Gielda.
I'm Chelsea Daniels and this is the Front Page, a daily podcast presented by the New Zealand Herald. An inquiry into New Zealand's banking competition or lack thereof, is currently under way. Finance Minister Nikola Willis announced it in June, putting particular emphasis on rural banking and lending. A ComCom market study has already, unsurprisingly found a lack of competition among our largest financial institutions, with a full report due
next month. So what does it all mean for the average kei we consumer and is their hope on the horizon for some healthy competition. Later on the Front Page, ABC journalist Dan Zipper explains what lessons could be learned from Australia's massive royal mission into banking. But first, Victoria University of Wellington Associate Professor of Economics, Martin Lubrink is with us to take us through the state of our
banking sector. Martin, can you explain to us what New Zealand's banking landscape looks like at the moment?
Well, the banking landscape at the moment looks very concentrated. There's four big banks and then there is a handful of smaller banks. That is not atypical. It's normal in many countries like France and the Netherlands. They also have concentrated banking landscape with a few dominant players. What is typical here, I think is that the profitability of the large banks very high, where does the profitability of the smaller banks is low, and I think that creates a bit of tension.
Our competition watchdog, the Commerce Commission, released its draft report into the state of Personal Banking in New Zealand earlier this year. Does that offer any solutions to our banking woes here?
Well, I think it's a good study, and in terms of solutions, there are some solutions that I would support the particularly when it comes to open banking and innovations and things that can improve the banking experience for customers and also for businesses. But these are recommendations appearing at the end of the report, whereas the main recommendations are
very much focused on helping the smaller banks. And I struggle with that a bit because the smaller banks, they're kind of vulnerable and to expect a lot of solutions from them, whereas the bigger banks are much more powerful or stronger and much more resilient. It's kind of asking, you know, the mouse to be the elephant, and that's a bit of a concern in my view.
Is it an issue that are four major banks that all Australian owned.
I'm not to worry about the ownership of the Australian banks. Also because there's good cooperation between the Reserve Bank as a prudential supervisor and the opera the Australian prudential supervisors, so you know, the communications is easy and it flows easily. I think, you know, it would be different and if it were a Latin American bank or maybe a Southeast Asia located bank, where you probably have a different supervisiony culture.
The supervision culture in Australia and New Zealand is very similar my guesses, and also similar to other very resilient countries like Canada. And so these countries in Australia and New Zealand and Canada have amongst the saving banking systems of the world. It's well documented. But nevertheless you'll just four big Australian banks that have a strong influence here on the market. Yes, that's true.
How could the government better capitalize smaller banks?
Say like Kiwi Bank.
That's a tricky one because it's not the role of the government to proper banks or to capitalize them, because that creates all sort of what they call moral hazard issues, in the sense that if suppose that Kiwi Bank gets more capital and starts becoming the really disruptor bank, it may start making risky bats and start gambling with that money, and then you have a well capitalized bank that gambles with money, but that nevertheless can go sideways in a
very bad way. So it's tricky to expect the government to step in, and it's also very hard to require or to fund the other banks. The smaller banks will recaplize them through the state, because that's a bailout in one way, shape or form, and that is never good because if that fails, what do you do? Then if it's success, then the question is when to step out. So that creates more messiness than actually it does help solve problems.
The inquiry launched by Finance Minister Nikola Willis will look into competition but also rural banking and lending.
What does that all mean?
Well, I think them inquiry was very much focused on retail banks and that's only half of the picture and my justice. When it comes to retail banking, there is competition. You know, maybe the competitions are not as strong as people would expect it, but if you go around for a mortgage, you will find good deals offered by various banks. So people are very well informed about what is available
for retail mortgages and they will play banks against each other. Now, maybe that's not perfect in the commissioned way, and it could be better, but when it comes to lending to the small and medium sized or the agre sector, it is far more opaque in terms of what the best deals are because they're all bespoke deals. There's not a lot of advertising. The market is very intransparent, and that creates opportunities to extract more profits from borrowers.
Farmers and others in the primary sector have told us that access to borrowing has become more difficult, that farmers are paying higher interest rates compared to other borrowers.
Their history has shown us that leading to businesses incloding. The egg rey sector is riskier than leanding to homeowners, and as a result, we do hold twice as much capable against an eggry line is a prime line.
So I think it's good to have another inquiry that looks in particular into that sector, these small and medium sized firms in the augre sector, because there's probably where the gains are made for the commercial banks, but we
don't know. I haven't seen the report, but from the start with the Commerce Commission report focusing on retailers, I feel like, you know, yeah, that's more or less looking for your keys onder the lamppost and you know, if you go through the part of the Commerce Commission, they noticed there is some competition, whereas I'm not sure what's happening in the SME market or the business market for lending. Neither do I have a good idea what's going on
within the harky business lending. So there's you know, I think it's very good to have that report to show the other side of lending and boring and that part of the market, because that gives it a far better view of what's going on in banking here in New Zealand.
Isn't it true that there is a lack of competition because those four banks do own up to say, ninety percent of the sector in New Zealand. Does that discourage them from say, investing in things like security measures for customers and doing other things like that.
