The big four Australian owned banks which hold 90 percent of New Zealand's total bank deposits. Photo: RNZ
Open banking alone will not solve the lack of competition in the sector, a banking expert says.
A draft report by the Commerce Commission is recommending the government set a firm deadline of 2026 to make it easier for people to shift between banks.
The report also said there was a two-tier market in which the big four Australian-owned banks have the major share, with smaller operators offering no threat to that dominance.
The market study was ordered by the government in 2023.
"I think we want to be careful not to assume that open banking's going to suddenly solve all the problems" - David Tripe
But Massey University Professor David Tripe told Checkpoint that the lack of open banking was only one reason for the lack of competition.
Open banking depended on individuals agreeing to their information being shared, and banks were also apprehensive about sharing data even if people had agreed to it, he said.
"It [open banking] means that if you are willing to let your potential new provider have access to your account, they're able to actually do so and see how you perform.
"It means for the potential new provider that they can make a better assessment of how risky you are and how desirable you would be as a customer."
There is legislation in the pipeline which would allow open banking to take place but it was not yet in effect, he said.
But Tripe said open banking would not solve all the competition problems in the banking sector.
"It'll make it a little bit easier for people to shift, but that's only part of the issue in terms of competition between the banks and making competition easy and effective."
David Tripe Photo: supplied
Profits for the four major banks were satisfactory, he said.
"There are other businesses in New Zealand which earn higher profits, there are certainly other businesses in New Zealand which earn lower profits, certainly other banks earn relatively lower profits."
One reason for the the major banks profits was their size and the benefit of what is known as "scale economies", he said.
"Their size means that they can spread costs over a larger base and so when we look at costs the costs for major banks relative to assets are much lower than for the smaller banks."
The Commerce Commission report indicated that there needed to be a "disrupter" in the market to push aggressive competition which consumers were missing out on.
It is recommending the government look at ways to beef up Kiwibank by increasing its capital and making it a 'disruptive competitor'.
Tripe said Kiwibank could be given a lot more capital to help it in that role.
"Kiwibank's returns on capital is quite low compared to other banks and not just the big four, so that wouldn't necessarily be a great return for the taxpayer or the investors and they would need actually quite a lot of capital to compete effectively and be disruptive in that market."
In the past there had been discussions about Kiwibank buying one of the existing four large banks if the Australian owner wanted to sell, he said.
If that happened Kiwibank would need a very large capital injection in the order of $10 billion to afford such a purchase, he said.
Meanwhile, First Union said it supported the recommendations made in the Commerce Commission's report.
But its general secretary Dennis Maga said the suggested measures were all medium to long term.
"Until such a time that the government is able to foster a more competitive environment in the banking market, a windfall profit tax or banking levy makes sense and would bring us into line with trading partners like the UK and France," he said in a statement.
Govt looking to hit 2026 open banking target - minister
Commerce and Consumer Affairs Minister Andrew Bayly would not give a yes or no answer as to whether the government could and would meet a 2026 deadline for getting open banking in place.
"We'll be very much targeting that ... to achieve open banking you've got to do the consumer data rights, you've also got to work out how you identify people and also how you transfer data."
"They're [banks] certainly very profitable" - Andrew Bayly
Work on anti-money laundering laws was underway and a consumer data rights bill would be before the house within weeks, he said.
Andrew Bayly Photo: RNZ / Angus Dreaver
Bayly said the report identified that banks were underspending on IT, which was a concern.
"We want to make sure that banks in New Zealand can offer a wide range of products on a modern platform, so that's certainly an issue."
The banking environment had been created over successive decades, he said.
"And we are where we are, we've got four banks who have 90 percent market share."
Bayly said there were questions about Kiwibank being able to act as a significant disrupter to the major banks.
"If it was capitalised with a 5 percent market share against four majors that have got 90 percent, you'd have to contemplate that may not be as disruptive as it could have been if it's got 20 percent market share."
There were two options in terms of capitalising Kiwibank as proposed by the Commerce Commission - either for the government to stump up with a lot of cash or by getting third parties involved, he said.
"And of course that second option involves coalition partners."
Bayly said he was open to a suggestion that the government to put more capital into Kiwibank.
But it would need to be weighed up whether that money would be better spent on other sectors, he said.
At the moment it would be better spent on the health system and schools, he said.
Banking Association
The Banking Association said banks embraced competition and supported easy access to services for its customers.
Its chief executive Roger Beaumont said the main challenges related to regulatory issues.
"On the competition front, it's important to remember there are at least 13 banks in the country who fight hard for every customer, and that's for a country the size of Sydney," he said.
"What the market study shows though, is that the major barriers to new competitors joining are actually regulatory issues rather than anything else."
Beaumont said banks would welcome regulatory relief.
"Well, I think the interesting thing is if you go to the recommendations in this report, by far the majority of them are recommendations directed at the government or regulators and not actually at banks," he said.
"Regulatory burden has been a real impost and barrier to innovation, and so if we can get some relief from some of those regulatory requirements, then it will allow banks to become able to spend more time and more resources on innovation."