Personal banking is a two-tier sector with limited competition and no disruptive forces to drive consumer benefits. That's according to the first study into Aotearoa's personal banking services, led by the Commerce Commission.
The study found banks have an apparent focus on maintaining profit margins, resulting in ongoing underinvestment in their core technology platforms.
It said there are also low levels of innovation, stable market shares, and sustained levels of profitability.
And it found customers can struggle to access basic bank accounts, as well as those who have difficulty understanding banks' terms and conditions, interest rates, and comparing products and services are disproportionally affected.
The commission heard that some Māori can be disproportionately impacted by factors affecting other consumers too.
Commerce Commission chair John Small said an "ongoing disruption needs to be baked in" to address the lack of obvious and aggressive competition for the major banks which is leaving Kiwi consumers out.
The Commerce Commission study found banks have an apparent focus on maintaining profit margins, and the sector has a lack of disruptive forces to drive change. (Source: Breakfast)
1News business correspondent Katie Bradford said the findings "probably won’t come as a surprise to anybody", and there is a lot for the Government to consider from the report.
“There has been so much attention on it… but it is something that affects everyone.”
Bradford said the pressure “will be on” both the banks and the Government to see how they react, and suggested it will be interesting to see if the banks admit any wrongdoing.
“[The banks] have always been quite defensive on those big profits we see them make.”
NZ banks enjoying high profits
Compared to overseas, Small said New Zealand's banks have a status quo of a "stable two-tier oligopoly", where they enjoy sustained levels of high profitability compared to their global peers.
"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."
Small said while there are 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.
Collective profits in the banking section rose 0.3% to a record $7.21 billion in 2023. There were increases in net interest income and margins, but also a lift in operating expenses, RNZ reported earlier this month.
Draft recommendations
Small said the commission's draft recommendations are designed to promote enduring competition.
A particular issue related to access to capital to build housing on Māori freehold land. The draft recommendations include measures that seek to address these concerns.
It urged the industry to improve the capital position of smaller providers and Kiwibank, accelerate progress on open banking, ensure the regulatory environment better supports competition and empower consumers to better access the benefits of competition.
Watson agreed, saying that discussion about the regulatory and legislative environment was important.
"There’s always a balance regulators and legislators have to strike between stability and safety of the financial system and the benefits to bank customers of healthy and strong competition," she said.
"We look forward to discussions with the Commission on these matters."
The draft report is is subject to consultation prior to its final report being published in August 2024.
Consultation opens March 22 and closes on April 18.
ANZ Bank NZ 'profits comparable to other countries'
ANZ Bank New Zealand CEO Antonia Watson said steps to enhance competition between Aotearoa's competitive banking and financial services sector would be beneficial for consumers.
"Like most industries, size and scale in banking enables improved access to capital," she said in a statement.
Watson said ANZ NZ also welcomed ideas to accelerate open banking, which would "enable us to partner more efficiently with fintechs in New Zealand to provide even better products and services for our customers".
However, she said there were "parts of the draft report that ANZ NZ disagreed with", including the Commission’s draft view that the major banks did not face strong competition, and that the banks had high profitability relative to international peers.
Watson said New Zealand's market structure – made up of five major banks – was "consistent with other countries of both similar and larger sizes".
"There are numerous banks and non-bank providers in New Zealand, which all provide an important source of competition. In a country of our small size, we have a comparatively large range of potential providers of core personal banking services to choose from."
She further said customers would "move to other providers" if their pricing was not sufficiently competitive.
"RBNZ figures show that in some months in New Zealand more than $1 billion worth of home lending, or more than 20% of total mortgage monies advanced, switches," she said.
"Profitability of New Zealand banks is about the same as similar banks globally. Our return on equity is around 12%, which is also in line with many other New Zealand companies in other industries."
But Watson also admitted it was "generally acknowledged that financial literacy is low in New Zealand".
"Anything that improves that is good for consumers and the overall economy."
Westpac NZ 'stepping up' access to banking
In a statement, a Westpac NZ spokesperson told 1News the bank "works hard to offer competitive products and services that support New Zealanders’ banking needs".
"The market study is a further opportunity to ensure New Zealanders continue to be well-served by their banks."
The spokesperson further added that it welcomed the Commission's focus on "improving access to banking services for New Zealanders and removing home ownership barriers for iwi".
"We are stepping up to help improve financial inclusion through initiatives like helping young people in care, customers who have been made bankrupt and recently-released prisoners to obtain a bank account. Last year we released the Access to Banking in Aotearoa report to better understand the issues causing financial exclusion, and we continue to work to address them. Our innovative shared equity and leasehold housing models are helping whānau into their first homes."
Westpac NZ said it would consider the draft report "in detail and will make a submission in due course".
Benefits, potential downsides to consider - ASB
ASB CEO Vittoria Shortt told 1News in a statement, the bank supported the Commission’s intent to promote competition for the long-term benefit of consumers in New Zealand.
However, she noted the importance of considering "the benefits as well as potential downside to any change".
"The stability of the financial system and protection of customers’ funds and information will be important considerations, alongside the competition dimensions outlined in this report," she said.
"We now have the chance to submit on the draft report before the final report is published later in the year, and we'll give this a lot of thought over the coming weeks."
Government response
Commerce and Consumer Affairs Minister Andrew Bayly urged people to engage with the consultation process.
"I encourage everyone interested in improving outcomes for personal banking services to provide feedback to the Commission to help with refining these recommendations," he said.
"The Coalition Government is committed to delivering better banking outcomes and a more productive economy for New Zealanders.
"I am working with our coalition partners to determine any possible response including the option of the select committee inquiry, but will determine what actions to take following the release of the final report."
Consumer: NZ customers are 'suffering'
Consumer NZ said it had "long-standing" concerns about the state of the banking sector in New Zealand.
However, it noted switching banks was generally easier than most New Zealanders thought but people don't do so often and that allowed the banks to "rest on their laurels" and get away with "lacklustre innovation and service".
"Eighty-four percent of people have been with their bank for more than five years."
Consumer NZ also found more than one-in-10 households have lost money to a scam in the last year, meaning banks could do more to protect their customers.
"The Commission’s preliminary findings support our view that there is limited competition, particularly among the major banks, and New Zealand’s banking customers suffer as a result."
Consumer noted all four of New Zealand's biggest banks were Australian owned and made up about 90% of the market. It's latest banking survey found three-quarters of New Zealanders agreed that banks’ high profit levels showed they were charging too much. The proportion of consumers holding this view had increased steadily over the past four years.
“We regularly hear the Australian-owned banks make much more money from their customers here when compared to Australia – that does not feel right.”
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