Call for more choice in banking

The Financial Services Federation (FSF) has lodged a submission on the Commerce Commission’s market study into banking services, which is at its draft stage.

It highlights how the non-bank lending sector can be empowered to provide more competition and Kiwis more choice.

More than 1.7 million consumers choose to work with a non-bank lender represented by the FSF. Its 97 members include the likes of UDC Finance, Avanti Finance, Toyota Finance, Harmoney, MTF, and several credit unions and building societies.

“As the draft report rightly points out, the four major banks have the lion’s share of the personal banking market in New Zealand by an enormous margin,” says Lyn McMorran, pictured, executive director of the FSF.

“It’s very difficult for smaller players to compete with them for various reasons the draft report has highlighted.

“Without sufficient competition and disruption in banking services, New Zealand runs the risk of consumers missing out. We have highlighted our key concerns and recommendations to stop this from happening.”

Home-loan competition

The FSF says the cost of capital for smaller players is a key barrier to being able to compete with the major banks.

The federation has several members providing non-bank housing loans, including credit unions, building societies and specialist lenders, some of which ironically rely on wholesale funding from major banks to pay for their activities. This means there’s an inability to compete with them, particularly on price.

“The public is all the poorer for this lack of access to other sources of funding at a reasonable price other than from major banks,” says McMorran.

“Non-bank providers compete with the banks by offering options to consumers which the major banks cannot. This is because of constraints imposed on them by the Reserve Bank, such as LVR [loan-to-value ratio] restrictions. 

“It’s imperative these are not passed on to non-bank housing lenders in order that they can provide the competitive friction that’s needed in the housing lending market.”

The FSF says this would allow them to service customers who require bridging finance, loans for a home-building project, finance to self-employed people, loans with higher LVRs and so on, which the major banks cannot or will not service.

Language matters

The draft report suggests the four major banks, known as “tier one”, account for 90 per cent of New Zealand’s personal banking market. The remaining 10 per cent – “tier two” – is spread across hundreds of small players including Kiwibank, the remainder of registered banks and hundreds of small non-bank providers.  

The FSF is uncomfortable with the terms “tier one” and “tier two” as they imply a difference in quality or compliance or reputation that’s not justifiable when all players are subject to the same regulatory obligations regardless of size. 

“We would prefer that, if there is to be differentiation between the market players, the terminology should be ‘large’ and ‘small’,” notes McMorran.

Deposit account competition

Outside of the major banks, the only realistic alternative that exists for deposit accounts are non-bank deposit takers (NBDTs), particularly credit unions and building societies, which are able to offer transaction and savings accounts as well as term deposits.

The FSF’s NBDT members have been fully supportive of the introduction of a depositor compensation scheme (DCS) to protect consumers’ deposit money. But the Reserve Bank’s “risk-based” approach for setting levies will disproportionately disadvantage NBDTs. 

McMorran explains: “Taking this approach will cost the NBDTs proportionately more than it will the banks.

“The FSF is struggling to make the Reserve Bank understand that using metrics like return on equity as a measure of default risk is inappropriate when many NBDTs are set up as mutuals. 

“Their reason for being isn’t to make large profits for shareholders, but to reinvest their profit into their communities and for the good of their members. 

“So, effectively under the current Reserve Bank proposals (it is still in the process of consulting on its proposed approach to setting DCS levies), NBDTs will be further disadvantaged proportionate to the major banks, which will do nothing to improve their competitiveness in the deposit-taking space.”

Inclusion of all Kiwis

It is the experience of FSF’s members offering transactional banking services – specifically, credit unions and building societies – that some people are excluded from participating in society fully and receiving benefits to which they are entitled simply because they are unable to access a basic bank account. 

The biggest barrier to this group is the “draconian” anti-money laundering and countering the financing of terrorism (AML/CFT) requirements with respect to address verification. 

“It is not possible to verify an address for a person who does not actually have one, such as a homeless person or someone just been released from prison,” says McMorran.

“This requirement is not just affecting people on the margins of society. It also creates difficulty for young people who have just left home, but who do not yet have a means to verify their new address. 

“To eliminate this barrier and create increased financial inclusion, the FSF supports removing the address verification requirement from AML/CFT obligations on reporting entities at the earliest possible opportunity.”

Banking sector’s profits 

The FSF believes profitability in the banking sector is a better option than the alternative. It would rather New Zealand enjoys a strong and stable economy and financial system.

“Much commentary around ‘excessive profits’ is highly emotive and not necessarily driven by a deep understanding of how important banks are in achieving this.”

Progress open banking

“Successive governments have largely left progress on open banking to the banks rather than legislating for it, and consequently there has been little to no progress to date,” says McMorran.

“It could be interpreted that the slowness of banks to adopt open banking is because they wish to hang on to the competitive advantage that having access to their customers’ transactional banking data provides to them.”

As much as the FSF wants to see open banking become a reality here, to be successful and contribute to effective competition it must come with a comprehensive public-awareness campaign on the benefits.

The federation will continue to provide feedback to the Commerce Commission in the run-up to its report being published in August 2024.