When the last bank pulled out of Te Aroha two years ago, Judy and Frank Finn took out most of their cash and marched down the road to the local credit union.

The retired couple had a small grocery store on Stanley Ave for 32 years, and ran the nearby college canteen; they knew how much the local community valued local banking services.

But one by one, all the banks quit the Waikato town. Kiwibank’s agency inside the local Four Square was last to go. “You’d line up beside the cabbages,” recalls Judy Finn, who is now 88.

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“Small businesses find the change hard. And it’s very hard on the elderly who have to go out of town to have anything to do with a bank.”

Only the credit union offers over-the-counter services now: “Face to face. Good tellers. A manager you can talk to. All the things that you didn’t get with the banks.”

Frank Finn, 91, chips in. “Te Aroha was a town of greater standing than what it is now,” he says. “People used to come across to Te Aroha to go to the lawyers, the banks and any other financial institutions, but now of course we’re just a satellite of Morrinsville. We’re borderline, financially.”

Te Aroha locals’ experience speaks to both sides of the debate about bank competition, which is now the subject of a market study by the Commerce Commission.

“Our banks are highly regulated, well capitalised, and profitable. That helps makes them resilient, and with recent overseas bank failures we’ve seen why that’s important.”
– Roger Beaumont, NZ Banking Association

On the one hand, the big banks pick and choose which customers and communities they value; challengers such as First Credit Union or the Co-operative Bank only get a look-in when the big banks make space for them.

On the other hand, the Finns say there was no problem changing providers. Banking Association chief executive Roger Beaumont concurs: “Switching banks is easy,”

So is it really?

This week, the Commerce Commission has published a preliminary issues paper for its market study – precipitated in February when Reserve Bank chief economist Paul Conway told Newsroom they’d back an inquiry into bank profits, with mortgage interest rates rising faster than term deposit rates. Big banks are making bigger profits than comparable banks overseas, the commission says, and also much more than their smaller rivals.

“Unnecessary barriers to switching such as opaque pricing, or perceived difficulties in relation to the technical procedure for switching can weaken the competitive constraint that personal banking providers can have on each other,” the issues paper says.

Oliver Meech, the commission’s market studies manager, expands on its next steps. It’s commissioning a comprehensive survey of about 2,000 consumers that will seek to understand the factors that influence New Zealanders’ choices of personal banking services providers, he tells Newsroom. That will look at rates of consumer switching, and key reasons why customers have or have not switched or considered switching.

Taking on the big boys

Mark Wilkshire was visiting family in Whanganui last week. He met a neighbour, a middle-aged woman working in the property sector, who was looking to shift banks. So Wilkshire, the chief executive of the smallish Co-operative Bank, introduced her to the bank’s “very capable team” there, who were able to help her across.

But why is it that hard? Why does it need the intervention of a bank’s chief executive to switch over, when switching power companies or broadband providers or cellphone networks is now so easy?

“There are some impediments to switching,” Wilkshire says. “And there’s debate about whether some of that is a perceived hassle factor, and how much we could make it easier. But there’s no doubt there’s friction in changing banks.”

Co-operative Bank chief executive Mark Wilkshire. Photo: Supplied

He cites a Consumer NZ survey, finding only 4 percent of New Zealanders switched banks last year – that’s perhaps 150,000 people.

He finds this disappointing, given the bigger profits pocketed by the bigger banks. He says the co-operative model is common in New Zealand – think Fonterra, Foodstuffs, Mitre 10 – but there is only one bank operating with that model.

“It is a unique model for a corporate bank, where we actually do return profits back to customers by way of a customer rebate, because the customers are our shareholders,” Wilkshire explains. “‘It’s a model that’s perhaps coming of age, at this time when people are concerned about the scale of some of those profits going back to external, overseas shareholders, rather than going back to customers themselves.

“For us, we need to make a reasonable return. We’d like to make a sustainable profit. But we’re not driven by profitability, because our customers are our shareholders. So whereas the large banks have investor reports to show they’re making those quarter-on-quarter improvements each time to satisfy their analysts and shareholders, that doesn’t exist in the co-op.

