The Reserve Bank of New Zealand (RBNZ)'s recent decision to grant non-bank financial institutions access to the Exchange Settlement Account System (ESAS) is set to increase competition and drive the integration of artificial intelligence (AI) within the nation's banking sector.
ESAS, a real-time settlement system, currently facilitates financial transactions among banks. Major incumbent banks control access to ESAS, which has been identified as a significant barrier for new market entrants.
The RBNZ's alteration to the ESAS access rules will allow non-bank financial institutions to engage directly with the country's settlement system. This change is part of a broader strategy to reform New Zealand's financial services regulatory framework, aiming to streamline regulations and reduce compliance costs to create a more competitive and innovative environment.
Jovan Pavlicevic, the co-founder of fintech company Emerge, has highlighted that the high capital requirements to become a registered bank, along with restricted access to ESAS, have been significant barriers to entering the banking sector.
Pavlicevic explains that fintech companies require ESAS access to process payments and transfers directly, instead of relying on traditional banks as intermediaries, which tends to increase costs, delay transactions, and limit their ability to provide competitive services.
According to Pavlicevic, these limitations have hindered competition, making New Zealand one of the world's most profitable markets for banks, while leaving local businesses and consumers underserved. "The decision-making body around open banking in New Zealand is largely controlled by the big banks," he observes. "Under the current regulatory model, they have no incentive to accelerate change because the status quo works incredibly well for them." He also notes that the RBNZ's move to change the ESAS access policy is a critical step towards levelling the playing field.
Pavlicevic believes this regulatory change offers a chance to develop an AI-first banking ecosystem in New Zealand. He notes that AI's most immediate benefits include improved fraud detection and enhanced financial management for small and medium-sized enterprises (SMEs).
"New Zealand is 10 to 15 years behind other markets in adopting open banking, and the major banks have little incentive to change that," Pavlicevic comments. He shares that this has led to a system that does not meet modern business needs, emphasising the lengthy process of opening a business bank account in New Zealand compared to other countries.
Pavlicevic points out that while financial technology is advancing rapidly worldwide, with AI driving real-time fraud prevention and seamless integrations, New Zealand's SMEs still face outdated systems. "Kiwis were once pioneers in fintech, introducing EFTPOS in the 80s—but that's where we stayed," he remarks. He highlights the ongoing challenges faced by small business owners in New Zealand regarding bank interactions.
Furthermore, Pavlicevic stresses the potential for AI technology to significantly reduce the multi-billion dollar annual fraud burden on New Zealand's small businesses. Pavlicevic indicates that, in contrast to traditional banks adapting AI to their systems, fintechs like Emerge aim to embed AI deeply within their platforms.
"As a result, New Zealand has the opportunity to become a world leader in the development and adoption of AI-based banking models—creating a smarter, faster, and more transparent banking experience from the ground up," Pavlicevic suggests. He elaborates on potential AI applications, including AI-powered facial recognition and automated fraud prevention measures, capable of flagging unusual spending patterns.
Despite technological advancements, Pavlicevic points out that significant regulatory and financial hurdles remain for new banking entities. He draws a comparison with the UK, where only GBP £1 million in capital is required to establish a banking entity, unlike the NZD $30 to $50 million required in New Zealand.
"The best way to be a registered bank in New Zealand is to already be a bank," Pavlicevic states, noting the financial barriers combined with the control of settlement systems pose significant challenges for new competitors. He emphasizes that overcoming these constraints could significantly enhance AI-driven banking innovation, improving areas like reconciliation time, expense tracking, and financial decision-making for businesses.
