In a nutshell:
- This week, the Commerce Commission delivered its report into competition in banking. It’s a document that’s heavy on the analysis, but light on actual recommendations.
- In Squirrel’s view, just one of the 14 solutions proposed has the potential to meaningfully increase competition. And it’s not a new idea.
- There are a few supporting recommendations that, together, will have some positive impact – in particular encouraging open banking – but again, there’s nothing new there.
- By our reckoning, many of the recommendations simply don’t belong in the report, and one, in particular, would likely lessen competition.
- The Commerce Commission report has been overly focused on home lending, which has the most competition (largely due to the prevalence of mortgage brokers), but has failed to focus on the real issue which is what banks pay (or more accurately, don’t pay) for retail deposits.
Dive into the full breakdown below or tune into our latest podcast episode for even deeper insights.
Earlier this week, the Commerce Commission released the findings of its study into competition in personal banking in New Zealand.
It’s a whopping, almost 400-page document.
Most of that—270 odd-pages—is a high quality, in-depth analysis into the state of our banking landscape, and the challenges the current pricing oligopoly we have here (across our four big banks) presents to competition.
Then, summarised in a mere 17 pages, came the Commerce Commission’s recommendations to address the issue. There are 14 of them in total.
Clearly, the Commerce Commission gets the magnitude of what they’re dealing with here—but the fact that the report is so light in terms of actual solutions, feels (to us at least) pretty underwhelming.
So, what are the recommendations to drive greater competition in banking in New Zealand? And, more importantly, will they actually make a difference?
Let’s work backwards through the list, starting with (in our view) the least impactful, and finishing with those recommendations which could stand to have the biggest impact in terms of competition across New Zealand’s banking sector.
#14: INDUSTRY SHOULD CO-OPERATE TO MAKE BASIC BANK ACCOUNTS MORE WIDELY AVAILABLE.
To put it bluntly, we’re not even sure how this recommendation made it into the paper.
Improving access to basic bank products would have zero impact on competition across the industry. And, honestly, how hard is it to get a bank account these days anyway?
So, is recommendation #14 going to improve competition in banking? No.
#13: INDUSTRY AND GOVERNMENT SHOULD PRIORITISE REDUCING BARRIERS TO LENDING FOR HOUSING ON MĀORI FREEHOLD LAND.
There’s a lot of merit to this idea, and it would be likely to increase access to affordable housing. But again, it’s not going to achieve anything in terms of improving competition.
So, is recommendation #13 going to improve competition in banking? No.
#12: MORTGAGE ADVISERS AND BANKS SHOULD MAKE CHANGES TO PROMOTE PRICE COMPETITION AND CHOICE FOR HOME LOANS.
The Commerce Commission has recommended four key changes here, one of which is that mortgage advisers should be required to present at least three formal loan offers to each client, to help them make a more informed choice.
To us, this feels like a solution in search of a problem.
The fact is that mortgage advisers are engaging with different lenders on an almost daily basis as part of settling deals, and we’re also constantly reviewing different bank credit policies to help us understand who’s prepared to lend and at what rates.
So, at any given time, we know where pricing is sitting across the market and this informs our recommendations to clients in terms of which lender to submit an application to.
In fact, a number of the banks also explicitly provide special rates (below advertised rates) for advisers to work with for their clients.
In reality, it feels like this recommendation could do a whole lot more harm than good—with the potential to massively slow down the loan approval process, much like the 2021 CCCFA changes did when they were introduced.
It wouldn’t just impact the adviser end of the spectrum either. The number of applications submitted to each bank would skyrocket—with lenders having to go through a full credit assessment for loans that they'd only get 33% of the time.
As it is, it can easily take 1-2 weeks to secure a loan approval, and that would balloon massively if this recommendation were to be implemented. It would bog down the entire system—while achieving nothing in terms of delivering greater competition in banking.
So, is recommendation #12 going to improve competition in banking? No. And in fact, it will probably have the opposite effect, making it much slower to get a home loan approved.
A final note:
If you cast your mind back a few decades, it was pretty common practice just to go straight to your bank when you needed a home loan. If you wanted to shop around, you did. Then, mortgage advisers became a thing, and brought a whole lot more competition to the home loan market.
So, in our view, it’s not the loan side of the equation where greater competition is needed. It’s deposits that are the problem.
#11: HOME LOAN PROVIDERS SHOULD PRO-RATE ALL CLAWBACKS FOR MORTGAGE ADVISER COMMISSIONS AND BANK CASH CONTRIBUTIONS.
Let’s focus on customer clawbacks as the example.
