A study by New Zealand’s Commerce Commission is devastating for Australia’s four major banks.
The owners of ASB, ANZ New Zealand, Bank of New Zealand and Westpac New Zealand stand exposed for their decades long strategies sweating the utmost out of their New Zealand subsidiaries and allowing them to dawdle.
The results are stubbornly excessive costs, indefensible profits and a scandalous absence of any real get up and go, let alone innovation in the banking industry.
Commerce Commission chair, John Small, more soberly said that the Draft Report from the Market Study into personal banking released on Thursday “reveals that an apparent focus by the four major banks on maintaining profit margins has resulted in ongoing underinvestment in their core technology platforms, low levels of innovation, stable market shares, and sustained high levels of profitability.”
Small said “ongoing disruption needs to be baked in to address the lack of obvious and aggressive competition for the major banks that means Kiwi consumers are missing out.”
Unlike in Australia, where banks are subject to regular forensic scrutiny in some domain or other, this study turns out to be the Commerce Commission’s first examination of the New Zealand banking industry in 20 years.
And much has changed, to the dismay of the commission and millions of customers.
“Over 20 years on from the last merger where we considered competition in the banking sector (the ANZ/National Bank merger), we observe a different competitive dynamic” the draft study concluded.
“None of the major banks appears currently to be acting as a disruptor in a sustained way.”
Why would any big bank stir discord within the oligopoly of which all four are members?
ASB, ANZ and Westpac all responded with fury and scorn at Bank of New Zealand’s efforts to pitch sustained price leadership in home loans in the early 2000s.
BNZ were soon back in their box, pricing in line with peers.
There are currently 27 registered banks operating in New Zealand, with 17 of these offering personal banking services that are the focus of the NZCC study. The major banks control 90 per cent of the market.
The Commonwealth Bank-owned ASB is called out and shamed in the study for abandoning its own past endeavours to upset the old order.
ASB was considered a particular constraint on the other major banks at the time the commission cleared the ANZ takeover of National Bank, the study says.
“For example, the clearance decision [in 2004] noted ASB has been growing successfully and was considered by one market participant as a maverick player.
“ASB was the first to introduce internet banking.
“Given ASB’s growth and high customer satisfaction levels, it is unlikely that it would have an incentive to participate in coordinated market power to maximise profits, at the expense of its expansion” or so the commission said 20 years ago.
“Over 20 years later, we observe a different competitive dynamic. None of the major banks appear currently to be acting as a disruptor in a sustained way.
“Although each of the major banks has their own strategies and focus areas, overall they have very similar price (ie, interest rates and fees) and non-price (ie, service) offerings, and shares of supply have been stable for some years.
“Kiwibank does not currently have the scale or capital backing to continuously challenge the major banks aggressively, and smaller providers do not appear to be a significant competitive threat for a range of reasons.”
The Commerce Commission of course analysed profitability in the NZ banking sector.
“We consider that the profitability of the New Zealand banking sector is high relative to peer countries. We are also not satisfied that the information provided fully explains the profitability of the bulk of the New Zealand banking sector since 2010.
“We therefore consider that at least part of the profitability is explained by the market power of some participants and that New Zealand’s banking sector profits are higher than what would be expected if the major banks faced greater competition.”
The Commerce Commission found the NZ industry, or the big four banks at least, to be stuck in a rut on their business models, while still earning sky high profits.
“The focus of New Zealand banks on lower risk activities means we would expect the sector to deliver lower returns relative to riskier banking sectors overseas” the study said.
“This is because, all things being equal, a business that takes on higher risk can typically expect to earn higher profitability on average over time.
“The New Zealand banking sector is relatively low-risk in nature because it is more heavily weighted towards traditional (vanilla) banking activities than many peer nations.”
Taking a swipe at the industry’s archaic framework for making money, the NZCC said: “On average over our analysis period, New Zealand banks proportion of non-interest income to total income was the lowest of our peer country sample at 22 per cent, indicating that New Zealand’s banking sector has a greater focus on traditional interest bearing banking activities.”
Considering the technology side of the industry, the study is at its most animated.
“We have been surprised by the limited investment by the major banks and Kiwibank into core banking systems and the low prioritisation given to it” the study says.
“Legacy systems constrain the ability of the major banks and Kiwibank, as well as fintechs, to innovate and compete.
“As a result, we have seen limited levels of innovation across the industry in personal banking services.
“Innovation has tended to occur around the edges of the customer experience rather than at the core of product and pricing structures.”
The study then goes on to question “whether the limited investment in core systems to date is explained by the need to keep pace with changing regulatory requirements [as most banks and all big banks have said].
“Comparable change has also occurred in Australia, where there has been a higher level of innovation by the parents of the four large New Zealand banks.
“While we acknowledge the pace of regulatory change and the associated need for investment, fully depreciated core systems indicate sustained under-investment and, for the major banks, appear to indicate a lack of competitive pressure over an extended period.”