A study into New Zealand’s personal banking sector suggests that our major banks appear to prioritise profit over investing in the products and services that would benefit consumers.

The Commerce Commission – our competition watchdog – has released a draft report on the state of retail banking and its main message to banks is that they need to do better for Kiwis.

Limited competition and opportunity for disruption

Commerce Commission Chair, John Small, says: “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.”

Price matching, not price beating

He adds that 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.

“The lack of a disruptive force in our banking market means competition between the majors is sporadic and not sustained,” says Dr Small.

The current system is largely to blame, because it makes it too difficult for smaller, more innovative providers to attract customers away from the main banks – namely, costly compliance and regulatory demands and the administrative burden of switching banks - which mean people have little appetite to shop around for better deals and service. As a result, the big players become complacent and lack the motivation to up their respective games.

 

Would you switch?

Chief executive of Consumer NZ, John Duffy, says that people think switching banks is more difficult than it actually is.

“Switching levels are worryingly low in New Zealand. Our research found that over the past year, only 3% of New Zealanders switched their primary bank. Eighty-four percent of people have been with their bank for more than 5 years.”

“Low levels of switching by customers has allowed big Aussie-owned banks to rest on their laurels and meant they can get away with lacklustre innovation and service.”

 

Is help on the way?

The Commerce Commission’s draft report included several recommendations aimed at reducing barriers to competition for those seeking to challenge the big banks by encouraging market entry and expansion for innovative players, and empowering consumers to make informed decisions about their banking providers.

The key recommendations include:

• Improving the financial position of smaller providers and Kiwibank

This could include reviewing the Reserve Bank’s requirements for how much cash banks must have on hand, to ensure this doesn’t rule out smaller players, who are generally not as well funded as the big banks, from competing. The report also suggests ways of supporting Kiwibank to be a more credible competitor.

 

• Speeding up the shift to ‘open banking’

Open banking basically means banks and other financial service providers must provide customers and any third parties of the customer’s choice with easy access to their financial information, like account balances, transactions and payments. This should make it easier for people to ‘shop around’ and switch from one provider to another. The Report recommends setting a clear deadline to have open banking fully operational by mid-2026.

 

• Make sure banking regulations support competition

To limit unintended consequences, the Commission would like policy makers and regulators to explicitly consider in advance whether any prospective policies or decisions relating to the personal banking sector will have a negative impact on competition.

 

• Empower consumers to take advantage of competition among banking providers

Consumers would be the biggest winners from reduced barriers to switching providers. The report recommends better tools and services to help consumers get the best deal, an enhanced switching service, and the introduction of a basic bank account service that is accessible to any New Zealander.

 

Good things take time

Dr Small admits that there are no “quick fixes” but hopes the Commission’s recommendations lead to “sustained and enduring improvements in competition across personal banking services over time.”

“We are now keen to hear from stakeholders about the directions we have set out in our Draft Report. Ultimately, we want New Zealanders to be better off and confident that they are getting great value, clear choices, and innovative offerings in their banking services,” he says.

 

Written by: Vanessa Glennie

Vanessa is Head of Communications at Lifetime Retirement Income. She’s an experienced investment writer, having spent more than a decade writing about financial markets in the global fund management industry.