Banks ponder credit disruption

Buy-now-pay-later schemes have been a headache for banks in a year when profits have dropped, KPMG says.

Its Financial Institutions Performance Survey for 2019 shows New Zealand banks’ combined net profit dropped 0.99 per cent to

$5.71 billion in the year.

It follows two years of steady profit growth.

Net interest income was up

4.79 per cent, driven by growth in loans of 5.37 per cent.

The report highlighted the disruption that fintech is creating in the banking sector.

Buy-now-pay-later services such as Afterpay and Laybuy had seen huge growth, KPMG said, and that had disrupted a payments market traditionally dominated by bank-funded credit card providers.

The report said those schemes were directly competing with credit cards and small personal loans but did not have to comply with responsible lending guidelines because no interest was being charged.

‘‘This is becoming somewhat of a point of contention.’’

Costs would rise if responsible lending obligations were introduced for the sector because it was expensive to apply them to each application for credit, KPMG said.

That could mean higher margins charged for retailers, or a service fee for customers.

KPMG said banks could be tempted to join the market if it was not regulated.

ASB has already partnered with Klarna, Europe’s biggest private fintech firm and buy-nowpay-later provider.

Banks also had new capital requirements confirmed by the Reserve Bank last year.

KPMG partner John Kensington said the success of the capital changes in shoring up the banking sector would depend on how it responded.

‘‘An outcome that is suggested by many is that to achieve the new capital requirements, the banks will amongst other things likely review their books client by client and reassess and reprice risk with the possibility of credit rationing.

‘‘For riskier clients in particular, rates will likely increase and loan covenants may become more restrictive or in more severe cases the banks may discontinue funding.

‘‘Deposit rates will likely reduce further however there is likely to be a floor in these rates as there will be certain levels of rates where term deposit investors will start looking for another home for their money in droves, which will reduce available funding for the banks,’’ Kensington said.

Banks would have to manage the changes through the transition period to ensure there was no shock to the economy, he said.