Commerce Commission releases draft report on its market study into personal banking sector

  • Legal update

    22 March 2024

Commerce Commission releases draft report on its market study into personal banking sector  Desktop Image Commerce Commission releases draft report on its market study into personal banking sector  Mobile Image

The Commerce Commission has released its draft report regarding its market study into the personal banking sector in New Zealand (Draft Report). 

The Draft Report, which can be found here, sets out the Commerce Commission’s preliminary findings and recommendations following its study of the market. 

Who should read this? Why?

The Draft Report outlines the key factors the Commerce Commission considers influence competition in the personal banking sector, along with their proposed recommendations aimed at improving competition. These issues are relevant to all banks, emerging FinTechs, as well as other stakeholders. 

What are the findings?

The Commission considers the personal banking sector in New Zealand lacks competition. In particular, the Commission highlights the absence of a “maverick” – a particularly aggressive or innovative provider capable of exerting disruptive competitive pressure on the major banks.

The Commission’s study was focused on deposit accounts and home loans. It identified four main factors that it considers limit competition in the sector:

  • Major banks enjoy significant structural advantages, including scale, scope, funding cost advantages, and established brand recognition. 
  • Regulatory barriers present significant obstacles to new entrants and expansion, particularly impacting smaller players. Notably, the Reserve Bank’s prudential capital requirements have provided major banks with a considerable competitive edge.
  • There are real and perceived difficulties for consumers associated with switching between providers.
  • FinTechs encounter various impediments to innovation, including challenges with regulatory compliance, opening and maintaining a business bank account, access to capital, and consumer data. 
What are the draft recommendations?

The draft recommendations are grouped into four interdependent areas that they consider hinder the entry and expansion of new and existing providers in the market.  

1. Improving the capital position of smaller providers 

The Commission recommends a review of the Reserve Bank’s prudential capital settings to ensure they foster a level playing field. Additionally, it proposes that Kiwibank’s owner explore options to bolster its access to capital, potentially transforming it into a disruptive competitor in the market.

2. Accelerating progress on open banking

The Commission recommends setting a clear deadline to have open banking fully operational by mid-2026. It further suggests having regulatory backstops in place to ensure the minimum requirements are met to support the acceleration of open banking. It also recommends that the Government reduce the barriers imposed by the Anti Money Laundering and Countering Financing of Terrorism regime on banks working with FinTechs.

3. Ensuring the regulatory environment better supports competition

The Commission recommends that policymakers and regulators responsible for the personal banking sector explicitly and transparently consider the competitive effects of their decisions. These recommendations aim to reduce unintended consequences of decisions on competition.

4. Empowering consumers to better access the benefits of competition

The Commission sets out how consumers will directly benefit from reduced barriers to switching providers. The recommendations include the introduction of better tools and services to help consumers in securing the best deals. Additionally, it advocates for an enhanced switching service and the introduction of a basic bank account service that is accessible to all New Zealanders.

What Next?

The Draft Report is currently open to consultation, with the final report slated for publication in August 2024. If you have any questions or need help with the consultation, please contact one of our experts.

This article was co-authored by Ken Ng, an Associate in our Banking and Financial Services team.