How to bank better: What competition study reveals

Saturday, 23 March 2024

The Commerce Commission has revealed the size and prevalence of mortgage discounts that customers can expect if they push the right buttons.

The Commerce Commission’s deep dive into the banking industry provides useful information for anyone wanting to get the best deal from their bank.

The insights are scattered throughout the draft market study that it published on Thursday and which it hopes may help usher in a new era of stronger competition.

Unsurprisingly, the commission found that it pays to be an “engaged customer”, but if you thought getting the sharpest deal on offer would be easy, think again.

The ‘discounts’ banks will offer

The commission revealed banks offer “discretionary discounts” to about 50% to 60% of their mortgage customers.

The discounts on offer from ANZ, ASB, BNZ, Westpac and Kiwibank can change frequently as they are set by pricing committees that in some cases meet each week, as well as in response to major events, such as changes in the official cash rate, it said.

But it reported that home owners who negotiated a discount on their mortgage could commonly secure a 10 to 20 basis point reduction on their interest rate.

For context, a customer could expect to save about $10,000 from a 10bp rate discount on a $500,000 loan repaid over 25 years.

Discounts were rarely more than 50 basis points, the Commerce Commission found.

But senior bank staff commonly had more discretion to offer larger discounts than more junior employees, it reported, suggesting customers may need to speak to more than one bank employee to be confident they are getting the best deal.

The commission found that discounts were not only offered to borrowers.

“Engaged consumers appear to be able to get better term deposit rates by comparing and negotiating with providers,” it also found.

Kiwibank most often has the cheapest advertised one-year loan rates, the commission says, but that doesn’t mean it will always have the best deal.

In some cases front-line bank staff had the discretion to immediately offer better deposit rates, within set limits, it said.

What if you switch banks?

If negotiating with your existing bank doesn’t result in a deal you are happy with, there is always the option of switching banks.

The commission found that 62% of bank customers it surveyed who had switched banks over the past three years found that to be an easy process.

But it found an alarming 8% reported it had been difficult, with 21% indicating their experience was somewhere in between.

One hassle to be aware of is the need to manually update payment card details in any services where an old bankcard has been on file. That could include “apps, websites, charities and shopping services”, the commission noted.

It observed that as of August, half of new home loan customers were splitting their home loans into separate tranches with different fixed terms.

But it points out that can make it harder for those customers to transfer their loans to another bank without incurring fees, in effect complicating their ability to shop around.

That could be a reason for avoiding split loans.

Commerce Commission chairperson John Small has suggested a range of reforms that could improve bank competition, but there is no big stick in sight.

Payments NZ operates a switching service that can help customers migrate some of their payment arrangements.

But the commission cautioned that only provided “limited support” to consumers switching their main transaction account.

Who to switch to?

It would be handy if the commission’s market study suggested one bank consistently offered the best deals but, sadly, no.

It found that when it came to floating-rate mortgages, Kiwibank and ANZ most often had the lowest headline rates, while ASB’s rates tend to be in the middle of the pack and BNZ’s and Westpac’s rates higher.

When it came to more popular one-year fixed-term loans, the rankings were more evenly distributed, though it said Kiwibank most often had the lowest headline rate.

BNZ appeared to be most focused on offering the best two-year fixed-term loans, it said.

Discretionary discounts and other incentives offered by banks, such as “cashbacks”, complicate the equation further.

The bottom line is the commission found “the lack of consistency in relative prices and the sporadic nature of competition” meant customers couldn’t have confidence that any particular bank would best serve their home-lending needs into the future.

Even trying to get the best deal on offer at any particular moment in time appears fraught with difficulty.

The commission warned discretionary discounts and incentives such as cashbacks meant customers could only be certain of the details of any offer — including the interest rate — after going through “a full application process” with each bank.

Regulation may be needed to force banks to present their offers in a way that makes it easy for consumers to compare offers across different providers, it said.

A word of caution on mortgage brokers

Given that, it seems unsurprising many people to turn to mortgage brokers to help them pick their loan provider.

Commerce Minister Andrew Bayly has been cautious in setting expectations for “open banking“.

But the commission made clear it had concerns their advice could be influenced by a complicated range of incentives banks offered brokers for putting customers their way.

Depending on the bank, those incentives could include a flat fee or commission of between 0.5% and 1% on the value of each loan and a “trail” commission totalling 0.15% or 0.2% of the value of the loan while it was still active.

The upfront fees paid to brokers could in some cases be subject to a “clawback” by the bank if the borrower later jumped ship, making it less attractive for them to later switch.

Will the commission’s proposed reforms advantage Kiwibank and smaller banks?

If that was the case, then switching to Kiwibank or one the smaller competitors, or choosing them when setting up a first bank account, might seem more appealing.

But it may be too soon to tell.

The Commerce Commerce made clear it believed Kiwibank had the biggest potential to disrupt what it described as a highly profitable oligopoly among the big four Australian-owned banks.

It has suggested the Government consider putting more capital into Kiwibank to ensure it can compete more strongly.

But Commerce Minister Andrew Bayly has indicated that the Government’s biggest concern is whether businesses are being well served by the banks.

So if the Government did put more capital into Kiwibank it is possible that may be earmarked to expand its business banking operation, rather to support its personal banking arm.

The commission has also suggested a range of regulatory tweaks that might make it easier for Kiwibank and smaller banks to lend more money at a lower cost with less capital.

But those proposals raise some tricky questions for their regulator, the Reserve Bank.

For example, the commission has argued that the big four banks should be subject to one tighter rule because the consequences of any one of them falling over would be huge for the economy.

But it also appeared to argue that smaller banks should not face any additional burden funding the forthcoming bank deposit scheme even if they had a higher risk of failing depositors.

It does not yet appear certain where policies in this area will land.

Do I need a bank at all?

The commission appears hopeful a new breed of financial services firms, or “FinTechs”, will harness technology to help consumers bypass some bank services and lower their costs.

Examples are businesses such as Wise and Revolut that travellers can already use to slash the fees and wide margins banks often apply when processing purchases in foreign currencies.

But the mass take-up of such services is dependent on the success of open-banking reforms that make it easier for FinTechs to integrate with the existing banking system and offer a seamless service to customers.

The commission warned New Zealand was “falling behind the rest of the world” when it came to implementing open banking.

It has called on the Government and banks to work together to ensure a range behind-the-scenes changes need to support open-banking services are in place by June 2026.

But as yet, the commission doesn’t appear to be waving any big sticks to guarantee deep or rapid progress in this area.

Bayly may have set expectations appropriately when he suggested open banking would not be a panacea, but offer the prospect “over time of making elements of banking subject to greater competition”.