Kiwibank can ‘disrupt’ banking

The Commerce Commission’s final report into competition in personal banking points to the potential of a stronger Kiwibank as a disruptor to the four major retail banks.

The regulator adds this could open the industry as a “game-changer”, unlocking competition and revolutionising choice for consumers.

The commission is recommending a raft of regulatory and structural changes to drive more competition for the benefit of Kiwis after a 14-month market study found “a stable, highly profitable, two-tier oligopoly with no disruptive maverick and a lack of obvious or aggressive price competition”.

Its chairman, John Small, says further work and consultation following the release of the commission’s draft report in March “has only served to reinforce our view competition isn’t working as it should in this sector and consumers are missing out”.

Small adds personal banking services are hugely important to New Zealanders and the broader economy with almost every household having an account and debit card and nearly 60 per cent having a credit card, while the residential mortgage market is worth about $340 billion.

“In a well-functioning market with strong competition, we’d expect to see more aggressive strategies to win customers from other banks.

“What we see in New Zealand is that the major banks have little strategic differentiation. Their growth targets focus on maintaining market share, and protecting margins and profitability.”

This means they avoid significant competitive responses, “resulting in limited investment in innovation, muted competition and some demographics being poorly served”.

How to ‘bake in disruption’

Small says stimulating competition in personal banking requires a “multi-faceted approach to ensure it’s baked in”.

The Commerce Commission’s recommendations in its final report released this week are designed to work together to support new entrants and expansion, reduce regulatory barriers to competition, and empower consumers to get better prices and services.

“We believe the best prospect for driving change will come over time from accelerating open banking and ensuring the regulatory environment better supports competition.”

Small says open banking could be a game-changer, giving thousands of underserved Kiwis access to financial services and revolutionising choice.

“Industry-led progress to date on open banking has been far too slow. We need a unified approach from industry and government, and a clear timeline if benefits are to be realised. The government needs to be an early adopter of open banking to build confidence and assist in developing a market.

“We also see a need for progressive regulation where competition is given a higher weighting to ensure balance between financial stability and competition.”

Small says reducing barriers to entry and expansion is fundamental to a more competitive personal banking sector.

“In the shorter term, we see the capitalisation of Kiwibank as providing the sector with the disruptive maverick that’s currently missing. Longer term, it’s through open banking.

“We’re also recommending changes that will put the power back in the hands of consumers, allowing them to more easily switch providers and access better prices and services.”

In practice, this means making it easier for mortgage advisers to present several quotes to clients and making it more efficient for lenders to process applications quickly “so consumers can truly test the market”.

The commission has made recommendations for some particular demographics that seek to address systemic issues, such as access to basic bank accounts and barriers to lending for housing on Maori freehold land.

The regulator’s recommendations are grouped into four inter-dependent areas that reflect the regulatory, behavioural and strategic impediments that make it difficult for new and existing providers to enter and expand in the market.

One is that the government, as Kiwibank’s owner, should consider what’s necessary to make it a disruptive competitor, including how to provide it with access to more capital. Others are listed below.

Accelerate open banking

Industry and the government should commit to ensuring open banking is fully operational by June 2026.

The government should support open banking by being an early adopter and taking an all-of-government approach to adopting payments enabled by open banking functionality.

Ensuring better competition

The Reserve Bank should broaden the way it undertakes competition assessments under the Deposit Takers Act, placing more focus on reducing barriers to entry and expansion in the banking sector.

It should place greater emphasis on competition in several specific upcoming decisions.

The government should ensure existing legislation and future decisions do not unintentionally favour banks, particularly larger ones, over other providers.

It should lessen barriers to switching home-loan providers as part of the Credit Contracts and Consumer Finance Act reforms.

The government should prioritise competition concerns when reforming the Anti-Money Laundering and Counter Financing of Terrorism regime.

Power to the people

Banks should invest in making improvements to its switching service. Home-loan providers should present offers in a readily comparable manner, accounting specifically for the effective value of cash contributions.

Home-loan providers should also pro-rate all clawbacks for mortgage adviser commissions and bank cash contributions. These advisers and banks should make changes to promote price competition and choice for home loans.

Industry and the government should prioritise reducing barriers to lending for housing on Maori freehold land, and banks should make basic accounts widely available.

Stakeholder engagement

The commission was directed to undertake a study into personal banking services by the Minister of Commerce and Consumer Affairs in June 2023. This was to examine how well competition is working and consider options for enhancing it for the long-term benefit of Kiwis.

Small says the regulator has analysed significant volumes of internal bank documents and engaged with a wide range of stakeholders.

“This sector is hugely important to New Zealanders and the broader economy. We’re grateful to the sector – major and smaller banks, as well as non-bank participants and fintechs – and the communities and demographics who have taken the time to share their experiences. 

“Our findings and the recommendations have been guided by the evidence and the feedback we’ve received over the past 14 months.”

The way forward

If the government supports the Commerce Commission’s recommendations, it will convene a steering group to accelerate progress towards open banking, with broad representation across banks, fintechs, government and consumer groups.

The regulator has recommended that the Minister of Commerce and Consumer Affairs designate the interbank payment network under the Retail Payment System Act. This would provide the commission with regulatory backing to convene the steering group and accelerate progress.

The regulator has also approved Payments NZ’s application for authorisation to jointly negotiate an accreditation framework, and standard terms and conditions, for the partnering between banks and fintechs needed to implement open banking.

Small says: “If the government supports our recommendations, we will monitor industry progress and be ready to intervene if it is insufficient.”

The full report and recommendations, an abridged version and an executive summary are available on the Commerce Commission’s website.