BOOSTING KIWIBANK DOESN’T CUT IT FOR REFORMING BANKING

For those who couldn't read my opinion piece in ThePost today due to its being premium content, I've copied it below::

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OPINION

“Frankly that is not good enough,” the Prime Minister said last week, referring to our banks’ focus on retaining market share and failing to drive better prices for consumers. “In short, we want to disrupt the status quo.”

But sadly the limp announcement that he and Finance Minister Nicola Willis made won’t do that, nor even tinker with the edges of the problem. Persuading some Kiwisaver funds to put a miserly $500 million into Kiwibank will have zero impact unless more ambitious actions are taken as well.

Kiwibank has shown no appetite to innovate. It can’t – it is trivial in size compared to the “Big Four” Australian cartel. Another $500 million in capital won’t change that – Kiwibank will still be an afterthought in the market. In the regional town where I live the major banks’ branches are open between 20 and 35 hours a week while Kiwibank opens for just 12 hours – 4 hours on each of 3 weekdays. So much for its being a hungry challenger. The only way Kiwibank could be part of the solution is to reinvent itself as a modern-day Fintech, using technology other than past-generation plastic cards as its payment conduit, but this does not appear to be on its or the government’s agenda.

Looking into history, there was a time when our banks were our most trusted and respected institutions. Their branch managers were pillars of their local community, knowing what the citizens and their businesses were up to, who could be trusted to repay loans, and who to avoid. A banker’s word was absolutely their bond. Loans were available for businesses, first home buyers, farmers, students, and other deserving causes. Decisions were devolved to Branch level. Personal relationships mattered.

In those earlier times businesses were generally ethical, mindful of their wider impacts on the community. The then widely accepted business principle of the “triple bottom line” implied a fair deal for customers and employees as well as shareholders. That changed when the former far right Business Roundtable came to prominence in the 1980s with the mantra that company directors should be focused exclusively on maximising shareholder returns, scorning any notion that a business should consider the impact of its decisions on the wider community. Banks, sadly, were among the businesses who adopted that philosophy.

Fast forward to 2024. As the Commerce Commission found in its market study we now have a lazy oligopoly of highly centralised, Australian-controlled entities, coasting along with stable market shares, little incentive to compete against each other. We see price-matching rather than price competition, and underinvestment in maintaining systems.

The range of circumstances in which a bank would offer a loan has been massively reduced. Decisions once made at a local level by an experienced manager who knew their community are now formulaic and centralised. As the Commission observed, the banks take care to make sure their advertised rates are aligned with one another. Their unified focus on loans in the housing market – very low risk business in which they favour landlords who they judge more able to pay and leave first home buyers to the “bank of mum and dad” - has distorted our economy massively. It’s made residential property more expensive and attractive as an investment, while making much harder the task of entrepreneurs or young people just trying to get ahead. Not to mention their detrimental impact on productivity with excessive margins being exported, flattering Australia’s economy but making ours worse. As the head of the Banking Reform Coalition, Kent Duston, expressed it, the Australian banks have been “looting the country.”

Banks have seemingly lost touch with the needs of people on lower incomes. Such people are irrelevant to them. The money is in residential property, especially commercial landlords, and big business.

Bank branches have become scarce. The informal role of local staff as financial mentors to their customers ended years ago. Even trying to contact them by phone is not for the faint-hearted or time-poor. Perhaps that could be accepted if the economies were passed back to customers through more competitive and cost-effective services, but that certainly hasn’t happened.

Then there’s PayWave. Years ago we all celebrated the convenience of EFTPOS, a then modern and efficient service providing both convenience and PIN-enabled security. PayWave emerged more recently as a more sophisticated (but less secure) version of the same. But suddenly all the banks demanded a surcharge that the retailer could either pay themselves or elect to pass onto the customer. No competition here – just tacit collusion.

Then there’s the standard oligopolist practice of delaying progress when it suits their narrow interests. The move to “Open Banking” is one such example. That’s industry jargon for a system that will open the market for payment transactions to a new generation of “Fintechs” or financial services companies that will take us beyond the now-antiquated Visa and Mastercard plastic, offering new options based on phones. For this to happen at scale requires the adoption of an industry code that needs to be agreed by all participants. A code is in development under the auspices of PaymentsNZ. But guess who controls PaymentsNZ - the major banks. There’s no representation by potential entrants, government agencies or consumers. And just last week the Commerce Commission let slip that it had taken the CEO of one of the banks to task for being “uncooperative” in the Open Banking process - sloppy at best and deliberately obstructive at worst.

Then there’s the extraordinary case of the Banking Class Action. Between 2015 and 2019 two of the banks failed to comply with disclosure requirements in relation to various loans. Having discovered their error they waited three years before writing to nearly 100,000 customers (you might be one of these) alerting them that an error had occurred and offering a payment in recompense. However, they declined to specify the exact circumstances of the error, or how the arbitrary payment had been calculated, nor did they alert the customers to their rights under the law. So unusual are the circumstances that a leading law firm has initiated a class action in the belief that the arbitrary payment was significantly less than the compensation to which the borrowers were entitled so customers may be entitled to considerably more – see bankingclassaction.com

That the banks think they can make a token payment and walk away from their legal obligations is strange. Imagine that a local business – say a builder, or plumber, or pharmacy – wrote to you and said “some goods or services we sold you have been found in breach of the law, here’s a credit in compensation but we won’t tell you what goods or services were involved, what exactly we got wrong, nor how we’ve calculated the credit we are required by law to pay you.” You wouldn’t accept that from a small business and nor should it be acceptable from a bank. So an increasing number of people including bank customers are taking notice and joining the Action.

One observation from the Commission was that it is extremely challenging for a customer to discover the real rate at which a bank will provide a mortgage, even where a professional mortgage broker is involved. This is because only the headline rate is published, and the only way to find the real rate on offer is to go through the full application process with every bank – often impossible for timing reasons when an unconditional purchase is contemplated.  This differs to Australia where a digital form can be completed in 15 minutes. So effectively, the New Zealand banking system locks borrowers into their own bank and deters their shopping around.

The Commission recommended changes to make it easier for potential borrowers to canvass the market. So how did the sector respond? In November the ASB thumbed its nose at the Commission’s request by announcing that it will not accept preapprovals from brokers on behalf of applicants who are not already ASB customers until 10 January 2025, citing “staff shortages”.

Does all that sound like a competitive, hungry market? Or a complacent oligopoly?

So will a slightly expanded Kiwibank riding in on a white charger make a jot of difference? I suggest not. Surely the government realises that?

We need a lot more. We need a government that is committed to the needs of society, not just the needs of big businesses. We need enforced structural change, not just tinkering. We need 2025 to be a year of genuine action. We don’t need just the illusion of progress which Christopher Luxon and Nicola Willis tried, unsuccessfully, to give this week.

Two decades ago successive governments wrestled with New Zealand’s epic case of market failure – telecommunications – and won. Had that not happened, we today would still be paying twice the global price for phones and Internet while getting the developed world’s slowest and worst broadband in return.

The banking issue is vastly more serious. This week’s announcement simply doesn’t cut it.

We’re into the 4th month since the Banking Market Study was published. The public are entitled to more progress than we are seeing. Please lets see a more convincing plan and action list early in the new year.