Key Points

• The Treasury is set to become the chief authority for open banking in Australia under regulatory reforms recommended by Scott Farrell.
• This may help accelerate the growth of open banking. But given the Treasury’s many competing priorities there are also risks to this approach.
• International evidence shows that delivering open banking takes more than putting a legal framework in place. A key factor in the UK’s success relative to other jurisdictions has been the existence of a dedicated entity to monitor open banking deployment, collect performance data, and advocate on behalf of challengers.
• Building on this UK experience, firms in Australia could encourage the Treasury to:
  • establish clear performance metrics, measuring the speed and quality of open banking connections as well as friction in the user journey;
  • ensure that fees for using payments infrastructure and the relevant consumer protection rules do not prevent open banking firms from competing with incumbents; and
  • give Farrell’s proposed payments industry ‘convenor’ an open banking mandate that would involve making recommendations to the Treasury - from a pro-competitive standpoint - about matters such as infrastructure access and delivery timelines.

Foundations for change

2022 is set to be a crucial year for the Australian payments sector thanks to several key policy developments that have taken place over the course of 2021. 

The year started with Scott Farrell’s Report on Future Directions for the Consumer Data Right (CDR), which included a recommendation to prioritise account-to-account CDR payment initiation. In March, the Treasury took over rule-making authority for the CDR from Australia’s competition and consumer agency, the ACCC. At the end of August, the Treasury published Farrell’s Review of the Australian payments system. The Review’s recommendations included an expanded role for the Treasury, a tiered licensing framework for different payment functions, and the integration of this licensing framework with the CDR accreditation regime. 

Finally, in September, the ACCC authorised the merger of Australia’s three domestic interbank payment systems: BPAY, eftpos (Australia’s low-cost debit scheme) and the New Payments Platform (NPP). The system owners had argued this would allow them to better innovate and compete against global payment platforms. The ACCC’s authorisation followed a number of commitments from the system owners to invest in their services, including eftpos and PayTo, a payment initiation service expected to go live on the NPP in mid-2022.

The Treasury takes the baton

Treasurer Josh Frydenberg has yet to publish his response to both Farrell reports. But the direction of travel seems clear. The Treasury’s role in payments policy will expand considerably, embracing a broad new power to designate payment systems based on the national interest as well as rulemaking authority over payment initiation rules under the CDR. In short, the Treasury will become the chief authority for open banking in Australia. 

This leadership role for the Treasury could help accelerate the growth of open banking services. Unlike a regulator, the Treasury should be able to quickly secure any legislative changes needed to improve the open banking regime. The Treasury can also approach open banking and its challenges in a holistic way: unlike a regulator, it is not strictly constrained in its remit nor bound to view the world through the lens of a specific set of regulatory concerns. 

However, the Treasury faces many competing priorities, even within the payments space. This could risk relegating open banking to the background relative to other more politically salient or less technically complex undertakings (and any perceived lack of commitment by the Treasury could in turn reduce open banking firms’ willingness to invest in the ecosystem). These different priorities could also increase the risk that open banking’s pro-competitive ethos is undermined by measures (however well-intentioned) in overlapping areas of policy. 

Open banking is a full-time job

Experience from other jurisdictions shows that delivering open banking takes more than putting a legal framework in place. The UK, the EU and the US have all had open banking laws for years, but the ecosystems in each have developed at different speeds. The US has a growing third-party ecosystem but it lacks a formal framework to make its open banking law effective. Frequent clashes between banks and fintechs have held back progress in this regard. The UK is considered the most advanced jurisdiction. It boasts the largest open banking ecosystem in Europe, with 113 registered firms with a live-to-market open banking product and a 2.5 million-strong user base. By contrast, only 8 accredited data recipients are currently ‘active’ under Australia’s CDR regime.

One of the factors driving the UK’s success has been the existence of a standalone entity charged with open banking implementation. Created by the UK's competition agency, the CMA, as part of its retail banking market order, the Open Banking Implementation Entity (OBIE) has set API standards for banks, monitored their deployment across the banking sector and published aggregate statistics on API availability and response times. It has also acted as an advocate for open banking firms when other regulators proposed interventions that could have challenged their ability to compete¹.

Takeaways for Australia

Having a dedicated agency is neither necessary nor sufficient for open banking to succeed. But its absence means the drive to promote competition and innovation through open banking could lose momentum as regulatory priorities shift, either out of neglect or because other public interventions undermine it. And incumbents can more easily push to retain the status quo when open banking is just one of many objectives. Short of creating a new entity from scratch, what could firms encourage the Treasury to do in order to mitigate these risks?

