The Banking oligopoly has been saved from radical reform

The champagne corks were surely popping last night in the Sydney headquarters of the “Big Four” Australian banks. The owners of ASB, ANZ, Westpac, and BNZ would have been highly relieved to receive the New Zealand Commerce Commission’s final report on competition in the banking sector and realise that the status quo would be retained. There would be some minor reforms, but none of the more radical proposals were being considered. The owners will be able to continue siphoning mega-profits – $7.21bn this year – back to Australia.

Likewise, the New Zealand Banking Association Te Rangapū Pēke was indeed being quite honest in welcoming the report yesterday and expressing how the banks are ready to help implement the relatively weak recommendations. Chief Executive Roger Beaumont praised the report: “The Commission has taken a well-informed and considered approach to the market study, which has provided useful insights into the New Zealand banking sector. We’re particularly pleased to see the Commission’s focus on the regulatory environment in which our banks operate… We support quality regulation that makes banking easier for consumers.”

Similarly, ANZ CEO Antonia Watson went on RNZ Morning Report today to say she approved of the Commission’s report and recommendation. She said that the banks actually wanted the government to help them with innovations like open banking, as proposed in the report.

The Government is talking tough on banks

The National-led Government responded to the Commerce Commission yesterday with a dramatically different message, suggesting the report represented a triumph of the interests of the people over that of the bank lobbyists. Finance Minister Nicola Willis talked tougher than anyone else: “The bank lobby may be strong, but democracy is stronger and our government won't be cowed by the big four banks.”

Willis played the role of the populist politician of the people, bashing the banks and positioning herself as taking action based on the Commerce Commission’s advice. She started in her press conference yesterday saying, “The Commerce Commission has proven what's been long-suspected: New Zealand's banking sector is uncompetitive, and Kiwis are not being well served by a highly profitable, two-tier oligopoly.”

Perhaps Willis’ most memorable bank-bashing line was her complaint that instead of genuine competition between the big banks, it “resembles a cosy pillow fight, with profit margins coming first and everyday Kiwis coming second”. The result, Willis complained, was that New Zealanders “are getting a raw deal: they face higher prices, fewer choices, and poorer service”.

Separate from the report, Willis pointed out that the big banks’ oligopolistic profits amount to 3% of New Zealand’s GDP: “That is more than the electricity market, supermarket and construction sector combined.” This means, she suggested, that the banking market is broken and is therefore holding back productivity and economic growth. Willis indicated that big reform was necessary, and so she promised that the Government would “action” all the Commerce Commission’s recommendations: “We do not intend to put this report on a shelf somewhere.”

Many people will find it refreshing and surprising to see the National-led Government hitting the banks so hard – at least in rhetoric. For example, Newstalk ZB’s Heather du Plessis-Allan responded today, saying “what's even more surprising is that it's a centre-right Government – who are often accused of cosying up to big business – who are prepared to do the ballsy thing there. Doesn't that make a nice change?”

Some caution is required, however. Politicians can often pose as populist enemies of the bankers, but this can often amount to pantomime unless they are willing to undertake radical reform. In reality, Willis or Commerce and Consumer Affairs Minister Andrew Bayly promised nothing substantial yesterday.

This is in line with what many in the banking industry had predicted. For example, a year ago, David Cunningham, who had worked in the industry for three decades, including as chief executive of The Co-Operative Bank, predicted: “I’m firmly of the belief that a banking inquiry will make diddly-squat difference.” It looks like he’s being proved right.

The Commerce Commission report was watered down

The Commerce Commission has developed a reputation for being a very mellow watchdog on the private sector. Its various market study reports have been incredibly mild in their recommendations. Whether about supermarkets, petrol retailing, or building supplies, there’s been a reluctance to take on the big companies dominating the sectors. Some complain of the government agency being “captured” by those they are supposed to be regulating.

Unfortunately, their final report on banking continued this trend. While the Commission was effective at pointing out the problems—it clearly identified that the banking market is broken—it was entirely weak in coming up with solutions.

