentiates on values and ownership, has long believed it to be the only way the entrenched big four Australian-owned banks might be meaningfully disrupted.

Simplicity’s Sam Stubbs, one of the great disruptors of our age, has run the numbers, and thinks open banking would save New Zealanders around $2m a day. For scale, that’s twice what the Commerce Commission thinks supermarkets are taking in excess profits.

This isn’t just an interesting piece of esoteric international policy – Newshub says an announcement from the government is imminent. The crucial thing is actual legislation to force it through, because the idea has been in the air since National was in power. In fact, it’s almost exactly five years since then-commerce minister Kris Faafoi talked it up as a “massive opportunity”. Now Faafoi is a lobbyist and the big banks (who have a powerful incentive to retain the status quo) have made no tangible progress on bringing open banking to market voluntarily.

If the government is able to bend the banks to open up, it would be the biggest change to our finance sector in decades. And do much more for New Zealand’s bank customers than the vague threat of a loss of social licence ever could.