New Zealand’s government has announced a market study into the banking sector, which is dominated by four Australian-owned banks. The study will examine the profitability, competition and innovation of the banks, and whether they are serving the best interests of consumers.
Why is the government concerned about the banking sector?
The government said it has long-standing concerns that the market is not working well for New Zealanders. It cited the high profits that banks have consistently made over a number of years, and their returns that have outperformed their peers in other countries.
According to the Reserve Bank of New Zealand, the four largest banks – ANZ Bank New Zealand, ASB Bank, Bank of New Zealand and Westpac New Zealand – accounted for about 85% of bank loans and 90% of deposits in 2022. They also reported a combined net profit after tax of $7.1 billion, up 23% from 2021.
The government said it wants to ensure that there is a more competitive market for personal loans, mortgages and credit cards, so that consumers can get the best deal as households struggle with higher living costs.
How will the market study be conducted?
The market study will be carried out by the Commerce Commission, which is an independent regulator that promotes competition and fair trading in New Zealand. The commission has the power to conduct market studies under the Commerce Act 1986, which was amended in 2018 to give it this function.
The commission will consult with stakeholders, including banks, consumers, regulators and other interested parties, and gather information and evidence to analyse the state of competition and innovation in the banking sector. It will also look at whether there are any barriers to entry or expansion for new or existing competitors, whether consumers have enough choice and ability to switch between banks, and whether banks are introducing innovative products and services that meet consumer needs.
The commission will publish a draft report for public feedback in February 2024, and a final report by August 2024. The government will then decide whether any action is needed to address the findings of the report.
What are the reactions from the banks and others?
The New Zealand Bankers’ Association, which represents 17 registered banks in the country, said it will engage constructively with the market study. It said it believes the inquiry will ease any concerns in the community about competition and innovation in the banking industry.
The association’s chief executive Roger Beaumont said New Zealand has a “highly competitive” banking sector, with low interest rates, low fees and high customer satisfaction ratings. He said banks have invested heavily in digital technology and security, and have supported customers through the COVID-19 pandemic and other challenges.
However, some smaller banks have welcomed the market study, saying it will provide an opportunity to highlight the issues they face in competing with the big four. TSB Bank’s chief executive Donna Cooper said smaller banks have been disadvantaged by regulatory settings that favour larger banks with lower capital requirements and funding costs. She said smaller banks also struggle to access customer data from larger banks, which limits their ability to offer better products and services.
Some consumer groups and experts have also supported the market study, saying it will help to improve transparency and accountability in the banking sector. Consumer NZ’s chief executive Jon Duffy said consumers have been paying too much for banking services for too long, and there is a need for more competition and innovation to drive down prices and improve quality. He said consumers also face difficulties in switching between banks, due to complex processes and lack of information.
Philip Stevens, director of economic research at the Productivity Commission, said there is no simple measure for competition, but there are some indicators that suggest the banking sector is not very competitive. He said banks have high margins, high returns on equity, low levels of innovation and low levels of customer switching. He said a market study will help to identify the causes and consequences of these issues, and whether any policy changes are needed.