Establish clear performance metrics

The UK experience shows that users will be reluctant to adopt open banking if third-party providers have unreliable connections, or if customer journeys are high-friction. A key way to measure progress - and identify any emerging issues that may stand in its way - is to collect and publish data. 

In the UK, the OBIE’s monthly data releases cover metrics such as API availability (the percentage of time that third-party apps can connect to bank accounts), the number of successful API calls and payments made, as well as average response times. These releases have helped track progress on delivery of open banking beyond the creation of bank APIs. The Australian Treasury could adopt a similar approach. It could even build on this by adding customer journey metrics, such as the number of windows users must go through to initiate a payment - a source of friction that UK open banking providers have raised as a persistent headache.

Ensure the infrastructure is accessible and low-cost

Open banking payments rely on the interbank infrastructure to work, usually via instant credit transfers. These are typically cheaper to provide than card payments - up to 100 basis points lower - although charges vary greatly by payment amount, merchant and card type. However, open banking firms have limited control over some of the fees involved, as they are not direct participants in interbank payment systems and do not set their wholesale fees. In Australia in particular, the fees third parties pay to make credit transfers using the NPP are not transparent, and some providers have recently raised their charges. It will be important for the Treasury to ensure that these charges do not hinder third-party entry.

Policymakers must also walk a fine line between giving users a reasonably consistent experience across payment methods and ensuring the associated costs are not prohibitive for challenger firms. The significance of this tradeoff was recently highlighted in the UK when the Payment Systems Regulator (PSR) considered introducing purchase protection rules that would make providers responsible for refunding customers when a merchant failed to provide the goods or services as agreed. This was seen as an attempt to replicate ‘chargebacks’, a scheme rule for Visa and Mastercard issuers (i.e., banks). Open banking firms worried that this would create significant additional costs for them and discourage merchants - who find card chargebacks expensive and fraud-prone - from using open banking payments at all.

In the event, the PSR has decided not to intervene while open banking payments are still nascent and instead wait to see if firms provide sufficient purchase protection on their own. In Australia, it is so far unclear what scheme rules will apply to open banking providers. The NPP’s PayTo brochure suggests that its rules will not include purchase protection. As for open banking payments under the CDR, the Treasury’s forthcoming response to Farrell might offer a glimpse of what the rules will look like. While it may be tempting to replicate the structure of card payments, the Treasury should be mindful of unintended adverse impacts on competition, whereby new rules for open banking would reinforce incumbents and limit consumer choice.

Make open banking a priority for the payments industry convenor

In his Review of the payments system, Farrell called for the appointment of a payments industry ‘convenor’, an expert who would work with the Treasury and the private sector on an overarching strategy for the payments ecosystem and act as a link between the Treasury and ecosystem stakeholders. As described by Farrell, the convenor’s role could be shaped by the Treasury’s priorities and change over time to involve different functions as the ecosystem grows.

Among these functions, the convenor could usefully act as an advocate for greater competition through open banking. Making this a prescribed duty would help reduce the risk that the convenor might be captured by incumbents, helping to maintain focus on a key objective that the Treasury may struggle to consistently prioritise among its manifold goals. The convenor might not be formally empowered to set interoperability and access standards like the OBIE has done in the UK, but he or she could make recommendations to the Treasury on issues including infrastructure costs and delivery timelines, with a presumption in favour of competition.

Open banking payments are a real-world test for the CDR

Open banking remains nascent even in the countries that pioneered it. But wherever compelling applications are coming to market they are accelerating user adoption. In Australia’s case, open banking - and payment use cases specifically - could help vindicate the CDR by offering one of the first examples of widespread adoption, in turn growing consumer awareness and setting the CDR up for success as it expands across the economy. The UK experience shows that a mix of transparent performance data, low barriers to entry and active engagement by public authorities on behalf of challengers can mean the difference between success and failure in this vital task.

 

¹The OBIE’s internal challenges, including as regards its corporate governance, have recently come to the forefront (see the October 2021 ‘Investigation of Open Banking Limited’ report). But these are of limited relevance for the higher-level issues that Australia is considering.

 

Related Fingleton reports (co-authored with the Open Data Institute)

Our 2014 report to HM Treasury and Cabinet Office was instrumental in the UK’s approach to Open Banking.

Our 2019 follow-up report for the Open Banking Implementation Entity evaluated progress to date and made further recommendations

 

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