Commerce Commission opens banking competition probe

Wednesday, 21 June 2023

The Commerce Commission says it has now opened a market study into competition in the retail banking industry, and the result could be anything from a “clean bill of health” to recommendations for change to enhance competition.

On Tuesday, the Government announced it was ordering the commission to probe competition in retail banking following months of mounting anger over high bank profits even as households struggled with a cost of living crisis.

The market study would examine how well competition was working and consider options for enhancing competition for the long-term benefit of households, said Commerce Commission chairperson John Small.

“This sector is hugely important to New Zealanders and the broader economy,” he said. “We know there is public interest in seeing how competition is delivering for consumers in accounts, lending, and deposit-related products and services, and whether people can switch providers easily.

“We also know that pretty much every household in New Zealand has a bank account and debit card, nearly 60% have a credit card, and the residential mortgage market accounts for $346 billion in overall lending,” he said.

The study would assess whether there were barriers or behaviours that were preventing competition from driving providers to offer the quality and services consumers should expect.

Small said the commission had requested a 14-month period for the market study from the Government, so it would be able to do a thorough job.

The commission had already begun arranging interviews with big bank chief executives, he said.

In around a month, the commission would publish a preliminary issues paper, and invite public submissions, Small said.

The focus would be on personal banking services like home loans, credit cards, overdrafts, and deposit accounts.

There would be less of a focus on financial services such as KiwiSaver, wealth management, insurance, and foreign exchange, he said.

However, it would examine bank financial metrics like profits, which could indicate where there were competition issues, Small said.

SME banking would be largely out of scope, except where it related to personal banking services, he said.

“This competition study will be a first for New Zealand, providing a deep and focused analysis of how consumers’ diverse needs for personal banking services are being met,” small said.

He defended the value of market studies, and said the grocery sector and fuel market studies was leading to competition-enhancing change.

“It’s fashionable in some quarters to denigrate the market studies programme, or aspects of it,” Small said.

Just this week ACT’s associate finance spokesperson Damien Smith said the calling the market study was an act of political populism attacking the private sector.

“Just as Labour publicly flogged the petrol companies in the election year of 2020, now it’s the banks’ turn to get a dose of election year populism. What will it achieve? Almost certainly nothing except more red tape and higher borrowing costs for New Zealanders,” he said.

But Small said: “When I look back on the first three studies, I do so knowing that none of these sectors had been subject to serious competition policy analysis in 30 years.”

They were studies on the fuel market, the grocery market, and building supplies.

“Our market studies aren’t a quick fix. They are intended to take a detailed look at a sector, and if there are issues, propose remedies that will bring about fundamental change with sustainable, enduring benefits, and not just for Kiwi consumers.”

It was also about ensuring a level playing field for all market participants, and ensuring new entrants to markets could bring competition.

“All that benefits consumers. That sort of change doesn’t happen overnight,” Small said.

The commission would publish its market study process report on Thursday, setting out its process and timetable.

Its final report could include recommendations for enhancing competition in the retail banking sector, but they would be non-binding, he said.

However, the Government must respond within a reasonable time, he said.