Open banking, stronger Kiwibank key to more bank competition: ComCom

Tuesday, 20 August 2024

The Commerce Commission believes it can rely on greater competition from a beefed-up Kiwibank and private investment in “open banking” services to help bring about more competition in the banking industry.

The watchdog released its final market study report into the banking industry on Tuesday, reiterating the conclusion it came to in a draft report in March that the industry was “a highly profitable, two-tier oligopoly” that lacked aggressive price competition.

Commission chairperson John Small said the work it had done since then “only served to reinforce our view that competition isn’t working as it should in this sector and Kiwi consumers are missing out as a result”.

Small said open banking, which allows new entrants to provide alternative services to the banks, but which often relies on their technological co-operation in opening up their IT systems and customer information to rivals, could be “a game-changer”.

But progress on open banking had been far too slow, he said.

The banking industry and the Government should commit to ensuring open banking was fully operational by June 2026, Small said.

Small said the Government should authorise the commission to set up a steering group, including consumer representatives, to oversee progress towards open banking, with the power to recommend government take action, if progress is not fast enough.

Some submitters had called for the commission to recommend splitting up big banks, but Small said: “We did think about that, but we came to the view that the structure can be changed through the two main levers that we are suggesting.

“One is a growing Kiwibank. It will destabilise the big four as it grows. Secondly with open banking coming in behind. These are new business models,” he said. “Our view is that is more disruptive, and more enduring disruption, and more competitive innovation.”

The report has been released amid speculation the Government will invite the New Zealand Superannuation Fund to invest additional capital in Kiwibank in order to help fund an expansion of the bank, including a push into business banking.

Small said the commission saw Kiwibank providing the sector with the “disruptive maverick” that’s currently missing.

He confirmed the commission was recommending the Government consider how to provide Kiwibank with access to more capital.

In other recommendations, the commission said the Reserve Bank should place more focus on “reducing barriers to entry and expansion in the banking sector” and make sure its regulations did not unintentionally favour large banks.

Reserve Bank governor Adrian Orr has pushed back very strongly against earlier suggestions from the commission that it should make the goal of increasing competition a major factor when it sets regulations for the sector.

The commission has made several recommendations to better “empower consumers”.

The commission had identified high levels of consumer inertia, which was limiting competition.

Small said banks should improve and promote their bank switching service, mortgage providers should be required to present offers in “a readily comparable manner”, and banks should make “basic bank accounts” more widely available.

Banking reformers are concerned that the package of reforms suggested by the commission will not quickly deliver a more competitive, and lower-cost banking system.

Kent Duston from the Banking Reform Coalition said: “The commission has done a very good job of analysing the problem, and putting their finger on the fact that the Australian banks are ridiculously profitable.”

That was underlined by ASB reporting its second-highest ever profit, and paying its chief executive $5 million in a year in which households were struggling with a cost of living crisis.

“The banks are looting something in the order of $3.5 billion to $4b each year in excess profits from our economy,” Duston said.

“Even the best bank lobbyists are going to find this report hard to argue with.”

However, he was concerned the recommendations were not strong enough and feared the outcome would be a repeat of the commission’s supermarket study in 2022.

“The recommendations were too timid and, as history has proven, they have been completely ineffectual … in lowering grocery prices for New Zealanders today.”

While supportive of the open banking goal, the Banking Reform Coalition had asked the commission to recommend splitting up the big banks, a suggestion inspired by the break-up of Telecom in 2011, which helped drive competition in telecommunications.

“The Telecom experience says that’s what works,” Duston said.

Shane Marsh, co-founder of open banking provider Dosh, said: “We know without government direction and enforcement, these recommendations are unlikely to be implemented.”

The baton had now been handed to the Government.

“The question is who is going to pick up that baton and run with it?”

“I believe Nicola Willis and Andrew Bayly are really well-placed to drive this,” he said.

Tex Edwards, founder of Monopoly Watch, said there needed to be real penalties for banks failing to hit the open banking deadline and the ultimate sanction should be splitting the big banks up.

“Splitting the banks should always be on the agenda as a penalty of last resort,” he said.

Sam Stubbs, chief executive of KiwiSaver provider Simplicity, which competes with banks on mortgages, said that if the recommendations were fully implemented it was conceivable mortgage rates could fall by up to 10% over time.

“Mortgages at that level would bring us back to banks making profits in line with their overseas equivalents.

“But this would take a properly beefed-up Kiwibank, and proper implementation of open banking, because the banks have been as good at keeping mortgage rates up as power companies have been at keeping power prices high,” he said.