What will it take to create greater competition in banking? It’s not another bank

Over the last 20 years or so, we’ve seen a few new players register as retail banks in New Zealand.

The mind naturally goes to Kiwibank as the main example, but there are actually several others, including Heartland, SBS Bank and The Co-operative Bank.

Many of these new entities have come about as a result of non-banks making the move to become banks (or, in the case of Heartland, several non-banks merging together) and we’ve also seen a few offshore banks open their first local branch.

But, have any of them done anything to increase competition in banking?

With bank profits at all-time highs (and still climbing) the evidence would suggest not.  

There might be more choice – sure. But the old banking oligopoly is still zigging and zagging together, just as it always has.  

Before I go any further, let me make it clear: I think banks provide an incredibly valuable service to society.

This isn’t about “bank bashing”. It’s about the importance of competition as a driver of the sort of innovation that will ultimately help Kiwi and Kiwi businesses thrive.

And if it lowers costs for bank customers, well, that’s helpful too.

So, if “more banks” isn’t the answer – what is?

The good news is, once you start peeling back the layers, you can see there actually is some competition emerging: from businesses that aren’t banks but which offer competing products.

Generally, these organisations are each innovating in one of the three main areas of banking – payments, deposits, and lending (each of which represents a pretty deep profit pool for banks).

Here’s a whirlwind rundown of some of the key players who've come to market, who might just drive the competition I think we’re missing.

1. Payments

As you dive deeper into this space you see competition starting to impact on the banks in a few different ways.

Wise (formerly TransferWise):

Focuses on international payments and holding international currency. It generally offers far better prices than what you’d get over the counter or online with any bank, and because it’s got such massive scale, and global reach, its services tend to be faster, too. I know for a fact Wise has already influenced foreign currency / transaction pricing in the NZ market, in a downward direction.

Dosh:

It’s still early days, but this NZ start-up offers a number of innovative payment and wallet features, as well as the ability to leverage a Visa debit card – with some of the features way ahead of what NZ banks offer today. Dosh may still be flying under the banks’ radar at this stage, but banks might soon see customers slipping between their fingers in favour of a better proposition.

Apple Pay & Google Pay:

While not offered by all banks (yet), we’ve seen these two tech behemoths leverage mobile and digital services to enter the payment market. It hasn’t driven price competition, but it has driven innovation and created value for consumers. I’ve certainly walked out of the house without my wallet, but have had my phone, saving me some embarrassment!

2. Deposits

This is a pretty huge category, covering the needs of consumers and businesses small and large.

And there are some pretty huge firms making moves in this space, too. Apple has just launched a savings product in the US, outsourcing expertise on the banking side of things to Goldman Sachs. Meanwhile, at a more domestic level…

Squirrel & Sharesies call accounts:

We're proud to be one of two NZ-based investing platforms to have recently launched interest payments on their call accounts. The move takes aim at the massive gap that’s opened up between the interest rates banks pay on savings accounts, and the Official Cash Rate – looking to put more money back in Kiwi pockets.

Similar to Dosh, the banks probably aren’t taking much notice yet, but the juicy margins they’re sitting on are a prime battleground for competition. In this case, both Squirrel and Sharesies act as custodians, with deposits held with a bank – they earn interest on this money, passing most of it back to their customers.

Mercer Macquarie NZ Cash Fund:

While cash isn’t same day accessible like it is with Squirrel and Sharesies, Mercer Macquarie’s NZ Cash Fund generates even higher returns than those platforms, with cash available within 10 business days and the benefit of PIE tax.

InvestNow:

While focused on providing easier access to managed funds, InvestNow now offers access to Term Investments with NZ banks.

It gives full visibility of term investment interest rates (which are often better than you’d get as an individual customer) and allows you to split money across term investments with up to six different banks, without needing accounts all over the show. It's certainly helped to create competition by making it easier to split your money.

3. Lending

Banks absolutely dominate in this space, and while the game is starting to change, it’s going to take some time and serious competition to turn this super-tanker around.

Mortgage advisors:

My first ever job in banking was with WestpacTrust (yes, I’m that old) as a product manager in the home loans space.

At the time, mortgage advisors were a relatively new thing, and banks both loved and hated them. A couple of decades ago, advisors were responsible for facilitating 10% – 20% of mortgage lending – but fast forward to today, and that number’s climbed to 50% – 60%.

Advisors help keep banks on their toes by supporting pricing transparency, choice for customers across different loan options, and offering advice.

Over in Australia, a few years back Macquarie Bank came out with home loan products suited to low LVR (loan-to-value ratio) customers. Its mortgages business has grown incredibly fast, to the point where Macquarie’s market share is starting to hurt the four main banks – and the key to that success has been distributing via the advisor channel.

Fund managers:

While it’s at a pretty early stage in Aotearoa, fund managers are now starting to dabble in the lending side of things. Traditionally fund managers have focused on the bond market for this sort of exposure to loans, but there’s an attractive margin opportunity in more direct types of lending, which also allows them to play in different parts of the risk spectrum.

The game changer here is KiwiSaver. KiwiSaver fund managers are getting big enough to consider direct exposure to lending, and they certainly have the funding behind them to make it happen.

Banks are masters of raising deposits and wholesale funding as cheaply as possible, and, in my view, fund managers are the only alternative that’s positioned well to challenge that in future – attacking business and consumer lending in different ways to create competition in this space.

And looking ahead, there are some other things on the horizon that may help competition.

• 7-day domestic payments: It feels like the last major innovation in New Zealand’s domestic payment infrastructure was when EFTPOS launched in the 1980s – or perhaps enabling electronic bill payments via digital channels. So, it’s been a long time coming, but the launch of seven-day domestic payments on 27^th May 2023 means you can finally make and receive payments between different banks, seven days a week, including weekends and public holidays. This influences competition, because it’ll mean propositions like Squirrel and Sharesies call accounts can become 7-day enabled, too.
• The Consumer Data Right (aka Open Banking): Open banking will (with your permission) enable banks and non-banks to safely and securely use and share your data, and unlock new avenues of competition for banks. The banks are best placed to drive innovation here – although whether they will, remains to be seen. Non-banks will definitely use the potential new services. We’re already seeing some of what’s possible with things like ANZ’s delivery of Spark invoices directly into mobile banking a cool start. Hopefully there’s more to come, although legislation needs to trundle through parliament first.
• Real-time payments: For something that’s pretty standard overseas, NZ is well behind the 8-ball. Payments NZ is currently working towards real-time payments with the banks, but I’m not holding my breath – the technology might be live by 2028 (although even that might be too optimistic). Real time payments enable all sorts of innovation from non-banks, including Squirrel’s services.

Much of the innovation I described above still leaves banks with a critical role to play – ironically providing the very same infrastructure that enables competitors to deliver new and better services, and beat the banks at their own game.

As more and more companies (that aren’t banks) realise the size of the profit pools that banks swim in, and find ways to dive into them, competition will only increase.

And in my opinion, there are plenty of signs to suggest competition in banking services will come from non-banks far more than from a new player with a banking licence.  

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Article by Dave Tyrer, Squirrel: 29 May 2023

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