23 April 2024 – The Reserve Bank of New Zealand – Te Pūtea Matua has released its submission on the Commerce Commission’s draft report from its market study into personal banking services.
We welcome the market study into personal banking services, Deputy Governor Christian Hawkesby says.
“We want a financial system is that it is inclusive, trusted, and resilient, while also being efficient and competitive.”
The draft report provides a useful analysis of the current market structure and makes some valuable recommendations to improve how competition could work better for consumers.
“We strongly support the report’s recommendations to speed up implementation of open banking, reducing barriers to switching bank accounts, enhancing financial literacy and improving access to banking services,” Mr Hawkesby says.
“However, we disagree with the Commission’s analysis regarding our prudential capital settings and the recommendation for us to re-review them. The current bank capital framework is the result of a careful and extensive review process that occurred recently and is still being phased in. The review included consideration of competition, and resulted in several changes to support levelling the playing field between large and small banks, while preserving the risk sensitivity of capital requirements.
“Furthermore, the Commission’s suggested changes to our risk-weighting framework in the draft report would lead to very marginal benefits to competition, and could have unintended consequences and put us out of step with international regulatory approaches. We note the introduction of the Deposit Takers Act 2023, including its principles and our new proportionality framework, provide a clear scope to consider competition in our decision making going forward.
“In our view the best way to drive competition that benefits customers is through promoting an ecosystem that enables and incentivises disruption through innovation by all banks.”
Similar to many jurisdictions around the world, the New Zealand banking market is characterised by a small number of large banks commanding a high market share, Mr Hawkesby says.
“As the draft report notes, large banks are able to gain significant scale, scope, and funding cost advantages compared to smaller peers. Larger banks can also be more able to sustain the investments needed to bring innovative products and services to the market, for example new payment methods.”
In our view, the final report should place more emphasis on policy changes which would result in more disruption and innovation both among the larger players and across the industry as a whole, Mr Hawkesby says.
“Combined, initiatives like open banking, easier switching and multi-banking, and improved financial literacy are likely to be mutually reinforcing. Easier switching and multi-banking will make it easier for consumers to move to providers offering innovations through more open banking. But these issues are complex and will require clear leadership, direction and prioritisation from government and industry, and resourcing to deliver. We are keen to be part of these efforts.”
Key points
A holistic approach is required. The best way to drive competition that benefits customers is through promoting an ecosystem that enables disruption through innovation.
Open banking can be a catalyst for innovation, opening existing systems up to new players and challengers, and incentivising new and existing players to invest in product and service development.
We encourage reducing barriers that prevent consumers from switching bank accounts and embracing multi-banking, such as through digital identities.
Enhancing financial literacy will put consumers in a better position to assess products, services and costs, and to compare risks. Ultimately it is the choices and actions of consumers that drive competition – addressing apathy and inertia is critical.
We support improving access to banking services and are working with our Council of Financial Regulators (CoFR) partners to improve financial inclusion. This includes access for marginalised individuals, and businesses and start-ups to bank accounts. We are also supportive initiatives to improve Māori access to capital.
We accept that regulatory barriers can inhibit entry. This reflects the important social position banks have as entrusted safekeepers of other people’s deposits. By design, the barriers ensure the maintenance of financial system stability, which is a public good, through reducing the significant and costly fiscal and societal impacts of unmanaged deposit taker failures, even small ones.
We consider the current and future regime (under the Deposit Takers Act and its associated Proportionality Framework) are appropriately calibrated to consider competition effects among other principles in pursuit of our overarching objectives.
More information
RBNZ Submission on Personal banking services market study: Draft report (PDF, 354KB) https://govt.us20.list-manage.com/track/click?u=bd316aa7ee4f5679c56377819&id=2d9d0c281d&e=f3c68946f8
