December 27th, 2024
New Zealand's personal banking sector is on the cusp of a monumental shift. The Commerce Commission's first-ever competition study into the industry has unveiled a two-tier system dominated by a handful of major banks, characterised by limited competition, low levels of innovation, and high profitability. This groundbreaking report not only highlights the pressing need for systemic change but also lays out a series of draft recommendations aimed at injecting much-needed competition into the market.
Government's responsive echo
Commerce and Consumer Affairs Minister Andrew Bayly’s response to the draft report reflects a proactive stance by the government. Acknowledging the findings, Bayly emphasised the importance of refining these recommendations through public and stakeholder feedback. The final report, due by 20 August 2024, is poised to inform the government’s next steps, potentially reshaping the regulatory landscape of personal banking in New Zealand.
A deep dive into the Commission's findings
Two-tier oligopoly: The Commission’s Chair, John Small, described the current state of the sector as a “stable two-tier oligopoly,” with ANZ, ASB, BNZ, and Westpac enjoying disproportionate levels of profitability. This stability is attributed to a consistent focus on profit margins and a systemic underinvestment in core technology platforms, limiting innovation and keeping market shares static.
The need for disruption: The lack of aggressive and sustained competition among the major banks means consumers are left wanting for better services and options. The draft report argues for “ongoing disruption” as a crucial component in fostering a competitive environment that benefits all.
Draft recommendations for a competitive future
The Commission’s draft recommendations are broad and ambitious, targeting the structural, regulatory, and strategic barriers that currently hinder market entry and expansion for innovative players.
Improve Capital Access: Suggesting a review by the Reserve Bank of its prudential capital settings to ensure competitive neutrality, the report urges measures to facilitate growth among smaller providers and transform Kiwibank into a disruptive force.
Accelerate Open Banking: With a recommended deadline for full operational status by mid-2026, the push for open banking is seen as a gateway to revolutionary changes in the sector, empowering fintechs and reducing barriers to innovation.
Regulatory Environment Reform: The recommendations call for policymakers and regulators to consider the competitive effects of their decisions more explicitly, aiming to mitigate unintended impacts on competition.
Empower Consumers: Proposals include enhanced tools and services to improve consumer ability to switch providers, introduction of a basic bank account service accessible to all New Zealanders, and measures aimed at making banking more understandable and accessible.
Addressing disproportionate effects
The Commission’s findings also shed light on the disparate impact of the current banking landscape on certain demographics, including those struggling to access basic banking services and Māori communities facing unique challenges in accessing capital. The draft recommendations seek to address these inequities directly, promising a more inclusive banking future.
Widespread consultation and the path forward
The Commerce Commission's thorough engagement with stakeholders—from major and smaller banks to non-bank participants and affected communities—underscores the comprehensive approach taken in this study. As New Zealand stands at a crossroads, the sector awaits the final report and the government’s subsequent actions with bated breath. The potential for substantial regulatory overhaul and the introduction of disruptive forces could herald a new era of innovation, competition, and consumer empowerment in New Zealand’s personal banking sector.