The Commerce Commission says its initial review of banks found they were more profitable than overseas counterparts and its market study will be focusing on home loans and personal deposit accounts.

Commission chairman John Small said the preliminary findings “raise questions for us”, and the commission wanted to understand whether lack of competition in personal banking was a contributing factor.

“This is important in the context of our study as profitability can serve as an indicator of the intensity of competition.”

It released a preliminary issues paper on Thursday which said registered banks held about $435 billion in deposits, which made up 62 per cent of their total funding.

Important role

“Our current understanding is that deposit accounts play an important role in how banks attract customers and sell, or cross-sell, other personal banking services.”

Retail deposits were also a stable and low-cost source of funding for banks, compared to alternatives such as short and long-term wholesale debt, or equity.

The paper also noted the four largest banks held 86 per cent of the $348b home loan market and there was anecdotal evidence of “consumer stickiness and inertia, corresponding to subdued levels of switching”.

The commission cited a study by its Australian counterpart which highlighted several issues that have dampened price competition for home loans, including unnecessarily high search costs created by opaque discretionary discounting by some lenders, unnecessarily difficult and lengthy discharge processes for switching between lenders, and the existence of gaps between prices paid (interest) for new home loans relative to existing home loans.

It said other overseas studies have also identified home loans as being particularly profitable portfolios for banks.

Innovation subdued

The commission said it would look at how competition is working for different population groups, the conditions for entry and expansion in the sector and the factors affecting consumers’ ability to search for, and switch to, alternative providers.

It would also inquire into any impediments to disruption and innovation in the sector, noting the Government had initiated the study partly because of indicators of subdued innovation and limited variation in products and services within the sector.

“Recent media commentary has identified specific innovations that are not present in the New Zealand banking sector as suggestive of weak competition.”

Examples include the variety of available services and open banking, and there have also been comments to the effect that any innovations which do occur are not benefiting banks’ customers and may actually be disenfranchising them in the case of digitisation.

The Government recently announced its intention to legislate for consumer data rights.

The commission said its study wouldn’t focus on insurance, KiwiSaver, wealth management and financial advice, or foreign exchange.

It also wouldn’t be looking too closely at credit cards, personal loans generally, or other types of personal banking services that are not deposit accounts (including overdraft facilities) and home loans.

It said including them would materially increase the scope of the study due to the extra markets, market participants and, in the case of KiwiSaver, other regulatory regimes involved.

“In identifying the proposed focus of the study, we have also taken into account that supply of home loans appears to be particularly concentrated compared to, for example, personal loans generally.”

The commission is now inviting feedback to the paper via its website, with submissions closing at 4pm on September 7.