Overview
This Payments Update provides details on the regulatory and industry-led initiatives being considered and pursued simultaneously to facilitate open banking, and looks at the Commerce Commission's (Commission) continued work in ensuring reasonable merchant surcharging (and the Commission's powers to regulate in this space).
Open Banking – Regulatory and industry-led initiatives
Open banking refers to a system where customers can enable third party financial service providers to have access to their consumer banking, transaction, and other financial information. Open banking could therefore enable new payment methods and allow financial information to be used in new ways, such as to aggregate accounts, and create improved budgeting and personal finance tools. Open banking is usually facilitated through the use of APIs which are a set of routines, protocols, and tools for building software applications that specify how software components should interact (or "how two computer applications talk to each other"). Open banking is intended to increase competition and innovation in banking, payments, and financial data services.
As at Q1 2023, there are several initiatives being pursued simultaneously that facilitate open banking, namely:
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The Commission's continued work on the regulation of payments between bank accounts. On 22 February 2024, the Commission announced that it intends to take steps to regulate payments between bank accounts (the "Interbank Payment Network") under the Retail Payments System Act (RPS Act) on the basis that regulation would support a thriving Application Programming Interface (API) enabled ecosystem that will deliver new payment products and services that better meet the needs of merchants and consumers.
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Payments NZ's authorisation application. The Commission is also considering Payments NZ's application seeking authorisation to permit all providers of APIs (eg financial institutions that issue bank accounts to customers who want to use standardised APIs developed using Payments NZ's API Standards) to enter into arrangements with third parties that want to use standardised APIs developed using Payments NZ's API Standards, which could otherwise breach the Commerce Act 1986.
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The CDR regime that would be implemented by the Consumer and Product Data Bill.
Update on Interbank Payment Network regulation – a step closer to open banking?
In the Commission's open letter on its Interbank Payment Network work programme (available to read here), the Commission sets out:
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That, following initial consultation in Q4 of 2023, it has decided to move to the next stage of deciding whether to recommend the designation of the Interbank Payment Network under the RPS Act to the Minister of Commerce and Consumer Affairs;
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Its current view on the minimum requirements to enable an API enabled payments ecosystem to develop which relate to the API programming interface, partnering, participation, and confidence requirements; and
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Its expectations for Payments NZ, the API Centre, and the five largest banks in New Zealand on the industry behaviour and actions to support the development of an API-enabled payments ecosystem.
The Commission notes that although some banks have recently developed APIs and there has been some limited partnering with third party payment providers, it has observed a similar period of momentum in the past and has seen it stall. The Commission states that it does not currently have confidence that, without direct regulatory powers to intervene, industry alone will deliver the minimum requirements to enable an API enabled payments ecosystem to develop. Therefore, it considers that the ability to use its regulatory powers makes it more likely that the industry will work to develop the necessary infrastructure and processes so that the Commission does not need to take further regulatory action. The Commission's current thinking appears to be that pursuing the designation of the Interbank Payment Network now would ensure the Commission is best positioned to use the regulatory tools available for designated retail payment networks in the future, thereby acting as an incentive for industry to deliver on their commitments and advance open banking in New Zealand.
The Commission has signalled that a public consultation paper on the proposed scope of the designation and further details on the Commission's reasons for designation will be published in the coming months. How the Commission balances consideration of Payments NZ's authorisation application and the CDR regime during its Interbank Payment Network consultation will be of interest. We discuss Payments NZ's authorisation application and the CDR regime further below.
Payments NZ seeks authorisation to overcome competition law hurdles
The Commission's open letter comes after Payments NZ made an authorisation application to the Commission on 7 December 2023 for API providers to enter into an arrangement to provide services to third parties wishing to use standardised APIs developed using Payments NZ's API Standards. The Commission's authorisation process is available for arrangements which may contain a cartel provision or result in a substantial lessening of competition.
Payments NZ is seeking authorisation for two distinct but interrelated activities that are intended to facilitate open banking:
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The joint development of an accreditation scheme for third parties and the creation of default standard terms and conditions on which API providers and third parties who meet the accreditation criteria would contract for the use of APIs; and
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The application of the accreditation scheme, the ability for API providers to agree to contract on the default standard terms and conditions, and the ability for API providers to apply the default standard terms and conditions, unless an alternative agreement is made between the API provider and a third party.
The RPS Act enables the Commission to issue network standards for designated networks relating to information disclosure, pricing, and access requirements. As such, there is the potential that a designation of the Interbank Payment Network and the subsequent issuing of network standards (and / or the giving of a direction on network rules) could achieve some of what is envisaged in Payments NZ's authorisation application (namely point 1 above).
The Commission acknowledges the Payments NZ's authorisation application in its open letter but describes the outcome of that process as "unknown". In light of this, the Commission expects the banks' existing bilateral partnering processes and negotiations to continue until a better alternative is developed. The intent of the Payments NZ's authorisation application is to establish a multilateral model to remove the need for a bilateral model. Payments NZ considers that the bilateral model is inefficient due to the lack of consistency and transparency in respect of the criteria that third parties must meet, and the terms on which API providers and third parties contract with each other. It is noted in Payments NZ's authorisation application that these barriers may prevent API providers and third parties from entering into partnering arrangements and prevent Payments NZ from achieving the objectives of the API centre. Notwithstanding this, the Commission has stated that it does not want progress to stall on new, or in-progress, bilateral partnering agreements.
It appears that the Commission anticipated a potential "dual track" approach involving both regulatory measures under the RPS Act as well as an authorisation process under the Commerce Act. In the Payments between Bank Accounts Request for Views Paper (available to read here) the Commission stated:
We consider the benefits of collectively developing fair and reasonable API access agreement terms and conditions for banks to partner with payment providers are potentially significant. Therefore, we encourage industry to seek to address its competition law concerns by engaging with us to explore the issue further, including any options available to mitigate these concerns where appropriate.
What about the future CDR regime?
The CDR regime that would be implemented by the Consumer and Product Data Bill will also be of relevance to the Payments NZ's authorisation application and any regulatory measures under the RPS Act. Alignment between the proposed API arrangements and the CDR regime will be of critical importance to the banking sector. The Government released an exposure draft of the Customer and Product Data Bill last year, which provides a high level framework for a proposed CDR. There appear to be some overlapping concepts between Payments NZ's authorisation application and the CDR, including the proposed accreditation scheme. It will be important to ensure that any requirements, including accreditation, for participants in the API ecosystem are consistent with those developed under the CDR regime - both to support the banking sector's compliance with the CDR when it comes into force and to avoid unnecessary compliance costs for CDR participants.
Merchant surcharging still a priority for the Commission
The Commission is continuing its public campaign on merchant surcharging to ensure that surcharges are in line with the cost to the merchant of accepting a particular type of payment. As the Commission has previously stated, where it observes that merchants are failing to amend excessive or unreasonable surcharges, or where there are systemic and entrenched issues in respect of surcharging that stem from payment service providers, it will consider the options available under the RPS Act.
Please see our previous update which provides a breakdown of the Commission's guidance on merchant surcharging. Where the Commission believes that surcharges are unreasonable, it has the power under the RPS Act to issue merchant surcharging standards to ensure that surcharges for retail payment services are no more than the cost to the merchant of the payment service. These standards may apply to any merchants that use payment services for retail payments (that is, the retail payment network in question does not need to be designated for these standards to apply).
If you have would like to further discuss the topics raised above, please get in touch with one of our experts.
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