Clawbacks here apply to the cash contributions (i.e. cash-back deals) paid to customers by their lender when a new loan is taken out, often worth thousands of dollars. Depending on the lender, clawback periods span three to four years.
The problem currently is that the clawback amount doesn’t decrease in a linear fashion over time. Instead, it’s based around key milestones set by the banks. If a customer repays their loan within the first year, for example—even if there’s only one day left in that year—the banks will still claw back 100% of the contribution.
What the Commerce Commission is suggesting is that, say you choose to refinance after 18 months, and the clawback period was three years, you should only have to pay back half of the cash contribution—not some arbitrary figure determined by the banks.
We agree. The way clawbacks are currently structured creates barriers to refinancing for customers, for the duration of the clawback period, and that needs to be addressed.
But whilst the move would help ensure bank customers are getting a fairer deal, in our view, it’s not going to make any real difference in terms of driving greater competition across the banking sector.
So, is recommendation #11 going to improve competition in banking in a meaningful way? No.
#10: HOME LOAN PROVIDERS SHOULD PRESENT OFFERS IN A READILY COMPARABLE MANNER.
Currently, the banks price all of their loan terms (including interest rates, cashbacks, and other factors) separately, which can make it difficult for consumers to compare different bank offers, and work out which is the best deal overall.
Take cash contributions, for example, which are really popular with consumers at the moment. A lot of people may be prepared to take a bigger cashback and a higher interest rate, over a lower cashback and a lower interest—because at face value, it looks like the better deal—but once you run the numbers, the true cost of the loan could be much higher.
The idea here is that lenders should be required to package their different loan components as one standardised rate, to make it easier for consumers to compare their options. Australia already has a similar measure in place, called the Annual Percentage Rate (or APR).
Again, it’s another great concept—and one we broadly agree with.
But while it would make a difference for consumers as part of their decision-making process, it’s unlikely to have any tangible impact in terms of improving competition across New Zealand’s banking sector.
So, is recommendation #10 going to improve competition in banking? No.
#9. INDUSTRY SHOULD INVEST IN MAKING IMPROVEMENTS TO ITS SWITCHING SERVICE.
What this recommendation is saying, essentially, is that changes need to be made to make it easier for customers to switch from one bank to another. But the fact is—while most consumers may not realise it—the process is already simple.
When you sign up with a new bank, they can manage the process of transitioning all your accounts and information across from your old one. It’s a manual process from the banks’ perspective, sure, but it works just fine.
The size of Kiwibank’s customer base is all the proof you need. Since launching in 2002, Kiwibank now has about a million customers, most of which will have had to switched from another bank.
The industry could invest money in digitising this service, but at what real benefit to its customers?
So, is recommendation #9 going to improve competition in banking? No.
#8: GOVERNMENT SHOULD PRIORITISE COMPETITION CONCERNS WHEN REFORMING THE AML / CFT REGIME.
AML / CFT—or anti-money laundering—encompasses the ID verification processes that new customers are required to complete when they sign up with a new financial services provider.
There’s been a huge global push in the AML space over the last few years, with a raft of new providers coming into the space. That’s seen technology and processes improve considerably, making the whole experience much faster—and the outputs more accurate.
While there’s no arguing it’s a necessary and important measure for the banking sector, but it’s hard to see how it will impact competition.
So, is recommendation #8 going to improve competition in banking? No.
#7: THE GOVERNMENT SHOULD LESSEN BARRIERS TO SWITCHING HOME LOAN PROVIDERS AS PART OF THE CCCFA REFORMS.
This recommendation is intended to make it easier for borrowers to switch home loan providers in a rising rate environment.
The argument is that, as long as a borrower has proven they can afford the loan at a higher interest rate—i.e. by meeting their repayments with their old lender—they should be able to switch that loan to a new bank, even if they don’t (on paper) pass servicing calculations.
Now, back in July, Government introduced its latest series of changes to the CCCFA.
The changes were designed to unwind a lot of the problematic clauses in the previous version of the legislation, which made the process of getting a home loan in New Zealand significantly harder, even for the most credit-worthy of borrowers. And part of the new legislation addressed this very recommendation.
While we support the move, once again it’s not something that’s going to make any real difference to competition in banking.
So, is recommendation #7 going to improve competition in banking? No.
#6: GOVERNMENT SHOULD ENSURE THAT EXISTING LEGISLATION AND FUTURE DECISIONS DO NOT UNINTENTIONALLY FAVOUR BANKS, PARTICULARLY LARGER BANKS, OVER OTHER PROVIDERS.
In a lot of ways, this recommendation makes sense.
