The Government's to rely on moral suasion to force some key changes on banks. Gareth Vaughan asks whether this will work

The Government's response to the Finance and Expenditure Committee's banking inquiry highlights the role moral suasion is going to have to play in forcing change.

Moral suasion is persuading someone to change their behavior through appeals to their morality, responsibility, or sense of public good, rather than by using coercion or the law.

After the release of the Government's response to the Finance and Expenditure Committee's banking competition inquiry report, Finance Minister Nicola Willis and Commerce Minister Scott Simpson said they'll write to banks to “encourage them to consider” disclosing profitability on transaction, on-call, and savings accounts.

Willis pointed out there's no law to compel the banks to do this, but banks would have to explain themselves to the public if they refused.

The Government also wants to see improvements to Payments NZ, endorsing the committee's recommendation the company's board "improve its governance structure to better support new entrants, such as fintechs, and announce next steps to improve transparency and competition."

In terms of Payments NZ, what's the Government going to do? Welcome; "efforts that would enable Payments NZ to support the wider financial services sector to support innovation and competition." And; "write to Payments NZ to encourage them to respond to this recommendation."

Formed in 2010 by the industry with support from the Reserve Bank, Payments NZ governs NZ’s core payment systems and works with the industry to lead the future direction of payments in NZ. Payments NZ's shareholders are ANZ, Westpac, BNZ, ASB, Kiwibank, TSB, HSBC and Citibank, meaning a company owned by banks leads the development of payments in NZ.

Given Payments NZ has overseen the development of open banking, which requires banks to share customer data with third parties such as fintechs creating more competition for the big banks, it's very easy to be sceptical, or even cynical, about why NZ has been very slow to get momentum into open banking. Do turkeys vote for an early Christmas?

It's really only this year's passing of the long awaited Customer and Product Data Act, and development of open banking regulations, that means we're likely to finally see momentum build for open banking in NZ.

The Government also endorsed the committee's recommendation to "push for real-time payments," calling on banks to; "invest in global standard, next-generation payment infrastructure to work towards real-time payments at a national and international level."

In terms of real-time payments, interest.co.nz has previously written about how NZ is one of just two OECD countries without them.

The Government says the Reserve Bank is developing a strategy to modernise the retail payments system, and it'll; "work closely with government agencies and industry participants to develop a roadmap for improving the efficiency, safety and resilience of retail payments infrastructure and processes in New Zealand." 

As law firm MinterEllisonRuddWatts notes, comparable jurisdictions such as Australia and the United Kingdom, with more advanced payments systems than NZ, have taken government-led approaches to payments modernisation, often involving central banks as key drivers. This, the firm says, means; "national strategy is driven by public policy rather than commercial objectives and reduces risk of fragmentation or monopolistic behavior that can arise from private-led initiatives."

MinterEllisonRuddWatts is thus optimistic the Reserve Bank's involvement in NZ's push for real-time payments, "viewed internationally as essential building block for innovation in financial services," will yield positive results. Here's hoping.

Given the slowness of the move towards open banking, it'll certainly be encouraging if the Reserve Bank is more proactive in pushing for real-time payments. However, the proof will be in the pudding. In 2023 the Reserve Bank criticized banks and the payments industry for not providing real-time payments fast enough. And here we are two years later with more rhetoric.

Against the backdrop of the Commerce Commission and Parliamentary banking inquiries, an interesting thing to note is the rolling out late last year of a confirmation of payee service, designed to help thwart financial scams. This has been done by GetVerified, a company established and owned by guess who? Why, banks of course.

Whilst having banks involved in the confirmation of payee regime is, of course, crucial, interest.co.nz has heard of frustrations from non-bank financial entities about not being included. There are signs, however, this may be beginning to change.

This week GetVerified announced its first non-bank customers including Hnry, CentrePort, Health New Zealand/Te Whatu Ora and Givealittle, saying more would follow over the coming months.

"We’re delighted to welcome these early customers and we're encouraging interested banks, non-banks, fintechs, businesses and government agencies to reach out to us now so we can help them plan for adoption early next year," says GetVerified CEO Duncan Robertson. "By starting early, organisations can be ready to integrate and give their customers greater peace of mind."

Whilst this week's news is encouraging it's fascinating that, whilst official inquiries were going on into banking competition, a bank-led company was established to run the confirmation of payee regime. This once again highlights NZ's favouring of market rather than regulatory solutions.

Meanwhile, another recommendation from the parliamentary inquiry to; "standardise credit information and make it easier to compare loans," will also see the Government; "write to industry to encourage them to consider standardising financial information and using digital technologies where changes would be effective for helping customers to compare products and loan options across banks."

So will moral suasion succeed in getting key recommendations from the parliamentary banking inquiry implemented? Or will, with the passing of time, politicians move onto new issues and banks and bank-owned companies continue calling the shots in ways that appear to suit the banks?

Late last year Commerce Commission Chairman John Small claimed a victory for moral suasion. Small said Commerce Commission officials had met with the CEO of a major bank considered "recalcitrant in several ways" in relation to open banking and, after "a cordial discussion," differences were resolved.

But can jawboning really work in getting select committee recommendations enacted? Perhaps if regulators are supported by their political masters real change can occur. Or is banks moving against their self interests as likely as pigs flying? Only time will tell. 

Either way with the Reserve Bank having been brow-beaten into halting its planned bank regulatory capital increases, NZ's major bank bosses and their Aussie masters won't be losing too much sleep over the outcomes from the dual bank inquiries of the past couple of years.

For as Victoria University's Martien Lubberink, who formerly worked for the Dutch central bank, puts it; "less capital means higher leverage, and higher leverage means higher profits."

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