Commerce Commission finds major banks not facing enough competition, sector needs 'disruption'

The Commerce Commission has found New Zealand's banking sector doesn't have enough competition.

A review of the sector released on Thursday, found the four major banks - ANZ, ASB, BNZ and Westpac – do not face strong competition when providing personal banking services.

It is New Zealand's first competition study into personal banking services and was launched by the previous Labour Government to ensure competition is working for customers.

Commerce Commission chair John Small said "ongoing disruption needs to be baked in" to address the lack of obvious and aggressive competition for the major banks that means Kiwi consumers are missing out.

Dr Small said the draft report found the status quo is a "stable two-tier oligopoly" with the top tier (ANZ, ASB, BNZ and Westpac) enjoying sustained high levels of profitability compared with their global peers.  Smaller providers are in the second tier, and Kiwibank was "stuck in the middle".

No new entrants have meaningfully increased competition faced by the major banks since the establishment of Kiwibank in 2001. Kiwibank imposes some constraint on the major banks but currently lacks the capital backing to consistently drive stronger competition in the market, the report found.

"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," he said.

"The lack of a disruptive force in our banking market means competition between the majors is sporadic and not sustained."

Dr Small said 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.

He said ongoing disruption is needed to ensure contestability over the longer-term.

The Commerce Commission identified four main factors that are limiting competition. They include structural advantages of major banks, regulatory barriers to entry and expansion, barriers to consumers switching and impediments to innovation by fintech.

It drafted up recommendations to improve competition in the sector.

Improve the capital position of smaller providers and Kiwibank: 

  • Access to capital is one of the key constraints affecting the ability of smaller providers and Kiwibank to grow and compete.
  • The Draft Report recommends that the Reserve Bank reviews its prudential capital settings to ensure they are competitively neutral and smaller players are better able to compete.
  • It also suggests that Kiwibank’s owner considers increasing its access to capital, and converting it into a disruptive competitor.

Accelerate progress on open banking: 

  • Open banking has the potential to revolutionise banking over the medium to long-term. However, fintechs are facing severe barriers and are unable to provide disruptive innovation. 
  • The Report recommends setting a clear deadline to have open banking fully operational by mid-2026 and having regulatory backstops available so that the minimum requirements are delivered to support the acceleration of open banking.
  • It also recommends that the Government does more to reduce the barriers imposed by the Anti Money Laundering and Countering Financing of Terrorism regime on banks working with fintechs.    

Ensure the regulatory environment better supports competition: 

  • The Report recommends that policy makers and regulators responsible for the personal banking sector explicitly and transparently consider the competitive effects of their decisions. 
  • The recommendations are intended to reduce unintended consequences of decisions on competition and ensure that any trade-offs with other policy goals (such as financial stability and consumer protection) are specifically considered. 

Empower consumers to better access the benefits of competition: 

  • The Report sets out how consumers will directly benefit from reduced barriers to switching providers.
  • The recommendations include the introduction of 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.  

Commerce and Consumer Affairs Minister Andrew Bayly welcomed the release of the draft report. He encouraged those interested in improving outcomes for personal banking services to provide feedback to the Commission to help with refining these recommendations.

"The Coalition Government is committed to delivering better banking outcomes and a more productive economy for New Zealanders," Bayly said.

"I am working with our coalition partners to determine any possible response including the option of the select committee inquiry, but will determine what actions to take following the release of the final report."

The Commission’s Draft Report is subject to consultation prior to its final report being published in August 2024. Consultation opens Friday and closes on 18 April.