This has been an issue in the past, including with the Government’s Funding for Lending programme, which saw the big banks—and a handful of second-tier banks—given access to cheap money to lend out to consumers in the wake of COVID-19. Smaller financial institutions, meanwhile, were left out in the cold.
Another example might be the minimum capital standards required for an entity to register as a bank in New Zealand. Currently, the standard is $30 million, which is a pretty significant barrier to entry for any new competitor.
But even if you were to reduce the capital requirement to, say, $5 million, would that actually make any difference in terms of attracting new players to the New Zealand market?
Probably not, because our national population (which barely stacks up to that of global cities like Sydney) just isn’t big enough to offer the economies of scale that would make it worthwhile.
The fact that our market is already completely dominated by a handful of players – who control market pricing, and all zig and zag together – would also make it incredibly difficult for any new players game enough to come here to get established, and drive innovation.
So, is recommendation #6 going to improve competition in banking? Well, it’s a nice idea. But no, probably not.
#5: THE RESERVE BANK SHOULD PLACE GREATER EMPHASIS ON COMPETITION IN SPECIFIC UPCOMING DECISIONS.
Once again, there were a few different parts to this recommendation—but the one which caught our attention was the suggestion that the Reserve Bank should widen access to its exchange settlement account system (ESAS).
So, first up, what the heck does that even mean? Effectively, it would give smaller financial institutions the ability—the same as registered banks—to go and invest money with the Reserve Bank and earn a rate of return set at the Official Cash Rate. Today, that’s 5.25%.
Using Squirrel as the example, that would mean today we could earn 5.25% on our balances, and then (taking a small margin) pay our deposit customers 5%.
But wait a second, we’re already doing that with our high-interest On-Call account. And that’s despite the fact that all those customer funds are held on trust with large New Zealand banks.
So how is that possible?
It’s because Squirrel banks with the wholesale arm of those institutions, not the retail arm. And because we’ve got strong relationships with our banks, we’ve been able to negotiate an interest rate aligned with the OCR, and then pass most of that benefit along to our customers. Other non-bank savings products, like those offered by Booster and Sharesies, do the same thing.
If the banks were forced to provide access to these same wholesale banking solutions to all new players in the non-bank deposit space – not just those large enough to negotiate better rates – that would go a long way to promoting greater competition. We’ve seen the same thing done in the telecommunications sector, and (to an extent) the grocery sector, with reasonable levels of success.
However, it would likely start to become problematic as those competitors gained size and scale—the banks probably wouldn’t be too keen to offer those terms to a non-bank lender with $4bn of customer funds under management.
Our view is that the Commerce Commission is focusing on the right issue, but that their recommendation proposes a complex solution where a relatively simple one already exists. We think the recommendation should be to require the wholesale arms of banks, who provide services to non-bank or smaller bank competitors, be required to provide Official Cash Rate-based interest rates on their deposits.
This would mean that smaller players could benefit from better interest rates, without becoming subject to the higher levels of prudential oversight likely if they had access to an ESAS account with the Reserve Bank.
So, is recommendation #5 going to improve competition in banking? Yes, though there’s a simpler solution.
#4. THE RESERVE BANK SHOULD BROADEN THE WAY IT UNDERTAKES COMPETITION ASSESSMENTS UNDER THE DEPOSIT TAKERS ACT AND PUT MORE FOCUS ON REDUCING BARRIERS TO ENTRY AND EXPANSION IN THE BANKING SECTOR.
With the Depositor Compensation Scheme coming into effect next year, there’s a lot happening in the non-bank deposit taking space at the moment.
The new deposit insurance scheme will see consumers reimbursed up to $100,000 per deposit-taker, in the event a deposit-taker fails. It will cover a select group of institutions, ranging from our biggest banks to our smallest finance companies, who will be required to pay a small premium as part of the scheme.
The idea behind all this, of course, is to promote greater competition within the sector.
But it feels like we’re just set to repeat the same mistakes we made a few years ago when the Government underwrote all New Zealand finance companies. Customers didn’t really care what the finance companies did with their money, because they knew they were protected—and so a lot of these institutions (many of which were dodgy anyway) rushed into all sorts of risky lending. It’s what ultimately brought about the collapse of our finance sector during the GFC.
Earlier this year, the RBNZ conducted a consultation process, seeking feedback on the scheme. Squirrel submitted that the rationale for implementing the DCS was flawed—and furthermore, that the premium to be paid by different deposit-takers (on a tiered basis) seriously misprices the level of risk inside these institutions.
One way of managing that would be to make these riskier players subject to vastly more intense regulatory scrutiny from the Reserve Bank to ensure sound risk management practices are in place. But we’d argue that, ultimately, the DCS will make it harder for those smaller institutions to succeed, as this increased regulatory scrutiny would be a massive overhead.
