Disruption lies in empowering non-bank lenders to compete, not just making four major banks five, Lyn McMorran argues

By Lyn McMorran*

We’ve heard a lot this week about how beefing-up Kiwibank will be the key to unlocking disruption in personal banking services in New Zealand.

But is adding one more player in the already existing banking oligarchy, really going to drive the competition and disruption we need?

It was one of two recommendations the Commerce Commission led with this week when it released its Final Report on driving competition in the personal banking sector. The report rightly highlights that without sufficient competition and disruption in banking services, including personal lending, New Zealand runs the risk of consumers missing out.

Don’t get me wrong, the Commission’s report was some of its best work to date, and you’ll find no opposition from me to the idea that Kiwibank should have access to more capital. I’m also not against profitability in the banking sector in general, it’s certainly better for the country than the alternative.

But if New Zealand is serious about shifting the dial to offer more competition and disruption, we need to do more than turn four major banks into five.

Untapped disruption potential lies in New Zealand’s specialist non-bank lending sector, if it’s given the chance to compete on a more level footing without so many barriers to entering the market (and staying).

Picture this - a town is facing a competition crisis with an oligarchy not of banks, but bakery giants.

Introducing one more bakery will help, but you’re missing a beat by not also evaluating the roadblocks stopping the patisseries, pie shops, bread makers, and other specialised players from reaching their competitive potential too.

Ask a non-bank lender how things are at the moment and they’ll likely tell you its tough. Cost of living aside, the layer upon layer of compliance and licencing regimes are disproportionately affecting smaller players, making it incredibly tough to complete.

Take the recent casualty of specialist home loan lender Resimac - not a good story for New Zealand and any aspiration of disruption and competition to benefit consumers.

The Report’s recommendation that the Reserve Bank should review its prudential capital settings to ensure they are competitively neutral and smaller players are able to compete, is hopeful.

This could be a game changer for the non-bank deposit takers (NBDTs) such as credit unions and building societies who are also prudentially regulated by the Reserve Bank.

It will however do nothing to improve the issues with respect to access to capital for the non- deposit-taking lending institutions (NDLI’s) such as specialist non-bank mortgage providers.

The issue of access to capital for all smaller players is a fundamental barrier to being able to compete with the major banks.

Some of New Zealand’s leading, non-bank housing loan providers ironically have to rely on wholesale funding from the major banks to fund their activities, meaning an inability to compete with them particularly on price, and the New Zealand public worse off for it.

One area that does let non-banks create competitive friction is the offerings they can provide consumers which the major banks cannot due to RBNZ constraints such as LVR restrictions.

If we want to foster competition, then this ability cannot be tampered with. It allows the non-banks to service customers who require bridging finance, loans for a home building project, loans to self-employed people, loans with higher LVRs, etc, which the major banks cannot or will not service.

Then there’s competition for deposit accounts.

Outside of the major banks, the only realistic alternative that exists are the NBDTs, including the credit unions and building societies, who are able to offer transaction and savings accounts as well as term deposits.

RBNZ has proposed a Depositor Compensation Scheme to protect consumers’ deposit money, however their “risk-based” approach for the setting of levies will disadvantage NBDTs by costing them disproportionately more than it will the banks.

It’s crucial that RBNZ understands that using metrics like return on equity as a measure of default risk is inappropriate, when many of the NBDTs are set up as mutuals whose reason for being is not to make large profits for shareholders but to reinvest their profit into their communities and for the good of their members.

This Report is a real opportunity for government to consider how, given the chance to compete on a more level footing without so many barriers to entry, New Zealand’s non-bank lending sector holds the key to meaningful disruption, and we hope it’s not an opportunity wasted.

*Lyn McMorran is the Executive Director of the Financial Services Federation (FSF), the non-profit industry body whose members provide credit and fleet leasing products to over 1.7 million New Zealand consumers and businesses.