The considered underinvestment by the four big banks in New Zealand in their core systems is one of the bedrocks of the oligopoly’s long-running dominance of the country’s banking sector, the New Zealand Commerce Commission’s Market study into personal banking services has concluded.
The final report of this study, released yesterday, is comprehensive, if (reasonably enough) less confrontational with regard to cajoling the Reserve Bank of New Zealand into watering down its prudential standards.
The ComCom’s study instead pins almost all its schemes for warming up competitive tensions in the industry on speedier rollout of Open Banking.
“The major banks innovate enough to maintain market share but significant investment to modernise core systems is needed” is one of the key findings in the study, echoing a key theme from the draft report earlier in the year.
The Commission noted that “a number of banks, including the major banks, Kiwibank and some smaller banks, have worked to simplify their product suites [and these] simplification efforts have, in part, helped the banks to position for digital transformation.”
But “while the major banks and Kiwibank are planning or progressing transformation programmes, they have yet to complete core systems upgrades despite the resources available to them.
“Across the board, there are ageing interconnected systems, many now fully depreciated.”
Legacy core systems “limit the banks and constrain innovation and competition by others” the ComCom complained.
“Modern core banking systems would enable greater innovation (as well as reducing operating costs and costs of regulatory change) and facilitate easier interoperability with third-party systems.
“The major banks and Kiwibank have acknowledged the limitations of their legacy systems and the need to invest.
“The major banks acknowledge that their legacy core systems can add additional time, cost and complexity to work required for regulatory change and compliance.
“We have also heard examples where banks’ inflexible systems appear to constrain the banks’ ability to work with iwi to provide finance for housing.”
The major banks – ANZ New Zealand, ASB, BNZ and Westpac New Zealand - say that limited investment in modernising core systems to date has been due to regulatory change “but we consider limited competition to be a contributing factor” the report said.
The competition report analysed the risk of “accommodating behaviour” as may often be found within an oligopoly.
“We have not found evidence of explicit collusion” the report sid.
“However, the major banks have broadly similar cost structures, can readily observe and respond to each other’s pricing, interact regularly across a range of services, and the threat of disruption by smaller providers or new entrants is low. These features make the sector prone to accommodating behaviour.
“We see banks commonly setting growth targets of seemingly limited ambition over periods that extend beyond what might reasonably be attributed to temporary misalignments.
“A near-term imbalance might explain a bank pulling back for, say, a few months.
“However, it does not explain a bank seeking to grow its loan or deposit volumes at, say, 1x system growth (sometimes less) for an entire financial year.
“Such strategies appear to reflect decisions to avoid competing too vigorously and instead seek mutually accommodating growth targets.”
“Accelerate and co-ordinate progress on open banking”, is probably the primary recommendation in the ComCom study.
“In the medium to long-term, open banking has the greatest potential to promote ongoing disruptive competition for personal banking services” the report said.
“Commitment to ambitious milestones and coordinated work between industry and Government, particularly over the next 12 months, will bring early gains to consumers.
“The Government should support open banking by being an early adopter.”
The study’s lead recommendation is in fact a call on the NZ government “as Kiwibank’s owner, to consider what is necessary to make Kiwibank a disruptive competitor, including how to provide it with access to more capital.
“In the shorter term, capitalising Kiwibank appears to have the greatest potential to constrain the major banks and disrupt a market that is otherwise stable due to lack of competition.”
This is almost certainly wishful thinking, though the finance minister Nicola Willis yesterday said she has asked Treasury to engage with Kiwibank’s parent company Kiwi Group Capital on options for raising new capital, including from KiwiSaver funds, New Zealand investment funds and investment from everyday New Zealanders, Stuff reports.
Willis said she wanted it to remain “New Zealand's bank”.
“I see the Government retaining a majority interest well into the future.”