Fintechs, or financial technology companies, are touted as a threat to banks and a way to boost banking competition. But should the big banks be quaking in their boots?

Just how much of a threat are fintechs to New Zealand's big banks?

Through the Commerce Commission's market study into personal banking services, the parliamentary banking inquiry and push to ramp up open banking, they're touted as key players in boosting banking competition.

Something banks have long been willing and able to do is acquire, or partner with, threats to their business. NZ's big four - ANZ NZ, ASB, BNZ and Westpac NZ - are no exception. We're seeing this again with fintechs, or firms that use technology that aims to improve and automate the supply and use of financial services.

Last November BNZ bought fintech BlinkPay. An early mover in open banking, BlinkPay enables fast payments directly from a customer's bank account to a merchant's bank account. Then there's Akahu, which offers an application programming interface ( API) for developers and is almost 37% owned by Westpac NZ offshoot Red Bird Ventures.

And this week Westpac NZ and Dosh announced a deal through which Dosh enters the home loan market with loans approved, issued and managed by Westpac, but promoted by Dosh.

Much has been made, by both the Government and Commerce Commission, of the potential of open banking to increase banking competition. Open banking, or open bank data, provides third-party financial service providers access to consumer banking, transaction, and other financial data from banks through the use of APIs.

Keeping in mind that, as of December 31, the big four banks had combined total assets of $604 billon, and Kiwibank, the next biggest NZ bank had total assets of just under $40 billion, where does a fintech wanting to be part of the open banking revolution really need to go to access customers? To the big four of course, because given their scale, they have the customers fintechs crave.

They do, however, have to pay fees for the privilege. And as Parliament prepares to pass the Customer and Product Data Bill, regulations to formalise what fees financial institutions are able to charge for providing customer data to third parties are expected. Yes, that's banks charging fintechs fees to access banks' customers' data.

Another area where fintechs work with entrenched incumbents is with global payments behemoths Mastercard and Visa. These two are also adept at embracing new threats to their business, enabling them to clip the ticket when new payments technologies and services emerge. Visa calls this its "open partnership model."

In a submission last year Dosh, which is 8.45% owned by Avanti Finance, told the Commerce Commission forcing Mastercard and Visa interchange fees down further would impact payments innovation. 

Interchange fees are fees paid by the merchant's acquirer/payment service provider to the customer's card issuer for each transaction on the Mastercard and Visa networks. According to the Commerce Commission, these fees form a significant portion of the merchant service fee and flow through to consumers directly via surcharging, or indirectly through the higher cost of goods and services.

"There is a real cost of providing issuing and payment services. Issuers such as Dosh must be able to recoup these costs in order to further build out innovative, value adding services for consumers. Reduced interchange revenue will likely decrease innovation and competition in banking," Dosh said.

This argument, that interchange fees need to remain in place as a source of revenue for fledgling fintechs' striving to offer competition to established banks, is one the Commission Commerce has accepted. 

In terms of international fintechs active in NZ, money transfer company Wise wants Parliament's banking inquiry to recommend the Government mandate price transparency for international money transfers. The United Kingdom-based Wise specalises in an area where NZ's major banks are potentially ripe for the picking, and where consumers would be advised to shop around given myriad options. Here banks appear to benefit from customer inertia.

Revolut, another UK-based fintech, has - like Dosh and Debut - publicly declared a desire to obtain banking registration from the Reserve Bank. In a NZ context one area Revolut is notable is that it offers trading in crypto-assets, something none of the NZ banks do.

Against a backdrop of pressure from the Government and Commerce Commission, the Reserve Bank is proposing to reduce the minimum capital requirement for entities taking deposits from the public from $30 million to between $5 million and $10 million, and broaden the criteria for use of the word "bank." Both steps would be good news for fintechs.

According to the Commerce Commission's market study, fintechs can face challenges getting a business bank account, securing access to funding, and with regulation such as anti-money laundering compliance.

However, fintechs have certainly made their voices heard through their lobbying efforts. The New Zealand Council of Financial Regulators even has an official forum for fintech-related regulation. This it describes as; "a single point of regulatory support and information for the fintech sector, which can consider regulatory enquiries directed at any of our member agencies."

Some at the country's long established non-bank deposit takers being credit unions, building societies and deposit taking finance companies, and even the smaller banks, must look on with envy at the sympathetic hearing fintechs appear to get from regulators and politicians.

Whilst fintechs do pose a challenge to banks, the big NZ bank-fintech relationship feels more like a partnership than a rivalry to me.

The big banks offer fintechs access to their massive customer bases, and in the likes of the Westpac NZ-Dosh relationship, funding for home loans. Fintechs offer banks nimbleness and zippy tech. They can help banks improve their services.

When you hear things like ANZ NZ's admission that limitations with its IT system means it can only change the interest rate on its Serious Saver product on the first day of the month, you realise how attractive some of the fintech tools must look.

With many involved at fintechs having a background at banks or in working with banks, they understand big banks' strengths and weaknesses well. Partnering offers them a chance to grow their businesses, and selling a stake or the whole business, offers an opportunity to take some money off the table or cash up and move on.

My sense at the moment is the big NZ banks would really need to mess up badly to have their lunch completely eaten by fintechs. And even over time, the big banks will probably still be able to eat most of their own lunch. Those who adapt to a changing world might even be able to add to their menu.

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