The country’s four big Austalian-owned banks have been so focused on maintaining their profit margins that they’ve under-invested in their core technology platforms, the Commerce Commission says.
They’ve delivered low levels of innovation but “persistently high profits”, it says, in a draft report into competition in personal banking.
The commissioners “are not convinced” by the banks’ explanations of their high profits, and says it’s really all about a lack of competition.
The commission published its draft report on Thursday morning, amid calls to rein in the dominance of the four big Australian-owned banks. In a submission, consumer group Monopoly Watch calls for ANZ and ASB to be broken up into smaller banks. Open banking isn’t enough on its own, it says.
The commission report comes barely an hour after the US Federal Reserve announced it would leave interest rates unchanged for now – but suggested it may cut rates three times over the coming year.
That just highlights the importance of competition in personal banking; New Zealand homeowners and business borrowers will be anxious to see lower interest rates passed on.
“This is a sector that matters to nearly every New Zealander, so it’s important to take time to get it right,” says commission chair Dr John Small, speaking to media just a few minutes ago.
So how should regulators address the lack of obvious and aggressive competition for the major banks that means Kiwi consumers are missing out? “Ongoing disruption needs to be baked in,” he says. “Today’s maverick could be tomorrow’s oligopolist.”
The draft report finds that the top tier of NZ’s banking oligopoly – ANZ, ASB, BNZ and Westpac – enjoys sustained high levels of profitability compared with their global peers. They face “no serious threats” from smaller competitors.
“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 NZ.”
Dr Small says 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.
Bearing in mind that this is just a draft at this point, the commission can deliver both its own solution as well as recommending law changes to the Government.
Its key recommendations include the Reserve Bank providing fair funding to Kiwibank and other smaller financial institutions, and setting a solid deadline for open banking by mid-2026 so customers can more easily switch banks.
It wants better tools and services to help consumers get the best deal, and the introduction of a basic bank account service that is accessible to any New Zealander.
Māori freehold land-owners, refugees, prisoners and those fleeing domestic violence are among those who can struggle to access basic bank accounts, or have difficulty understanding banks’ terms and conditions.
Earlier, an international report showed that more and more mortgage market share is going to the big New Zealand banks.
The paper, published by the Bank for International Settlements, is referenced in evidence to the Commerce Commission market study.
The BIS report’s author, Chris McDonald from the Reserve Bank, notes a slight increase in the number of house purchases financed by non-bank lending institutions, but says it still remains beneath 2 percent.
Much of that is from construction, remediation, and bridging finance loans, which are exempt from loan-to-value restrictions. “Industry contacts have noted that most borrowers switch to banks once their loans have been sufficiently amortised.”
This comes amid concerns from other financial institutions, business and consumer groups about the dominance of the big banks.
“By not having large scale mortgage insurers in the New Zealand market, the incumbent four majors have significant competitive advantage when managing credit risk,” says experienced payments lawyer Simon Jensen, representing small financial institutions like credit unions and building societies.
Monopoly Watch, founded by entrepreneur Tex Edwards, is understood to have written to ANZ shareholders warning that the bank’s dominance has sparked problems.
Banks’ conflicting profitability measures
Edwards was the founder of 2degrees, which took on Telecom and Vodafone to make phone and data bills more affordable. He says it wasn’t enough just to change the law to provide phone number portability; the telecommunications markets needed the structural shock of a challenger.
He argues the banking market is similar – it’s not enough to just provide bank account portability and other moves to open banking; the market actually needs to be broken into smaller pieces.
“The big four banks must, in their daily prayers, thank God for fraud, scams, climate change,
ESG …. and regulation,” the Monopoly Watch submission says. “These issues have has given them the perfect backdrop to camouflage their oligopolistic structure and confuse regulators.”
New Zealand’s big banks have mostly presented a united front, saying their big profits are what insulate them from the fluctuations seen in American, Japanese and Swiss banks. Government plans for account number portability and sharing data will make it easier for customers to change banks, they’ve insisted.
