More Competition In NZ Banking Needs Fewer Banks, Not More

29 August 2024 

The Commerce Commission's call for a more competitive New Zealand banking sector is little more than lip service because it is almost impossible for banks to offer better deals or diversify their products in this country's highly regulated financial system—Kiwis need fewer traditional banks and greater exposure to innovative nano banks if they want a better deal. 

Meurig Chapman, CEO of Happy Prime, a leading specialist credit risk firm in New Zealand's corporate banking and financing sector, says the ComCom is being hypocritical by calling for more banking competition after four years of throttling competition with the CCCFA, which is known for its rigid compliance requirements and the RBNZs Macro prudential requirements which have restrictive LVRs and debit to income limits. 

"The stringent controls imposed by the CCCFA and the Reserve Bank of New Zealand's (RBNZ) extreme capital requirements and tough banking license requirements stifle any level of innovation or diversification in the New Zealand banking sector.

"Government departments are pointing fingers at each other, while the RBNZ is following instructions to maintain the stability of banks as its primary focus, which, I believe, goes to extremes," Chapman says. 

He says New Zealand is already saturated with banks with excessive focus on mortgages due to inconsistent approaches to capital requirements and strict regulations like the CCCFA and banking code of conduct. This risk-averse approach has led to an over-concentration in mortgages, which are largely non-productive assets. 

"If the Commerce Commission wants more competition in the market, we need fewer traditional banks, not more, and if we're going to offer better deals to customers, we should consider allowing more innovation in the market. One of the actions RBNZ would need to take is to reduce capital requirements and make it easier to obtain a banking license.” 

Chapman says the only way banking in New Zealand will change is “if we have fewer vanilla banks, which will require consolidation of New Zealand-owned banks into an entity. However, Kiwibank does not have the capital to achieve this at present. But then again, Kiwibank struggles to justify its existence because its offerings are identical to traditional Australian-owned banks”.

"The key question is whether we are willing to accept more risk for better customer outcomes. We must also create more opportunities for businesses to gain a larger share of banking activities. The challenge is to incentivise banks to invest in productive market sectors rather than just residential mortgages."

Chapman says that instead of calling for more competition, the real need lies in fostering innovation. 

1. Greater innovation 

New Zealand's banking sector needs innovation, focusing more on niche markets and introducing nano banks and other models. These smaller, targeted banks could offer specialised services tailored to specific demographics, moving beyond the vanilla offerings of the dominant banks.

Greater exposure to risk 

To spur growth, policymakers must shift the regulatory environment from policing to supporting innovation.

"Lowering the capital threshold, offering temporary licenses, and fostering a consultative approach could enable new entrants to thrive. The government must also address the broader tax system and compliance landscape that discourages risk-taking. Without these changes, New Zealand's banking sector risks remaining stagnant, dominated by vanilla products and missed opportunities."

Open banking

Open banking is good because it enables consumers to share their financial data with third-party providers, allowing for more personalised financial services and increased competition. However, while it offers potential benefits like easier account management and tailored products, its impact remains limited.

"Without complementary innovations, open banking alone doesn't drive significant change. Globally Open Banking has had minimal effect, largely due to a lack of support for innovative banking models to adapt and regulatory hurdles that stifle broader transformation in the sector," Chapman says.

Fewer traditional banks

The current structure, dominated by four Australian-owned banks, leaves little room for smaller, more agile New Zealand Banks to thrive. By consolidating the number of New Zealand-owned banks, we can create larger, more competitive entities that are better equipped to challenge the status quo and push for innovative solutions.

"Fewer but stronger New Zealand banks would have the resources to invest in niche markets, drive technological advancements, and offer more diverse financial products. This consolidation could break the dominance of vanilla offerings and foster a competitive environment where banks are incentivised to differentiate themselves through innovation. This will ultimately benefit consumers with better services and more choice," says Chapman.

New Zealand needs to foster innovation by creating an environment where businesses can test ideas without heavy regulation. Instead of over-regulating, we should encourage risk-taking and creativity, enabling smart individuals with good ideas to succeed and drive economic progress.

"Breaking up the dominance of Australian-owned banks could spur competition and innovation in New Zealand's financial sector. Just as the UK saw increased competition after the GFC by breaking up large banks, a similar move here could create a more dynamic, customer-focused market," says Chapman.

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