We need more banks, not bigger ones
In its draft report on banking, the Commerce Commission highlighted Kiwibank’s potential to be a challenger to the “oligopoly” of the big four Aussie banks. This was the right call.
But there is a much better (and cheaper) way to do this than increasing Kiwibank’s capital, and it meshes with one of the commission’s other recommendations – to promote open banking.
Our biggest problem is that we need more banks, not bigger banks. Setting Kiwibank on an expansion path to join the oligopoly won’t change the underlying problem – it simply means that five banks will share 90 per cent of the market instead of four.
This outcome is almost certain if we pursue one popular option for Kiwibank capital-raising: a partial public listing. With a shareholderfocused board facing inevitable demands for large, reliable dividends, Kiwibank will quickly slip into comfortable co-existence with the other big banks, as has happened in the electricity market.
We will lose control of Kiwibank and a generational chance for real change. Poor service, towns without banks, too much lending on housing and too little on productive businesses – these problems will persist.
So what’s the solution? Instead of making Kiwibank big enough to join the oligopoly, the Government can use Kiwibank to supercharge the entry of innovative new banks, both branchbased and digital.
The opportunity is to make the entry of new banks easier and one area where scale is important is technology. A banking system that encourages more banks can address this by providing a “shared services hub” that smaller banks could tap into.
This is where Kiwibank is ideally placed. It can establish a publicly owned banking-as-a-service (Baas) group offering new entrants technology, back-office and regulatory support on commercial terms. It has the expertise and a banking licence to do this.
By making it easier for banks to start and operate profitably, and safer for their customers, it can encourage iwi, regional groups, corporates, global fin-techs and local start-ups to offer banking services.
Not only is this option better, it’s less risky than a head-on assault on the oligopoly. Instead of finding billions for new capital to make Kiwibank a serious challenger, the Government can put millions into growing a banking services hub that will eventually draw in billions of dollars of private capital, innovation and perhaps a globally competitive New Zealand fintech industry.
This is where the “two-tier oligopoly” identified by the Commerce Commission can be turned into New Zealand’s opportunity at a pivotal time as technology transforms banking.
There is plenty of room for growth. New Zealand has strong regulation and no small bank has ever failed here. The United States has one bank for every 70,000 people, Germany one for every 45,000, but New Zealand has one for every 567,000.
The answer to competition and better outcomes is not bigger banks but more banks – and our publicly owned challenger Kiwibank is ideally placed to lead this.
Instead of making Kiwibank big enough to join the oligopoly, the Government can use Kiwibank to supercharge the entry of innovative new banks, both branch-based and digital.