The main two recommendations amount to optimism that developments in “open banking” would help consumers rather than the big banks and that the tiny state-owned KiwiBank, which has so far been relatively ineffectual in its role of creating anything different in banking, might do so if it could be funded with a few more billion dollars. Few banking experts think either of these recommendations will make much difference.

The Commerce Commission has pushed aside the more radical options for shaking up the banking industry. The leading proposal for reform was to implement some sort of structural separation in the market—i.e., break up the big banks.

The idea was that New Zealand should essentially replicate what happened in the telecommunications sector when Telecom was separated into what is now Spark and Chorus. In terms of banking, it would have meant that banks could operate as retail or wholesale clearing banks, but not as both, as they currently do. Making them choose to do one or the other would have taken away much of their market power to dominate.

The CE of the Commerce Commission, John Small, explained today why the final report avoided this area, essentially saying that it would be too big of a fight: “It’s a case of picking your battles.”

Small told The Post’s Rob Stock that a vertical or horizontal breakup of the big banking operations would be too difficult: “Breaking them up in a horizontal way would be, I think, really difficult. You have got a whole load of different branches, but they are all intimately connected to the mother ship. It seems a really tricky proposition to split some of those away. It would require another core banking system, bearing in mind none of them have invested in their core banking systems, and are only getting to them now. That vertical split, which has been promoted by the Banking Reform Coalition, we just don’t understand how it works to be honest.”

The Commission’s report also backed off from its earlier recommendation that the smaller banks' regulatory capital requirements should be reduced to allow them to compete with the Big Four banks. The current settings favour the big banks’ dominance and are widely seen as much more conservative than in comparable countries. Previously, the Commerce Commission’s John Small had indicated that this was the most important of their draft recommendations. But suddenly, this more radical proposal had been dropped.

The focus on open banking and KiwiBank

The media coverage of the market study report has focused mainly on recommendations involving open banking and KiwiBank. The suggestions for open banking are indeed sensible and necessary. So far, the big banks have dragged their heels on open banking, partly because this innovation might reduce their stranglehold on customers, allowing them to more easily shift banks and allowing other financial providers to offer useful banking services.

The Commission’s Small called open banking “a game-changer”. In response, Heather du Plessis-Allan says today: “I haven't seen any evidence that this is the game-changer it's being sold as. If anything, it's been really expensive in Australia – it's cost about $1.5 billion without doing all that much for customers.”

She’s right about this. When Australian Prime Minister Scott Morrison launched open banking in 2018, he declared it was a “monumental step” for empowering consumers in dealing with banks and promised a “revolution coming to customers”. But the Sydney Morning Herald reported this week that “Six years later, the policy… has not lived up to the hype. Usage has been underwhelming”, and now the Labor Government is vowing to fix it by cutting “the compliance costs for business”.

The idea of trying to upscale KiwiBank also has merit, but is probably being oversold as a solution. Willis spoke powerfully on this recommendation yesterday, saying: “I share the vision of a stronger more disruptive Kiwibank.” At the moment, the bank is a minnow, lacking the many billions of dollars it would take to compete with the Australian Big Four. Willis says: “If we remove that capital constraint and allow Kiwibank to really go for the growth that's out there ... it would knock the big four banks out of their complacency because, quite frankly, at the moment, they've got a cosy little arrangement.”

The problem is in finding those billions of dollars. There don’t seem to be any politicians who are willing to borrow that money or take it from the health or education spending budgets. This leaves a private-public deal to be done, with the risks and rhetoric that might result around the idea of the bank’s “privatisation”. So far, NZ First is treading carefully on whether they could support that, but Labour is showing more willingness.

Regardless of any private injection of funding, it’s unlikely that KiwiBank’s growth would change anything. Banking academics evaluate KiwiBank's performance as poor so far. The bank mostly just mimics the behaviour of the Big Four. Having it join the oligopolists as the Fifth Big Bank might not change anything for consumers, even if it produces more profits for state and private owners.

The Banking industry’s influence

Clearly, the Commerce Commission’s final report had been strongly influenced by the banking industry, especially the Big Four banks. The Commission had been undertaking extensive consultation with them since the interim report was drafted. In May, banking journalist Rob Stock commented: “The resistance has emerged: Banks have massive lobbying power and access to powerful consultants.”

