The big banks in New Zealand tend to cop a lot of flak for their extremely healthy profits, with every day Kiwis having little choice but to accept products and rates which are much the same across providers.

Lack of competition is the prime culprit, certainly according to the Commerce Commission. The regulator’s recent study into our personal banking sector concluded that more competition is required to reduce the profits of the four big banks.

However, if customers don’t switch between banks in sufficient numbers, there’s little incentive for those banks to offer market-beating deals.

In the past, when people had to visit branches in person to do their banking, often building enduring relationships with staff over many years, loyalty might’ve kept them tethered to a particular bank. However, those days are long gone for most of us.

Banks don’t need to compete for “sticky” customers

Aaron Gilbert, Professor of Finance at Auckland University of Technology, recently discussed the hurdles to changing banks with The Conversation.

“One barrier to competition is consumer disengagement. This results in many people staying with their bank despite being charged more than those shopping around. The [Commerce Commission]’s report notes 54% of customers have never switched banks.

“The report also identifies several issues that result in customers being “sticky” and disinclined to switch banks, including how difficult it can be to find the best deal.

“For example, the advertised mortgage interest rate can differ from the rate you are ultimately offered. Customers must go through the mortgage application process to get a definitive rate. This is a time-consuming process that limits their incentive to shop around.

“Additionally, switching banks can become a long and onerous task involving changes to automatic payments, and notifying your employer and every organisation you have financial interactions with,” Prof. Gilbert explains.

Easier than you might think

Pippa Beams used to be a client manager at a mortgage brokerage and has changed banks herself to secure a more attractive mortgage rate. She agrees many people are put off by the perception that switching banks is a big job.

“Don’t get me wrong, it’s always a bit of a hassle, but it’s a lot easier than it used to be and probably more straightforward than people think.

“Most banks have switching services to make it as streamlined as possible, including programmes that copy over automatic payments and direct debits. And they’ll often deal with your previous bank to close your account there.

That’s a big plus for a lot of people who’d feel uncomfortable going into their bank and telling them themselves,” she says.

The New Zealand Banking Association’s website promises switching banks is “secure, easy and fast,” and that your new bank will manage the entire switching process, including all recurring payment instructions, within five working days.

Open banking to the rescue?

Prof. Gilbert notes that open banking is regularly touted by the government as a sure fix for our lack of banking competitiveness. He’s less sure.

“Open banking allows users to aggregate multiple bank accounts within one app and allows lenders to directly access a person’s financial information. There is the potential for open banking apps to compare products and services from different banks using a person’s own data, making shopping around considerably easier.

“With the aggregation of services from different providers in a single app, a consumer could easily have their savings and transactions with different banks, selecting the “best” product for them.

“While open banking has huge potential, it will again depend on the consumer to realise this potential. Willingness to accept the third-party apps and to allow them access to personal data will be critical, at least once the infrastructure is in place.

“The ongoing disengagement of many consumers to all things financial means even open banking may not improve competition in the banking sector,” he says.

Greater transparency

According to Prof. Gilbert, if the government wants to address bank profitability, it needs to enable and encourage people to change banks. He advocates a three-pronged approach:

• Firstly, information needs to be more clearly available and understandable. Advertised mortgage rates and cash back incentives, for example, are often less attractive than the rate offered at the end of the application process. But a prospective client is unable to find that out until they have invested time and effort applying.

 

• Secondly, the government needs to make the process of changing banks easier. Some countries have implemented systems to reduce the time and pain associated with switching accounts, such as Australia’s New Payments Program or the UK’s Current Account Switch Service.

 

• Finally, the government needs to accelerate the adoption of open banking. This will allow consumers to centralise their financial data and to apply for different banks’ products (such as savings, credit cards and mortgages) from a single platform.