Big four banks operate as oligopoly, commission says
New Zealand’s big four banks are highly profitable and operate as an oligopoly without strong competition in the personal banking market, the Commerce Commission has concluded in its draft market study into the industry.
However, neither the commission nor the Government are promising a quick fix.
Banks’ average return on equity – which is a measure of profitability – averaged 12.6% between 2010 and 2021 putting their profits well within the top quarter among banks in comparable countries, the commission said.
Between them ANZ, ASB, BNZ and Westpac own about 90% of all bank assets in the country. “No new entrants have meaningfully increased competition faced by the major banks since the establishment of Kiwibank in 2001,” the commission said.
“Kiwibank imposes some constraint on the major banks but currently lacks the capital backing to consistently drive stronger competition in the market.”
Competition between the major banks was sporadic rather than strong and sustained and they had been limited in their innovation, it said.
The Government has been planning its own select committee inquiry into the banking industry that is likely to focus more on the services banks provide to businesses. But Commerce Minister Andrew Bayly confirmed for the first time yesterday that it would allow the Commerce Commission to complete its market study, saying he was looking forward to receiving its final report in August.
He told Stuff last week that in his view the jury was out on whether there was adequate bank competition and whether people could get access to credit when they needed it. The solution probably lay in “incremental changes”, he said.
Commenting on the broader concern that people might feel they were being ripped off by big businesses, Bayly said that “unfortunately, many of these markets are where they are” and had taken decades to get to the point they were at.
“The best that the Government can do is look at how it can facilitate competition.”
Bayly said a proposed “consumer data right” law that will be designed to give people more control over their financial and other information could increase competition by making its easier for people to switch between banks. It would not be a panacea, but offered the prospect “over time of making elements of banking subject to greater competition”, he said.
Commerce Commission chairperson John Small said he “broadly” agreed with that assessment and the commission agreed in its report there was no single quick fix to improve competition.
“Overseas experience suggests that the scale and brand advantages of large banks and consumer inertia are difficult to overcome, even where open banking is well-established,” it said.
But it appeared more upbeat about the potential of open-banking reforms that are designed to make it easier for people to shop around for banking services.
“We recommend that the Government target having open banking fully operational by mid-2026,” it said.
Small said the Reserve Bank’s remit should change so it recognised “promoting” bank competition as one of its objectives when weighing up regulations.
Kiwibank had “the greatest potential” to be a disruptive competitor to the big four banks in the short to medium term, and the Reserve Bank could adjust its regulations over the capital that banks needed to hold to give it a leg up, the commission suggested.
The Reserve Bank should view other regulations through “a competition lens”, it said. “This will reduce the risk of unintended consequences of decisions on competition.”
Competition advocate Tex Edwards – who has called for the commission to consider recommending the break-up of ANZ and ASB – said it should make clear a breakup was an option if banks missed deadlines for the implementation of open-banking.
But Small suggested it was banks’ behaviour, rather than their number that mattered.
“Even if there were six banks, you could imagine that settling into a pattern.”
Consumer NZ chief executive Jon Duffy said it had long-standing concerns about the state of the banking sector.
“Swift action needs to be taken,” he said. “Our research found that over the past year, only 3% of New Zealanders switched their primary bank.
“Low levels of switching by customers has allowed big Aussie-owned banks to rest on their laurels and meant they can get away with lacklustre innovation and service.”
New Zealand Banking Association chief executive Roger Beaumont said banks would provide constructive feedback on the commission’s draft recommendations.
The draft report was “a comprehensive and robust assessment of banking in New Zealand”, he said.
“We are pleased to see the commission recognises the significant impact regulation has on consumers.
“Our banks embrace competition and support transparent and easy access to banking services for all New Zealanders,” he said.