Yeah, I'm not saying that there's a lack of competition because you know, you can do shopping and the report in the Commerce Commission notice is that there are deals to be had. You can get favorable deals, although it's not perfect. I mean, yes, you know there is some competition, but it could be sharper. But you know, in circumstances like this, I wouldn't worry too much about that.
But I agree with you.
The last point in particular is that give that the banks are very profitable, in particularly the larger one, They're very profitable. You know, there's no doubt about that. It has been well documented. And then to see the services provided in terms of technology and support, and also the risks that are imposed on customers when things go wrong, I think there is a lot of gains to be made.
You know, hotter stories about people being scammed. And then I think, you know, as far as I know most of these cameras, the cost of these scams are upon you and me, Whereas I think you know, the better informed party and the stormer party is the bank, and they should have systems in place to prevent that.
Well, New Zealand's currently looking at introducing confirmation of PAYE, which essentially is the ability right for customers to check the account owner's name and account number and make sure they match before they make a payment. The fact that this is available over season is only something that we're looking at.
Now.
Does that mean that we are quite behind in those protections for customers?
Yes, I would say so we're lagging and the incentives to improve are not there. A lot of the innovations are in the European market. You know, the US market is even more backward than ours. They still work with checks and some You cannot transfer money from one small bank to the other small bank in US, so that's
a very different territory. But Europe has a pretty advanced and I think Australia as well, but in particular Europe has a very advanced or pretty advanced banking system where you have real time online payments, so you transferm money and then within seconds it's at the receiving bank and you have number confirmation to make sure that the person you pay to is the right person.
So yes, you know we're behind, and.
So if you look at it, you think like, you know, there's all these profits made by the banks, and if there's the Reserve Bank or the Minister of Finance or whoever is in charge, can tell these banks like, you know, yes, it's fine that you're working in a profitable sector, but we expect more of you in terms of service.
I would really encourage that, you know, top.
Down approach to forcing the larger banks in particular to offer better services. Whereas the Comcoman report focuses very much on the solid banks, most of the innovations has to come from the larger banks, and the larger banks are profitable, so regulation can be written in such way that they prescribe these innovations to be implemented in New Zealand.
And of course there was the Royal Commission into Banking in Australia five years ago. Now do we need something like that or are there lessons to be learned from the Royal Commission over in Australia. I know that there was a completely different set of circumstances that led to that Royal Commission, But what can we learn from that hard.
To say because shortly after the Royal Commission came out with their report, the FMA and the Reserve Bank did a similar report, and then that report shows nothing to be seen here, and so we have to take their words for it that it's true. So there's not immediately the issue that we saw in Australia where mortgages were given to people that didn't exist, and where the emphasis on sales were so hard that bad behavior starts happening.
Occasionally hear stories here in New Zealand what's happening, but it's not well documented and so I'm not sure what we can learn from that. Plus, what people forget is that many of the recommendations of the Royal Commission in Australia they would lead to a more competitive and probably
less profitable banking sector. So one of the things that happened in Australia because of the COVID crisis is that many of these recommendations where I think frozen or just like, oh yeah, well, maybe it's not great to implement these proposals now because it will go at the expensive jobs in the banking sector.
So I'm not sure what.
Happened afterwards after COVID and which of the recommentation is still being implemented. But it seems as though that the banking sector in Australia is pretty powerful and lobbied in such a way that they probably can keep going on with what they did before the Royal Commission report.
But that's speculation for my side.
What do you think is the biggest issue facing our banking sector?
Now, well, that's a good question.
I think actually there's nothing really that affects the banking sector here except for the complacency the tardiness when it comes to innovations, and that is because of the way the market is structured. There's not a lot of competition, for example, from in FinTechs. You don't see that. The expectations are that the smaller banks are meant to be competing,
which I think is beyond belief in a way. You know, innovations should come from the largest banks, the big four, They should be leading there, so you know we have a sable financial system. But it's just as slowness and the tardiness with the innovations that probably upsets people.
Thanks for joining us, Martin. The majority of New Zealand's banks are OSSIE owned and those banks went through a Royal Commission into their practices five years ago. In Australia, to discuss the outcomes of that and the lessons it could pose for New Zealand. We're joined now by ABC journalist Dan Ziffer. Dan, you've covered banking in Ozzie for years now. Can you give us a brief background of the woes Australia has faced and is facing. I guess when it comes to its banking sector.
We've probably need to go back about ten years.
There was a series of scandals, a lot of them in financial advice, a lot of them really to do with the banks putting the interests of customers well below the interests of the institution. These scandals build up and up and up until there's quite a political weight to call a commission of inquiry, which in Australia is called World Commission. This became very politicized. Our Labor Party on the left wanted it. The government who had the coalition,
the Conservatives didn't want it. But essentially the National Party, who are a partner with the coalition, they kind of eventually came on board and the numbers grew and grew and grew to such a point that in late twenty seventeen, the then Prime Minister, Malcolm Turnbull called Royal Commission, a very short and sharp one which went for a year all the way through.
Twenty eighteen, and then reported slightly after that.