So, despite Nicola Willis declaring yesterday that “democracy is stronger” than the banking lobbyists, it’s not so clear she is right. Discussing this today, Auckland University economist Robert MacCulloch has explained how the Commerce Commission has produced such weak recommendations: “Every day Kiwis are ripped off by the Big Banks. Every day you use Pay Wave the Banks pinch money out of your account. That's how banks make their dough these days. They hire a team of lawyers from one of NZ's big firms and ask them, ‘How can we legally steal money from our customers?’, and the lawyers duly oblige.”

MacCulloch says that the Government needs to get more creative in boosting KiwiBank as a disruptor. For instance, he recommends that the Ministry of Education help every new secondary school student set up a bank account with KiwiBank, soon providing the bank with a million new customers who are likely to stick with the bank. He says that this is essentially what happened with the old Post Office, which he suggests was sold off to ANZ, helping them become the biggest in the country and enabling a monopoly in New Zealand.

MacCulloch is right to point to the banking sell-offs that have occurred in the past, which have produced New Zealand’s current broken banking market. Previously, New Zealand had “disruptor” banks, but they’ve been sold off or merged into the big Australian banks. For example, in 1989, the Post Office Bank was sold to ANZ, and the Rural Bank went to another consortium, and this was followed by the sale of the BNZ in 1992 to the National Australia Bank. And in the 1990s the state’s “Housing Corp Mortgages” were sold to various banks such as Westpac and ANZ. The Trust Banks were also swallowed up, primarily by Australian owners.

There’s now a feeling that the public has been let down by both the banks and successive governments that have allowed this oligopolistic market to prevail. This latest report probably won’t change much of that. Some anti-monopolists have advocated radical reform, but they seem to have lost the debate, and bank lobbyists have won.

But that doesn’t mean the fight for a fairer banking system is over. Surveys show that the public is still distrustful and angry with the banks—especially with the perception that they are paying excessively high loan rates yet receiving incredibly low deposit rates. The mega-profits being pumped out of the country each day will continue to rankle.

Nicola Willis has done her best to signal that she is on the side of banking customers and that some significant reforms are coming. Eventually, however, the public is likely to be upset when they realise that nothing much will change.

Dr Bryce Edwards

Political Analyst in Residence, Director of the Democracy Project, School of Government, Victoria University of Wellington

Key Sources

Lucy Craymer (Reuters): New Zealand promises banking shake-up after watchdog finds the sector lacks competition

Heather du Plessis-Allan (Newstalk ZB): I'm not convinced the Commerce Commission study will lead anywhere

Lillian Hanly (RNZ): ComCom report: Willis adamant she wants 'action' on banking sector reforms

Richard Harman: Making Kiwibank fly – with (or without) Winston (paywalled)

Herald: Banking competition report says stronger Kiwibank, open banking could shake up ‘oligopoly’

Robert MacCulloch: How to Break NZ's Bank Oligopoly right now, in three lines, at no taxpayer cost. (Forget the Commerce Commission).

Ben Moore (BusinessDesk): ComCom banking shakeup hinges on open banking (paywalled)

New Zealand Banking Association: Banking Industry Welcomes Spotlight On Regulatory Barriers To Competition

RNZ: ANZ boss says New Zealand can't afford to own banks

Rob Stock (The Post): ComCom chair ‘really thrilled’ by Government response over banking (paywalled)

Rob Stock and Tom Pullar-Strecker (The Post): ‘Open banking’ and beefed-up Kiwibank key to more bank competition, says ComCom (paywalled)

Tom Pullar-Strecker (The Post): Government agrees to beef up Kiwibank (paywalled)

Gareth Vaughan (Interest): Nicola Willis & Andrew Bayly set sights on Kiwibank, open banking, the Reserve Bank & mortgage brokers

Gareth Vaughan (Interest): Commerce Commission pins hopes on Kiwibank & open banking

Clancy Yeates (Sydney Morning Herald): The fight over $1.5 billion ‘game-changer’ that hasn’t lived up to the hype