“When you look at the big banks’ profitability, some of the absolute numbers are high because they’re large. But there’s been some analysis by other commentators looking at their relative size and return on equity – and those returns are quite high. And you have to look at that and think, are they too high? And I think that’s a valid question for the other banks to answer.”

There are simple solutions that could make things easier, he says, such as digital IDs, easing repetitive anti-money-laundering requirements on customers, consumer data rights and of course account number portability.

But much of it is just fear of the unknown. “Particularly when we’re heading into a more recessionary environment, as we are now, and the interest rates have been going up, and cost of living going up, people are more inclined to just stay put, to keep their head down.”

Co-operative Business NZ chief executive Roz Henry agrees. “The Council of Financial Regulators is inadvertently squeezing out competition, in particular from any of the smaller players which will leave just the four big Australian-owned institutional banks offering banking services,” she worries.

As a result of the implementation and application of Conduct of Financial Institutions legislation, the cost of compliance for the smaller players, and debt-to-equity ratios having to be significantly greater, the four big institutional banks are the only ones with the funds to enable meeting the big compliance costs.

“That’s a substandard outcome given the reduced level of competition, none of them are New Zealand-owned, and their significant profits are sent back off shore.”

She contrasts that with domestic banks such as SBS and Co-op, and credit unions such as Unity and First, that are in the main member-owned.

“Internationally, we see a significantly greater number of member-owned banks being highly successful in providing banking services within their countries,” Henry says. “Their governments recognise the importance of these entities to their economies and communities at large.

“Here in New Zealand, we still have little understanding, by those who should know, what value this business community has to offer.”

The challengers

It’s a business community with a – mostly – distinguished history.

From 1950, non-bank financial institutions, such as building societies and finance companies, grew by offering services that banks could not, such as riskier lending at higher interest rates. The Commerce Commission issues paper says that in 1960, finance companies accounted for only 1 percent of total deposits of the bank and finance sector as a whole, but by the end of 1984 this had increased to 20 percent.

This growth was, in large part, in response to the intensive regulations of the banks, described by former Reserve Bank financial systems analyst Dr Chris Hunt as “one of the most heavily strait-jacketed financial sectors in the industrialised world”. But after the Fourth Labour Government loosened controls, there was a wave of bank mergers and acquisitions which culminated with four big banks, all Australian-owned, that hold a combined 88 percent of the total assets of all registered banks in New Zealand.

There’s something safe and solid and reassuring about a bank with big buildings and big balance coffers. And so the unspoken challenge for the challenger banks and other financial institutions is, of course, trust.

Few of us really remember the Government bailout of the BNZ in 1990, or the near-failure of Westpac Australia in 1992. By contrast, we all remember the post-GFC collapse of the finance companies: Bridgecorp, Hanover, South Canterbury, and many more. 

Financial Services Federation executive director Lyn McMorran says the big banks’ stranglehold on consumer data makes it harder for smaller financial institutions to compete. Photo: Supplied

Lyn McMorran remembers the bank woes. The memories of Westpac’s troubles were still raw when she joined the bank’s New Zealand subsidiary in 2000 first as an adviser and then as an area manager. “We do need a robust banking system,” she says. “We have had situations where banks have had to be bailed out.”

McMorran is now executive director of the Financial Services Federation, representing non-bank lenders and deposit-takers, including credit unions, building societies, small business lenders and finance companies. It calls its members the “responsible non-bank sector”.

And that sector has been through tough times since the glory days of the early 1980s. It’s not just the finance company collapses. Many credit unions and building societies have gone under, or merged.

Last year, Newsroom reported concerns from the Reserve Bank and others that the small credit unions, and some building societies and finance companies, were too small to survive. Under threat of receivership, the Firefighters Credit Union members voted to transfer their depleted assets to the bigger, better-capitalised NZCU Auckland

Firefighters chair Mark Virtue told members: “As a small financial entity, we are finding it difficult to compete due to higher costs associated with delivery of financial services and, in recent years, increased costs of compliance. We are not alone – the number of credit unions in New Zealand has reduced from 70 (20 years ago) to 30 (10 years ago) to just eight today.”

