2024-08-22 02:41:27
Business Committee Banking Market Research It concluded that more competition was needed to reduce profits at the big four banks, but the report said that would likely be ineffective unless customers were able and willing to switch between banks easily.
By 2023, the four Australian banks operating in New Zealand Profits of approximately NZ$7.1 billionequivalent to $1,400 per person. Even as many customers struggled due to rising mortgage costs, banks’ profits rose.
The previous Government commissioned the market study to understand whether competition in personal banking services in New Zealand was effective.
The report highlights the lack of real competition. Kiwibank undercapitalised And slowly roll out Open Banking.
While open banking is on the horizon, it may also prove ineffective unless we can demystify the financial system and reduce switching costs and time.
Barriers to switching banks
A big barrier to competition is consumer disengagement. This leads many people to stick with their bank even though their fees are higher than if they shop around. The committee’s report noted that 54% of customers have never changed banks.
The report identified several issues that led customers to be “stubborn” and reluctant to switch banks, including the difficulty of finding the best deal.
For example, the advertised mortgage rate may be different from the rate you ultimately receive. Customers must complete the mortgage application process to receive a final rate. This is a time-consuming process that limits their motivation to shop around.
Additionally, switching banks can become a long and arduous task involving changing automatic payments and notifying your employer and every organization you have financial dealings with.
The experience of KiwiSaver has also raised questions about the effectiveness of competition. With more than 20 providers in New Zealand, the KiwiSaver market is highly competitive.
However, in 2019 Report A study commissioned by the Financial Markets Authority concluded that KiwiSaver funds had fees ranging from a third to 80 per cent higher than similar funds in the UK.
Furthermore, economies of scale do not appear to be passed on to customers. Consumers are reluctant to use KiwiSaver, essentially a set-it-and-forget-it approach, which limits the price competition that would be expected in a competitive market.
The Promise and Reality of Open Banking
Open banking allows access to banking and transaction data through third-party service providers. New Zealand has lagged behind other countries in establishing an open banking system.
Open banking allows users to consolidate multiple bank accounts in one app and gives lenders direct access to a person’s financial information. Open banking apps have the potential to use a person’s own data to compare products and services across different banks, making it easier to shop around.
By aggregating services from different providers in a single application, consumers can easily save and transact across different banks, choosing the product that best suits them.
While open banking has huge potential, it will take work for consumers to realize it. At least once the infrastructure is in place, it will be critical that consumers are willing to accept third-party applications and allow them to access personal data.
The continued disengagement of many consumers from financial products means that even open banking may not improve competition in the banking sector.
Improve transparency
If the government wants to solve the problem of bank profitability, it needs to allow and encourage people to switch banks. So how can this be achieved?
First, information needs to be clearer and easier to understand. For example, advertised mortgage rates and cash-back incentives are often less attractive than the rates offered at the end of the application process.
But potential clients have to invest the time and effort to apply to discover this.
Second, governments need to make it easier to switch banks. Some countries, such as Australia, have already implemented systems to reduce the time and hassle required to switch accounts. New Payment Plan or UK Current Account Switching Service.
Finally, governments need to accelerate the adoption of open banking, which would allow consumers to centralise their financial data and apply for products from different banks (such as savings, credit cards and mortgages) through a single platform.
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