So since then we had the pandemic, which again changed people's relationships with the bank.
They're now on probably, i'd say, a better keel.
The regulators are stronger, the public scrutiny is still there, but they certainly have launed their reputations.
I don't meant that in the malicious way.
They've actually improved what they do from where we were a decade ago, but they had to get through a lot in the middle first.
When it comes to that Royal Commission, it's been five years since the final report and recommendations. What has actually been tangibly done a lot.
I will say that when all the journalists and I were covering it, we used to joke RC twenty three, which meant that we'll be back here in five years time we'll be having another one of these. But actually what happened is they did a lot of boring but important work. They spent hundreds of millions of dollars in improving really old systems that were allowing these bad things to happen. They changed internal culture and certainly fixed it, but they certainly made big shifts so that problems would
be elevated. Every single thing that was exposed at the Australian Banking Royal Commission was something that was noted inside the bank, sometimes by a junior lawyer, an IT worker in Bangalore, by customers. All of these problems were known, but they just couldn't penetrate a high enough level to get something done about them, or even if people were made aware had reasonably senior level, they didn't care enough to fix the problem or to create a long term
solution for the problem. So since then we've seen really big shifts. We've seen changes in the law. We've seen much stronger regulators and a different attitude from regulators. Rather than essentially being the mosquito on the back of the elephant and working out essentially cozy deals to deal with problems, actually started prosecuting banks and when they've done things wrong in a civil and even a criminal level, they've prosecuted
them for them. So that stuff does make a difference in attitude, and it also tells the public that the regulator is more serious about looking after them.
The frenzy of scandals exposed at the Royal Commission made banks put customers first. The industry says it's gone back to basics. Banks have simplified their operations, exiting financial advice, wealth management and insurance. They now have a razor sharp focus on core banking services that serve businesses and households.
As an aside, this Commission prompted the RBNZ and FMA here in New Zealand to do a joint review of bank conduct and culture here, which led to the instruction of something called the Conduct of Financial Institution Amendment Act. Banks, insurers and non bank deposit takers have until March thirty first next year to have a KOFEE license as a result of that, it's something if similar being done in Australia.
We haven't changed the licensing so much, but certainly every problem that existed at one bank existed in the others. You know, they were really broad and systemic. So the biggest one was a thing called fees for no service, which is exactly what it sounds like. It's taking fees for services that were never rendered. It we're never going to be rendered. This was a problem in the billions. I mean Australians have received back about six billion dollars
from this problem. And of course, in all the ways of these scandals, it started off very small. It's very isolated. Oh, it's just to this section of the bank. Actually it's a little bit broader. Actually, hold on, no, it's a billion dollars.
You know, these.
Problems do tend to be systemic because if one bank is doing them, they share employees, they share systems, they share processes. Sometimes these things are falling through the cracks and happening. So there hasn't been any change in the licensing. I would say the biggest changes in Australia have been attitudinal and cultural, as in internally with the bank, they have improved and they've proved their focus on hold on, this is actually four customers.
We don't exist for the bank. We exist four customers.
And with regulate, it's having that focus to the public as well, rather than just trying to manage the banks and deal with them, actually focusing on well, what's the impact and how can we get a better result, not just now but in the future.
It seems like New Zealand is years behind the countries in the way of protecting customers from scams and the like. We're only just looking into rolling out something called a confirmation of paye and that's things like reimbursement, et cetera. It seems like if a customer here is scammed, it's their fault and it's quite the fine to get their money back.
What's it like in Australia, It's pretty similar.
So a lot of the consumer groups here wanted essentially UK model where the banks pretty much give back the money in most circumstances.
Now, the banks, understandably you can see their argument.
Here, push back and said, look, if we pay money back for every single scam, then there has to be something on the customer to not act really.
Rashly and foolishly.
Now, the issue, of course is the scams are coming increasingly sophisticated, so it's not as simple as what we call the kind of Nigerian print scam that used to exist where people say, hey, I've got all this money, but it's locked up and I just need a bit of help to get it out and then you can share our riches. The scams now are really sophisticated. They look like it's coming from your accountant or your bank or your child saying hey, we need your money or
we need your details. So there is certainly a very live discussion here about how much consumers need to wear and how much care they need to take, and how much responsibility banks should take given that they certainly have access to power and more systems. The good things that are happening here, I'm sure similar is happening in New Zealand, is that they are working with the telcos and mutility companies and to change those systems and make them more secure.
As simple as now it happens at most banks that didn't happen a year ago is when you put in a code to pay a bill, it actually checks whether that code is the utility bill that you're going to pay or if it's a completely different company. So there's a lot more to be done, and I think it's an ongoing discussion about how much risk there is for a customer and how much risk the bank needs to wear, both of them essentially and introducing work.
Thanks for joining us, Dan. That said, for this episode of the Front Page. You can read more about today's stories and extensive news coverage at NZ Herald dot co dot nz. The Front Page is produced by Ethan Sials with sound engineer Patty Fox. I'm Chelsea Daniels. Subscribe to the front page on iHeartRadio or wherever you get your podcasts, and tune in tomorrow for another look behind the headlines.