Disruption needed in personal banking services – Commerce Commission

New Zealand money, currency or cash
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The Commerce Commission has preliminarily found that the personal banking sector lacks competition and requires significant change in a draft report released on Thursday.

On 21 March 2024, the Commerce Commission (the Commission) released a draft report (the Draft Report) on its preliminary findings on the factors affecting competition for personal banking services and its recommendations to improve competition in this sector.

The Draft Report follows the Commission being tasked by the Government with carrying out a 14-month long study into whether competition for personal banking services in New Zealand was working well and, if not, what improvements could be made. The Commission will publish a final report by 20 August 2024.

The Draft Report makes three key findings:

The major banks do not currently face strong competition

The Draft Report identifies two tiers of providers: New Zealand’s “Major Banks” – ANZ, ASB, BNZ and Westpac – who hold 90% of the assets of New Zealand’s registered banks and the remaining smaller providers, with Kiwibank being “stuck in the middle”. The Commission’s preliminary view is that the Major Banks make up an oligopoly and do not face strong competition for personal banking services.

The Commission emphasises the lack of a “maverick” – an aggressive or innovative provider – to put disruptive competitive pressure on the Major Banks. This results in sporadic competition and gives rise to price matching, as opposed to sustained competition and a desire to beat the others’ prices. This lack of competition has resulted in limited innovation, has ensured the Major Banks sustain a high level of profitability and may be contributing to barriers to personal banking services for particular groups including Māori and those vulnerable to financial exclusion.

Main factors limiting competition

The Commission identified four main factors that are limiting competition. These include:

Structural advantages of the Major Banks

It is difficult for smaller providers to compete with the Major Banks which have scale, scope and funding cost advantages. Additionally, consumers view larger banks as safer and more stable and tend to engage with the Major Banks accordingly.

Regulatory barriers to entry and expansion

The Commission found that Major Banks have an entrenched competitive advantage over smaller providers due to regulatory barriers; smaller providers are disproportionately affected by regulatory burdens, such as barriers to entry from offshore providers and the Reserve Bank’s prudential capital requirements.

Barriers to consumer switching and engagement

Consumers tend not to switch banks and often remain inactive or disengaged. Switching banks is made more difficult by the logistics of switching providers. This is exacerbated by the industry-led account switching service and the heightened identification checks required by the Anti-Money Laundering and Countering of Financing Terrorism Act 2009 and/or the Credit Contracts and Consumer Finance Act 2003.

Impediments to innovation by fintechs

Fintechs – a term encompassing all financial technology – have the potential to offer disruptive competitive pressure but face several barriers to operating in New Zealand. Open banking (which allows financial data to be shared between banks and third-party service providers) could help this, as was seen in Australia and the United Kingdom, but as the Major Banks have been left to drive change in this area, progress towards open banking has been slow.

Multi-faceted solutions are needed to improve competition

The Commission has identified four areas of recommendation for improving competition, being:

  • Improve the capital position of smaller providers and Kiwibank
  • Accelerate progress on open banking
  • Ensure the regulatory environment better supports competition
  • Empower consumers to better access the benefits of competition

The Commission has noted that the current advantages of the Major Banks will be difficult to overcome, and that consumers’ tendencies reinforce the current market positions. In combating this, they have emphasised the need for solutions to be multi-faceted and consider the current state of competition in its entirety.

Submissions on Draft Report

Submissions on the Draft Report are due 4pm, 18 April 2024 and should be sent to marketstudies@comcom.govt.nz. The Commission is hosting a consultation conference in Auckland and online in the week beginning Monday 13 May 2024 with registration details to come.

If you would like assistance with making a submission to the Commission or have any questions about the Draft Report or the operation of competition law in personal banking services, please contact Nick Crang or a member of our Competition and Antitrust team

Special thanks to Graduate Brooke Kinajil-Moran and Law Clerk Molly Hurley for preparing this article. 

Disclaimer: The content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.

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