New Zealand’s Commerce Commission spent two years investigating banking competition, heard extensive submissions, and released findings in early 2024. The inquiry confirmed what most people already suspected: the banking sector is highly concentrated, switching rates are low, and competition could be stronger.

But the proposed remedies were modest. No structural breakups, no forced divestiture, no dramatic intervention. Instead: easier account switching, better fee transparency, and some regulatory tweaks. Whether this improves competition meaningfully is questionable.

What the Inquiry Found

The big four Australian-owned banks—ANZ, ASB, BNZ, and Westpac—control about 85% of the market. This concentration has persisted for decades despite various attempts to promote competition.

Switching rates are low. Most New Zealanders bank with the same institution for years or decades, even when they’re dissatisfied with service or pricing. Barriers to switching include perceived hassle, direct debits and automatic payments tied to existing accounts, and lack of compelling differentiation between banks.

Net interest margins—the difference between what banks pay for deposits and charge for loans—are higher in New Zealand than comparable markets. This suggests banks are earning excess profits due to limited competition rather than operating at competitive margins.

Small business lending is particularly uncompetitive. SMEs have limited alternatives to the big four, and pricing and terms reflect this. Business loan margins are substantially higher than residential mortgages despite similar credit risk for many borrowers.

Proposed Remedies

Account switching should become easier through standardized processes and portability of payment connections. This reduces one barrier to switching but doesn’t address why customers don’t see compelling reasons to switch.

Fee transparency requirements will force banks to disclose fees more clearly. In theory, this lets customers comparison shop. In practice, most customers don’t actively shop for banking services, so improved transparency may not change behavior much.

Open banking requirements will let third parties access customer banking data (with permission) to offer comparison tools and potentially alternative services. This creates infrastructure for future competition but doesn’t directly create new competitors.

Regulatory barriers to new entrant banks will be reviewed and potentially reduced. But starting a bank requires substantial capital and expertise. Regulatory barriers aren’t the primary constraint on new entrants—economics are.

What Didn’t Change

Market structure remains untouched. No forced breakups or divestitures were proposed. The big four will continue dominating unless organic competition gradually erodes their positions.

Profit levels weren’t directly addressed. Banks can continue earning their current margins unless competition actually intensifies and forces margins down. There’s no price regulation or margin caps.

Mortgage lending, which drives most bank profits, remains concentrated. Easier switching helps at the margin, but most customers will still choose from the big four based on rates that move largely in lockstep.

Foreign bank entry barriers persist. Australian parent banks have natural advantages operating in New Zealand given trans-Tasman integration. But truly independent foreign banks face regulatory, capital, and market knowledge barriers that the inquiry didn’t materially reduce.

Why Bolder Action Wasn’t Taken

Structural separation—forcing banks to divest branches or businesses—is legally and practically complex. It risks financial stability, could reduce efficiency, and faces strong industry opposition. No government wants to trigger banking sector disruption.

New Zealand’s small market limits how many viable banks can operate sustainably. Unlike large markets where dozens of banks compete, NZ probably supports 8-12 banks at most. We’ve got roughly that number now; adding many more isn’t realistic.

Banking stability concerns constrain competition policy. Regulators want healthy, well-capitalized banks. Aggressive competition that squeezes margins might weaken bank resilience. Balancing competition and stability is difficult.

Political economy matters. Banks are powerful, well-connected, and have strong lobbying capability. Government inquiries that propose dramatic banking sector restructuring face industry pushback and public worry about financial stability.

The Challenger Bank Reality

Kiwibank, TSB, SBS Bank, and The Co-operative Bank provide alternatives to the big four, but their combined market share is roughly 15%. They compete on service and some niche offerings but generally can’t match the big four’s rates due to smaller scale and higher funding costs.

Digital challengers have emerged—Heartland Bank online business, new players in payments and lending—but haven’t captured significant market share. New Zealand’s market is too small to support purely digital banks at profitable scale unless they achieve very high market penetration.

Non-bank lenders provide some competition in specific segments. Consumer finance companies, peer-to-peer lenders, and specialist mortgage providers nibble at the edges but don’t fundamentally challenge bank dominance.

Open Banking Potential

Open banking creates infrastructure for third parties to build services using customer banking data. Comparison tools, budgeting apps, and aggregated financial management could make switching easier and highlight better deals.

But open banking hasn’t transformed banking competition in markets where it’s been implemented longer. UK open banking launched in 2018 and has improved some services but hasn’t dramatically increased switching or reduced market concentration.

The value of open banking accrues partly to customers through better tools and partly to new service providers. Whether it materially shifts market share from incumbents to challengers remains to be demonstrated.

Business Banking Impacts

Small businesses got limited help from the inquiry. Business banking is less regulated than consumer banking, and banks argue that business customers are sophisticated and can negotiate. This ignores the reality that most SMBs have limited negotiating power.

Some banks have improved business banking offerings in response to inquiry scrutiny and competitive pressure. Better digital tools, faster loan approvals, and more transparent pricing have emerged. But these are incremental improvements, not transformation.

For SMBs seeking better banking deals, the inquiry’s practical impact is limited. You still need to actively shop around, negotiate, and potentially work with multiple banks for different services to get best outcomes.

What Customers Should Do

Don’t assume loyalty is rewarded. Banks often offer better deals to new customers than long-standing ones. Periodically reviewing whether you’re getting competitive rates and fees is worthwhile.

Use easier switching processes when they’re implemented. If you’re genuinely getting a better deal elsewhere, the reduced friction of switching makes it worth doing.

Consider splitting banking across multiple providers. You don’t need to have all accounts, loans, and services with one bank. Having a transaction account with one bank, mortgage with another, and business banking with a third can sometimes get better overall outcomes.

For businesses particularly, negotiate actively. Banks have more flexibility on business banking terms than they typically admit. Bringing competing quotes and being willing to switch creates negotiating leverage.

Looking Forward

Banking competition in New Zealand will likely improve incrementally rather than dramatically. Easier switching, better transparency, and open banking create conditions for competition, but actual competitive intensity depends on whether new entrants or challengers can offer compelling alternatives.

The big four’s dominance will probably persist for years, though specific market shares may shift. ANZ’s recent struggles and customer dissatisfaction could benefit competitors if they effectively attract switching customers.

Technology might prove more transformative than regulation. If digital services genuinely offer better experiences or meaningfully lower costs, they could grow share even in New Zealand’s small market. But this hasn’t happened yet despite years of digital banking availability.

For businesses evaluating banking relationships, the inquiry didn’t create a dramatically different competitive landscape. Active management of banking relationships, willingness to negotiate and switch, and using multiple providers where advantageous remain the practical approaches to getting better banking outcomes.

The Commerce Commission’s inquiry was thorough and well-intentioned, but constrained by political, economic, and practical realities from proposing truly transformative changes. New Zealand banking will remain concentrated and modestly competitive—better than monopoly, worse than highly competitive markets.