Value of personal consumer loans

Source: Reserve Bank of New Zealand – Registered banks and non-bank lending institutions / Sector lending (C5)

McMorran insists her members are as secure as banks, thanks to the new legislated depositor compensation scheme that comes into effect next year. It will protect deposits up to a level of $100,000, whether they be with banks or regulated non-bank institutions.

But that security extends only to deposits: “They’re not economically and systemically important to the economy,” she admits. “So, if one of our members was to do some lending that caused them to be very shaky, then they they certainly wouldn’t get a taxpayer bailout.”

Despite understanding the nervousness of some consumers about trusting these smaller institutions, she is adamant that they pay an important community role – one that deserves support. “People are very loyal and come back and reinvest their funds, when they mature. So their money is sticky.”

Not only are more people placing their deposits with credit unions and other non-bank institutions, but also New Zealanders are borrowing from them as well. Reserve Bank figures show the gap closing between non-bank lenders and banks.

In part, that may reflect ANZ’s sale of UDC in 2020; in part, it may be an outcome of tighter Credit Contracts and Consumer Finance Act that arrived in 2021. But it’s bigger than either of those – because the gap had begun to close before either of those happened. 

“I think it’s also to do with the fact that they’ve been around for a long time,” McMorran says. “People are used to them being there, and they’ve got branches. In the local community, there’s a building with their name on it – and that means something to a lot of people.”

She believes the playing field is tilted against small players like non-bank financial institutions, and wants to see the Commerce Commission inquiry level things out again. “The extent of compliance and regulation makes it difficult for smaller players,” she argues. “That essentially favours the big players.”

But it’s not just government regulation that is stopping smaller institutions competing effectively with the big banks. She points to the stranglehold the banks keep on consumer data. “They have access to an enormous amount of transactional information on their customers that is not currently transportable, which doesn’t make it easy for other players in the market.

“Our members could provide competitive offers if they did have access to that data.”

Profits = resilience

Most of the big banks are keeping their heads down and digesting the Commerce Commission paper this week. Only ANZ, the biggest of the bunch, is willing to speak publicly. “We are considering the commission’s assessment of issues relevant to the market study,” says external communications head Briar McCormack.

“We look forward to the opportunity to provide insight into what can be a complex area. New Zealand has a highly competitive market for personal banking services with banks and service providers of all sizes and ownership structures, including a government-owned bank. We’re contributing to the market study and hope that it improves the confidence that New Zealanders have in the banking sector.”

The big banks aren’t apologising for their big profits. A cynic might say the collapse of the US Silicon Valley and Signature banks has been timed well for the New Zealand banks.

“Our banks are highly regulated, well capitalised, and profitable,” says Roger Beaumont. “That helps makes them resilient, and with recent overseas bank failures we’ve seen why that’s important.”

The Banking Association boss acknowledges the quality of the Commerce Commission’s preliminary issues paper, saying it’s comprehensive and shows an understanding of key issues in personal banking. He highlights the focus on the significant current and future regulatory requirements (the same compliance obligations that Roz Henry complains of) as providing “important context” to competition and barriers in the industry.

“We believe the focus indicated in this issues paper will ease any concerns in the community about competition and innovation in the banking industry. We have a competitive banking sector, with 16 retail banks operating in New Zealand,” he argues.

“Switching banks is easy. Your new bank can arrange everything including transferring your funds from your old bank and setting up your recurring payments to your new accounts. This can be done within five working days, and you don’t even need to talk to your old bank.”

Back in Te Aroha, there are still three bank ATMs, and BNZ sends its big blue van once every three weeks; the mobile bank parks up for half a day in the Countdown carpark. But many people have tested Beaumont’s assertion that switching is easy. They’ve voted with their feet.

The banks put up no hurdles to the Finns and other locals taking their business down the road to the credit union. “They tolerated it,” Frank Finn says. “They created the situation, so they had to live with it, didn’t they?”

Newsroom Pro managing editor Jonathan Milne covers business, politics and the economy.

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