Open Banking - My Article in Today's NZ Herald

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New Zealand banks face scrutiny as open banking delays hinder competition

By Ernie Newman

NZ Herald·

18 Nov, 2024 10:00 AM6 mins to read

Ernie Newman is a semi-retired consultant in Waikato with background as an industry advocate in the telecommunications and grocery sectors. He is a regular submitter to the Commerce Commission on competition issues.

OPINION

Among the cluster of industries identified as failed markets in recent years, our banking sector stands apart in having not one but two powerful state adversaries breathing down its neck. Following an exceptionally thorough report by the Commerce Commission, Parliament’s powerful finance and expenditure select committee is now in the midst of an investigation – and it’s uncovering some uncomfortable truths for our four-bank oligopoly.

One such theme goes under the heading of “open banking”. It’s code for a system that would enable numerous small, new-generation competitors waiting in the wings to offer a partial banking service on highly competitive terms, to enjoy a level playing field and challenge our “big four” Australian giants, to the benefit of Kiwi customers. It’s widely accepted that the big full-service banks are a dying breed and smaller, digital-based entities focusing on one part of the market, such as credit cards or home loans, will replace them. But the new entities need open banking, which requires the established banks to collaborate in setting up a common database and system to equalise the information and access available to them.

It was 2019 when then-Minister Kris Faafoi wrote to the major banks expressing frustration with their then “uncertain and slow” progress on open banking. Five years on, progress is still glacial. New entrants are still “on hold”.

Deja vu! A similar barrier to competition was raised at the very start of the Telecom market failure issue. In that industry, it was styled “number portability”. In those times anyone wanting to switch their phone from Telecom to a different service provider had to change their phone number, at considerable inconvenience and cost. So, in 1997, then Minister Maurice Williamson urged Telecom to rapidly finalise a number portability system. Telecom took the best part of a decade to comply, using every excuse in the monopolists’ playbook – including an outrageous claim that it “owned” the country’s telephone numbering system.

Ten more years of monopoly profits were taken from users while it gamed the Government system.

So I almost jumped out of my seat when a CEO of one of our largest banks told the select committee recently that one of their issues with introducing open banking is that some of their technology is “very, very old or complex” and they “can’t do more than one thing at a time”.

Hmmm. My experience with large organisations is that IT upgrades are perpetual and concurrent. That excuse simply doesn’t wash – if they really wanted open banking we’d have had it years ago. As other submitters pointed out, there is a whole new generation of digital-based banking services waiting only for open banking so they can come aboard and compete. Given that all four banks made profits in the billions of dollars there is clearly no shortage of funds to invest.

But there are other issues in the way of true competition too. For example, the Commerce Commission’s report identifies that banks are not driving competition for home loans, resulting in many homeowners paying too much. This is because banks publish only a headline rate for mortgage lending. Below that sits a large and complex web of discounts available, but this is deliberately kept under wraps. Sometimes mortgage advisers can shed light on these, but even the brokers are restricted – many are former bank employees who have allegiances to some banks but not others. Result – many mortgage borrowers pay much higher interest rates and fees than they need.

Surely if the market was truly competitive, at least one of the four would publish its discount structure? The commission points out this would be easier for applicants, whose only way to ascertain the “real” best rate available is to apply to all four banks – a process that is expensive, inefficient, and often impossible due to time pressure when making an unconditional offer for a real estate purchase. It also disadvantages first-home buyers against professional property investors who are in the know.

Isn’t the fact that none of the four banks comes clean with that information ample evidence of at least, tacit collusion – an unspoken agreement to maintain a common practice that enables them all to maintain super-profits, ripping off borrowers at the expense of competition?

As to profitability, much has been said. But an excellent observation was made to the select committee by entrepreneur Tex Edwards (founder of phone company 2degrees) who pointed out that the ASB chief executive’s admission to a remuneration package of $5 million a year was more than embryonic startup Dosh had in capital.

For another comparator, the CEO’s package enables her to earn every week as much as one of the bank’s cleaners on a living wage would earn in 18 months. Sure, she has skills. But that difference, funded by the bank’s customers, feels obscene.

Another example of déjà vu came when two of the CEOs explained the justification for high profits as being due in part to our being “a small island nation at the bottom of the world, prone to natural disasters and earthquakes”.

Bunkum! That line too, came straight from the Telecom playbook. It was rolled out back in the day to justify why we had to accept the world’s worst and most expensive phone and internet services, a claim that was comprehensively disproven once competition was allowed. It’s a total red herring in the digital age – just look at the successful economies of many other nations who are as isolated and exposed as ours.

Our country is being hoodwinked by big, paternalistic Australian businesses that should know better. Previous experience shows the best solution is a breakup. But at the very least the Government should put a very tight deadline around the full introduction of open banking to enable the innovators of the future to enter the market, with a substantial financial penalty for any bank that is not ready in time. Five years has already been burned up – in the digital age that’s a lifetime of warning.

Please get on with it – now! That way the bank CEOs will be able to hold their heads high knowing they are leading their businesses in a competitive market, rather than just being paid a huge premium just to defend their anticompetitive status quo.