New Zealand Banking Sector Competition: Regulatory Challenges and Concerns

Discover the regulatory challenges and concerns faced by the banking sector in New Zealand. Explore the impact of competition and learn about the advantages enjoyed by big banks over local counterparts. Stay informed with the latest developments.

New Zealand’s Commerce Commission recently embarked on a thorough market study aiming to analyze the level of competition within the country’s personal banking services sector. This study received an impressive total of 38 submissions from a diverse range of entities including the big four Australian-owned banks, New Zealand-owned banks, non-bank financial institutions, and bank customers. Interestingly, a joint submission made by New Zealand’s Co-operative Bank, Kiwibank, SBS Bank, and TSB Bank shed light on the contentious competitive advantage enjoyed by the big banks over their local counterparts.

New Zealand Banking Sector Competition: Regulatory Challenges and Concerns | ogusyis.com

One of the key concerns raised by the Financial Services Federation (FSF), which represents 94 members encompassing credit unions, building societies, and their 1.7 million customers, pertains to the competition landscape. The FSF specifically pinpointed the Credit Contracts and Consumer Finance Act (CCCFA) as the primary legislation responsible for stifling competition and hindering innovation. Lyn McMorran, the Executive Director of FSF, emphasized that the CCCFA unfairly places their members at a disadvantage, urging regulators to take into account its impact on both banks and non-bank lenders. According to McMorran, the CCCFA has made it unduly difficult for bank customers to explore alternative options with non-bank lenders, creating a group of consumers dubbed as “mortgage prisoners” who cannot secure credit from responsible providers.

Given these preliminary findings, the banks have been granted a month to respond, with the release of the final report expected in August next year. It is noteworthy that New Zealand’s scrutiny of banking profits echoes similar concerns expressed in Australia, where the Australian Competition and Consumer Commission recently rejected a major acquisition due to potential oligopoly formation and coordinated pricing. The Commerce Commission has voiced concerns regarding factors that might undermine price competition for home loans, such as high search costs resulting from opaque discretionary discounting by certain lenders, as well as disparities between interest rates paid for new home loans compared to existing ones.

Noting the relatively lower levels of digital disruption in New Zealand compared to global banking markets, the Commerce Commission intends to delve into the exploration of innovation trends and the development of new services within the sector. Additionally, it highlighted the slow pace at which banks are advancing in the establishment of application programming interfaces (APIs), which enable external access to customer data and facilitate payments. Critics argue that this gradual API development by banks acts as a hindrance to the implementation of widely adopted real-time account-to-account payments, a feature already prevalent in various other parts of the Asia Pacific region.

The absence of small business banking in the market study has elicited criticism. As the growth in business lending lags significantly behind residential mortgage lending, critics vocalize the importance of ensuring easy and cost-effective access to finance for businesses as it is crucial for fostering economic growth. Notably, freelance economist Cameron Bagrie has strongly urged the government to incorporate small business banking in the market study’s terms of reference, drawing attention to the low net promoter scores obtained by banks from small business owners in comparison to retail bank customers.

As New Zealand’s banking sector braces itself for anticipated transformations, the outcomes of this market study and the subsequent regulatory decisions will undoubtedly play a pivotal role in shaping the industry’s future. Whether it involves equalizing the playing field for smaller banks, facilitating digital disruption, or ensuring fair access to finance for businesses, the choices made at this juncture will carry long-term implications for the sector and its valued customers.