Lack of competition in banking hurts consumers: Commission
Thursday, 21 March 2024
Banks need consistent competition to provide better outcomes for consumers, the Commerce Commission says.
It said the current structure had led to sustained high levels of profitability, compared to banks in other countries.
There had not been any meaningful new competition since Kiwibank launched, it said.
A lack of competition in personal banking means New Zealanders are missing out, the Commerce Commission says.
It has released its draft report as part of a market study into the personal banking sector.
It found that an apparent focus by the big four banks on maintaining their profit margins had led to underinvestment in core technology platforms, low levels of innovation, market shares that did not move, and sustained high levels of profitability.
KPMG’s latest financial institutions performance survey found the banks made a combined net profit after tax of $7.21 billion in 2023, up 0.28%.
Commerce Commission chair John Small said ongoing disruption needed to be “baked in” to address the lack of competition for the major banks, which meant New Zealanders were missing out.
“In a well-functioning banking market, we’d expect to see strong competition driving innovation and choice for customers, rather than the price-matching strategies we see here in New Zealand, which result in very stable market shares.
“The lack of a disruptive force in our banking market means competition between the majors is sporadic and not sustained.”
He said there was a two-tier structure, where the top tier of ANZ, ASB, BNZ and Westpac had sustained high levels of profitability compared to banks around the world.
Kiwibank was stuck in the middle, with other banking providers below.
The commission’s report said no new entrants had meaningfully increased the competition faced by the banks since Kiwibank was established in 2001.
“Kiwibank imposes some constraint on the major banks but currently lacks the capital backing to consistently drive stronger competition in the market”
Small said while there were periods of relatively intense competition between the major banks, this tends to be linked to events like changes to interest rates triggering price-matching, rather than price-beating behaviour.
“We have seen a willingness to match (rather than beat) each other’s offers (for example, discretionary discounts for home loans) to maintain market share,” the report said.
Small said disruption needed to be ongoing to keep the competitive pressure on.
The report recommended measures to improve the capital position of smaller banks and Kiwibank, including Reserve Bank potentially reviewing its prudential capital settings to ensure that they were competitively neutral and smaller players were able to compete.
It also suggested the government consider increasing Kiwibank’s access to capital, and converting it into a disruptive competitor.
The commission also highlighted open banking, something which has been talked about in the banking sector for the past decade, as a key part of improving outcomes for consumers.
“Steps are underway to create an open banking eco-system that will enable fintechs to compete, but progress to date has been too slow compared to Australia and the UK.”
It said this had the potential to revolutionise banking over the medium to long term but fintechs were facing severe barriers.
The report recommended setting a clear deadline to have open banking fully operational by mid-2026.
The recommendations also included the introduction of better tools and services to help consumers get the best deal, an enhanced switching service, and the introduction of a basic bank account service that was accessible to any New Zealander.
Consultation on the report starts on Friday and closes on April 18.