By Lyn McMorran*
We’ve heard a lot this week about how beefing-up Kiwibank will be the key to unlocking disruption in personal banking services in New Zealand.
But is adding one more player in the already existing banking oligarchy, really going to drive the competition and disruption we need?
It was one of two recommendations the Commerce Commission led with this week when it released its Final Report on driving competition in the personal banking sector. The report rightly highlights that without sufficient competition and disruption in banking services, including personal lending, New Zealand runs the risk of consumers missing out.
Don’t get me wrong, the Commission’s report was some of its best work to date, and you’ll find no opposition from me to the idea that Kiwibank should have access to more capital. I’m also not against profitability in the banking sector in general, it’s certainly better for the country than the alternative.
But if New Zealand is serious about shifting the dial to offer more competition and disruption, we need to do more than turn four major banks into five.
Untapped disruption potential lies in New Zealand’s specialist non-bank lending sector, if it’s given the chance to compete on a more level footing without so many barriers to entering the market (and staying).
Picture this - a town is facing a competition crisis with an oligarchy not of banks, but bakery giants.
Introducing one more bakery will help, but you’re missing a beat by not also evaluating the roadblocks stopping the patisseries, pie shops, bread makers, and other specialised players from reaching their competitive potential too.
Ask a non-bank lender how things are at the moment and they’ll likely tell you its tough. Cost of living aside, the layer upon layer of compliance and licencing regimes are disproportionately affecting smaller players, making it incredibly tough to complete.
Take the recent casualty of specialist home loan lender Resimac - not a good story for New Zealand and any aspiration of disruption and competition to benefit consumers.
The Report’s recommendation that the Reserve Bank should review its prudential capital settings to ensure they are competitively neutral and smaller players are able to compete, is hopeful.
This could be a game changer for the non-bank deposit takers (NBDTs) such as credit unions and building societies who are also prudentially regulated by the Reserve Bank.
It will however do nothing to improve the issues with respect to access to capital for the non- deposit-taking lending institutions (NDLI’s) such as specialist non-bank mortgage providers.
The issue of access to capital for all smaller players is a fundamental barrier to being able to compete with the major banks.
Some of New Zealand’s leading, non-bank housing loan providers ironically have to rely on wholesale funding from the major banks to fund their activities, meaning an inability to compete with them particularly on price, and the New Zealand public worse off for it.
One area that does let non-banks create competitive friction is the offerings they can provide consumers which the major banks cannot due to RBNZ constraints such as LVR restrictions.
If we want to foster competition, then this ability cannot be tampered with. It allows the non-banks to service customers who require bridging finance, loans for a home building project, loans to self-employed people, loans with higher LVRs, etc, which the major banks cannot or will not service.
Then there’s competition for deposit accounts.
Outside of the major banks, the only realistic alternative that exists are the NBDTs, including the credit unions and building societies, who are able to offer transaction and savings accounts as well as term deposits.
RBNZ has proposed a Depositor Compensation Scheme to protect consumers’ deposit money, however their “risk-based” approach for the setting of levies will disadvantage NBDTs by costing them disproportionately more than it will the banks.
It’s crucial that RBNZ understands that using metrics like return on equity as a measure of default risk is inappropriate, when many of the NBDTs are set up as mutuals whose reason for being is not to make large profits for shareholders but to reinvest their profit into their communities and for the good of their members.
This Report is a real opportunity for government to consider how, given the chance to compete on a more level footing without so many barriers to entry, New Zealand’s non-bank lending sector holds the key to meaningful disruption, and we hope it’s not an opportunity wasted.
*Lyn McMorran is the Executive Director of the Financial Services Federation (FSF), the non-profit industry body whose members provide credit and fleet leasing products to over 1.7 million New Zealand consumers and businesses.
11 Comments
Yes. Making four into five will only help very marginally.
A that idea being reported so gleefully shows our reluctance to consider serious remedies. We always skirt around the edges.
We need instead to break these banks up. Big four into completive twelve. Let's not muck about.
(Same for supermarkets actually)
Both monopolistic industries are not efficient, as they claim. They make their money from control.
I would say their is actually two markets in NZ
Residential House Lending - Break this up by a secondary mortgage market ala Fannie Mae
Business Lending - Make this competitive by separating this lending from Resi above - ie real banking separate from real estate banking
A privilege only available to registered banks.
But from the point of view of the bank, it has acquired the security without giving up any cash; the counterpart, in its balance-sheet, is an increase in its liabilities. There is expansion, from its point of view, on each side of its balance-sheet. But from the point of view of the rest of the economy, the bank has ‘created’ money. This is not to be denied. Hicks (1989, 58)
We start with the idea of credit creation, specifically a swap of IOUs between a bank and myself involving a bank loan that is my IOU and a bank deposit that is the bank’s IOU. Nothing could be simpler, and yet the mind rebels, especially the well-trained economist’s mind, because this simple operation increases my purchasing power without decreasing anyone else’s. It seems like alchemy, or anyway a violation of some deep conservation law. Real productive resources are the same as they were before, and the swap doesn’t change that, does it?
Spending of the new purchasing power adds another layer of perplexity. If spending increases but real resources do not, then it seems logical that the increased spending must exhaust itself in higher prices—that is the intuitive appeal of the quantity theory of money. My purchasing power may increase, but everyone else’s decreases because their money balances buy less. From this point of view, the alchemy of banking seems like a kind of theft, something to be deplored in the name of economic science and if possible outlawed in the name of the general good. Link
ANZ is not going to change it's lending policies or allow non-bank competitors to diminish repatriated returns to Australia.
Housing lending market share was flat at 30.4%, with ANZ NZ's total lending book rising $3 billion to $107 billion. Housing comprises 72% of ANZ NZ's total lending. Link
Assistant Governor Karen Silk, who has responsibility for markets and banking, said just over a third of households had a mortgage but those households tended to be higher income ones.
This means about 65% of all household income was impacted by mortgage rates, and will find themselves with more money to spend as they shift onto lower rates. Link
Hence:
Also, cryptocurrencies. They are the future and if we are serious about challenging the oligopolistic practices of not just the big commercial banks but also the central banks, they are an indispensable part of that.
Crypto is for the 99%, the current system is for the 1%. Don't let the banking cartels convince you you otherwise, if crypto is so terrible then banks should have no problem out-competing it.
Good article Lyn. Yes, choice is a wonderful thing & may there be more of it. But I sense we are heading into a period where there will be less banks operating, not more. Banks have been closing branches by the dozen & have been doing so for the last 20 years. Everything is headed online, including the so-called neo-competitors [the fintechs] who are almost wholly online. Such is the way of the world. In fact, I wouldn't be surprised to see the people of this country dealing directly [digitally] with the behemoths from North America in my time left on planet earth.
I went to Kiwibank a while ago but found their online offering frustrating. Getting this right is their future. I wish them well. But, I'll say it again, more choice is the answer.
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