It’s turned into a battle of the economic consultancies, which have been hired to present evidence on behalf of big banks like ANZ and BNZ, in contest with smaller banks like publicly-owned Kiwibank.
Link Economics (commissioned by Kiwibank) submits that the big banks can pick up twice as many new home loan customers as smaller banks with the same interest rates.
Frontier Economics (commissioned by ANZ) retorts that its competitor’s analysis doesn’t account for the discounts to the published headline rates offered by the larger banks to their customers. And Deloitte Access Economics (commissioned by BNZ) says challengers like Kiwibank do play a role in forcing down the interest rates set by ANZ, ASB, BNZ and Westpac.
Late last year, the smaller, NZ-listed Heartland Bank broke ranks to warn of the “barriers to competition” the big banks set in place.
Chief executive Leanne Lazarus told Newsroom the smaller banks often couldn’t access Reserve Bank funding, so had to rely on credit lines from the big banks – and though it happened only occasionally, these could be cut off at will.
What she described is very similar to the problems found by an earlier Commerce Commission market study of the grocery market, which showed that the two big supermarket companies controlled the supply chains. That meant smaller grocery retailers had to go cap in hand to the big supermarkets to buy their wholesale supplies.
Since the Reserve Bank began raising interest rates to rein in post-Covid inflation, the retail banks have been able to increase their net interest margins margins. This is a profitability metric that reveals the amount of money that a bank is earning in interest on loans, compared with the amount it is paying in interest on deposits.
And as Reserve Bank chief economist Paul Conway pointed out to Newsroom in February last year, banks are quick to hike mortgage lending interest rates, but slow to raise deposit rates. “I think the banking sector would be an appropriate focus for a market study, should the Government wish to go there,” he said at the time.
With that prompting, the Government did go there – and at 8.30am Thursday, the Commerce Commission delivered its draft report.
“There is little evidence of aggressive broad-scale price competition, particularly from larger banks … Instead, banks tend to pursue strategic pricing practices [taking] advantage of consumer inertia and other biases to reduce the overall cost of their deposit funding.”
Australian Competition and Consumer Commission
One of the biggest arguments is over how it measures profitability.
The Reserve Bank reports banks’ net interest income hit a record $3.94b in the December quarter – the first full year it’s topped the $15b mark.
That delivers a net interest margin that’s been wavering around 2.3 percent for the past 18 months. For the banks, that’s a healthy increase on the 1.8 percent low in mid 2020 – but not so good for their customers.
The Reserve Bank may well believe that net interest margin is a good measure, but the banks would prefer the commission looked at their return on equity. That’s now dropped to 11.2 percent, on par with other big NZX-listed companies.
In its latest monetary policy statement, just last month, the Reserve Bank says mortgage rates are likely to increase relative to wholesale rates over coming years, as banks’ funding costs increase.
Meanwhile, it confirms term deposit rates have decreased. And rates on other types of deposits, including bonus saver and transaction accounts, also remain low.
Income from interest on loans isn’t the banks’ only revenue, of course. Interest makes up about half the banks’ income. So the Commerce Commission is also looking into other revenue streams like bank fees.
That’s garnered greater concern and more headlines in Australia than it has in New Zealand, despite the big four New Zealand banks being owned by the big four Australian banks.
The Reserve Bank of Australia has been researching bank fees charged to Australian households, businesses and government. In a report this year, it says they’ve fallen by about 4 percent, to comprise just 5 percent of banks’ total revenue.
The Australian Competition and Consumer Commission has also been conducting an inquiry into the banks, focusing on retail deposits.
It reported back just before Christmas, with seven recommendations to increase transparency,
support more effective consumer engagement, and reduce barriers to consumer switching to drive competition.
“Although we have observed instances of price competition from smaller competitors seeking to grow their market share, there is little evidence of aggressive broad-scale price competition, particularly from larger banks,” the Australian commission found.
“Instead, banks tend to pursue strategic pricing practices at an individual product or
customer level. We found a range of such practices across banks, designed to attract and retain higher value customers. These pricing strategies take advantage of consumer inertia and other biases to reduce the overall cost of their deposit funding.”