What this recommendation appears to be getting at is that the Government should make it easier for new non-bank deposit takers to come to market—by making the Reserve Bank carry the risk. Which feels like a disaster waiting to happen.
So, is recommendation #4 going to improve competition in banking? Yes, to some extent, but it comes with a lot of risks and potential costs.
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THE NEXT TWO RECOMMENDATIONS ON THE COMMERCE COMMISSION'S LIST RELATE TO THE INTRODUCTION OF OPEN BANKING IN NEW ZEALAND
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#2: INDUSTRY AND GOVERNMENT SHOULD COMMIT TO OPEN BANKING BEING FULLY OPERATIONAL BY JULY 2026.
#3: THE GOVERNMENT SHOULD SUPPORT OPEN BANKING BY BEING AN EARLY ADOPTER.
In simple terms, open banking allows third-party financial services providers greater access to customers’ traditional banking data and records, through secure interfaces.
It stands to have significant benefit in terms of speeding up processes (such as applying for a loan, for example), and allowing these financial service providers to offer more personalised advice and solutions.
Using the example of mortgage advisers, the advice you get from your broker currently is based on the financial info you provide at a single point in time (when the loan is first arranged). The longer the loan’s in place, the less accurate that information is. Open banking will give your adviser access to up-to-date data on an ongoing basis, enabling them to make more proactive recommendations moving forward, and identify opportunities to save you money.
So, yes, open banking will allow pockets of innovation to emerge that will be hugely beneficial for Kiwi customers in the long term. But the question remains—will it actually help to foster greater competition in terms of shaking up our banking oligopoly?
Let’s look to the UK as an example, where open banking has been in place for several years. The major new competitors that have come to market over there in recent times, and shaken things up across the banking sector—Monzo Bank and Starling Bank—both launched before open banking came into effect.
In other words, open banking is not the prerequisite for the sort of innovation we need to create greater competition across our banking sector.
Now, back to the Commerce Commission’s recommendations here. That first one—#2—has already been mandated, so its inclusion in the report is almost redundant. They’re just saying that what’s already happening should continue to happen.
As to the second – #3 – of course it makes sense that Government should be leading the charge.
But are recommendations #2 and #3 going to improve competition in banking? There are some competitive advantages here, but we believe the net result is unlikely to be earth-shattering. And, it's already happening.
#1: CAPITALISE KIWIBANK
Finally, here’s a change that could actually stand to have real impact.
What the Commerce Commission is talking about here is the idea of investing significant funds into Kiwibank to allow it to grow aggressively and drive disruption across our banking industry.
Kiwibank is well positioned to be the vehicle of change we need for the sector. It has a strong, trusted brand in New Zealand, is a great business and is very well run. It’s currently the smallest of our big banks, which means there’s a huge potential upside to be gained by it becoming more competitive—allowing it to quickly chip away at the big four’s market share.
Now, the banks don’t like losing market share, especially not for a sustained period of time. So, the move would also likely force our other big banks to respond by becoming more competitive themselves, in order to protect their customer base.
The reality is that the required investment is unlikely to come from government, so the natural option here would be for Kiwibank to become a listed company. It would be an attractive option for investors, given the huge growth potential and the knowledge that as it achieves economies of scale, dividends will increase.
The potential downside to this approach, of course, is that when you’re listed on the share market, investors expect a certain rate of return—which is arguably what drives the pricing oligopoly across our four big banks now. So that would need to be carefully managed.
So, is recommendation #1 going to improve competition in banking? Yes, it’s a big tick from us.
What’s not included in the report, that perhaps should be?
The report talks at length about the need for a new “maverick” player in the New Zealand market, who can come in and shake up the current landscape.
The Commerce Commission has suggested Kiwibank should fill the role, and there’s no doubt they’re well positioned to do the job.
But what’s not considered is the idea of creating the right conditions to attract a new, global player to New Zealand who can deliver profound change across the market.
We’ve seen this happen across the ditch in Australia, with the emergence of Macquarie Bank. In recent years they’ve grown from nothing to 6-7% market share, driving down prices, and chipping away at bank margins—now at 1.8% in Australia, compared to 2.5% in New Zealand.
So, the question we’d be asking is what’s missing in the New Zealand market that might help us attract our own Macquarie Bank into the mix?
So, will the findings of the report deliver any meaningful change?
By our estimates, just one of the Commerce Commission’s 14 recommendations stands to have any major new benefit in terms of competition in banking in New Zealand—although, granted, the potential impact would be huge.