The Nature of Competition for Personal Banking Services, 2023

Project by Link Economics Group

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Expert report for Kiwibank’s cross-submission on the Commerce Commission’s Preliminary Issues Paper

Kiwibank engaged Link Economics to consider certain aspects of the submissions made by the largest banks on the Commerce Commission’s preliminary issues paper for the market study into personal banking services.

Link Economics’ report used empirical analysis to assess the competition landscape in personal banking services. The study focused on the extent of competitive constraints on the largest banks including the impact of Kiwibank’s home loan rates on competitors’ rates, the ability of smaller banks to attract customers, and the effect of regulation on competition.

The study revealed an oligopolistic market structure in home lending with a competitive fringe. It found that the largest four banks experience minimal competitive constraint from smaller lenders, responding to the other large banks’ rates and changes in the Official Cash Rate (OCR) rather than to smaller banks such as Kiwibank. Low switching rates for “Main Bank” customers relationships and home lending were identified as limiting competition, with small banks relying heavily on new customers, such as migrants and youth, for growth. Customer inertia and switching difficulties were shown to present challenges, suggesting that reducing barriers for smaller banks could enhance price competition.

The report discusses the asymmetric effects that historical prudential regulation has on large and small lenders, emphasising the impact of capital ratio differences on competition and growth. It finds that the example of how prudential regulation has distorted competition highlights a critical need to examine the way in which competition impacts of regulation are assessed and weighed up in future regulatory decisions and reviews.

The report recommends addressing barriers to entry and expansion for personal banking services including through improving the switching process, providing customer education and awareness campaigns, and by including comprehensive examination of competition considerations in future regulatory decisions.

Link Economics Report available here

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