Stronger, faster, wider: New competitors in the banking Olympics

Finance companies and fintechs are lining up to register as banks, after the Commerce Commission opened the door to new competition.
And smaller existing banks like TSB and Kiwibank want government backing to scale up to compete.
This week, the commission reported back on its 14-month market study into personal banking, with a plan to widen and strengthen competition, and enable speedy innovative technologies. It has now handed the baton to the Government – and ministers are running with it.
The Minister of Finance, Nicola Willis, has promised to respond with urgency to all the commission’s recommendations. Some, like finding a way to better capitalise Kiwibank have made the headlines; others like loosening the definition on what constitutes a “bank” have not.
She plans to issue a revised financial policy remit this year, to influence how the Reserve Bankassesses competition in decisions like lowering its $30 million capital requirement for smaller players and new entrants, and a revised access policy for Exchange Settlement Account System accounts.
The Government supports the market study finding that the Reserve Bank should review the restrictions on the ability of some entities to market themselves as a “bank”.
The existing big banks argue their size and capitalisation have stabilised and protected them against volatile international markets, that last year took down’s Signature Bank and Silicon Valley Bank in the US, and necessitated a rescue package for the giant European bank Credit Suisse.
“Obviously financial stability for New Zealand is critical,” Willis acknowledges. “However, I agree with this report that we’ve let the balance go so far that, in fact, we’re promoting financial stability at the cost of competition, and that’s led to a situation which has made the oligopoly at the top incredibly cosy.”
One of the big challenges is the regulatory requirement that any bank have at least $30m capital set aside. Finance company Christian Savings and fintechs Dosh and Emerge all tell Newsroom that they’re seeking to register as banks, but they need that bar lowered – tentatively, to about $10m.
Christian Savings is a not-for-profit licensed deposit taker owned by church trusts, that raises funds from deposits in order to finance churches and charities. It has a BB+ credit rating that’s good compared to other finance companies, credit unions and building societies – but could be better it it were listed as a bank.
It has $270m in term deposits, nearly $39m in equity, and a loan book of $250m. Beyond that, it has a $70 to $80m loan pipeline, so says raising new term deposits is key.
“We’ve doubled in the last five years. We could double again very easily,” says chief executive Dan Mazengarb.
Today’s churches are a little more relaxed about money-lending than they were. “Not from the temple,” he laughs. “And no one’s making money off this.”
He says the official capital requirement to register as a bank is $30m, but he’s heard through the grapevine that the real number to get the regulatory tick is closer to $50m.
Being registered as a bank would formalise Christian Savings status; its customers already think of it as their bank. “In 62 years, we’ve never lost $1 on a loan. We’ve never had a mortgagee sale to the best of our knowledge, we’ve never not been able to pay out a depositor. But we’re under this classification that has negative connotations, like Hanover Finance.”
Mazengarb adds: “People are fed up with the banks. The non-bank deposit taker sector presents a fantastic opportunity for competition, to level the playing field. The likes of the fintechs, yep, we need them to disrupt and innovate. But also we’ve got some existing players with some strong track records.”
One fintech is Dosh, an app-based provider that places its customer deposits with ASB and BNZ. Because it aggregates small term deposits into big multimillion dollar deposits, it’s able to get better interest rates than it passes on to its customers. It also makes personal loans and is promising to soon have one of the best home loan offers on the market.
Co-founder Shane Marsh got a sneak preview of Nicola Willis’ plans for the banking sector when he posted on LinkedIn two weeks ago, suggesting the Government provide extra capital for a stronger Kiwibank, as well as enabling the registration of digital banks like Dosh.
Willis replied on his LinkedIn page: “Let’s do both!”
He’s been talking to Commerce Minister Andrew Bayly, too, who he says will visit Dosh’s Auckland head office in the next few weeks. And he welcomes Willis and Bayly’s support for a review of the $30m capital requirement. “That’s not $30 million that I can then go and use to grow my business. That’s $30 million that sits there. You can’t touch it, yeah? And then I need more money on top of that to build myself a competitive bank.”
Another fintech is Emerge, a mobile-first digital platform for Kiwi businesses that says it’s “here to make business banking what it should be” – with the obligatory caveat that it’s not a bank.
“We’ve been having this conversation for years now,” says Emerge co-founder Jamie Jermain. “It’s time to stop admiring the problem and start fixing it for Kiwis.”
He admits the capital requirement is “a tricky balance”.
“$30m is too prohibitive for new entrants if we want to create competition in the industry, but there are serious and valid arguments around customer safety to be considered,” he says. “Adrian Orr himself says $30m is there to keep consumers safe. That’s paramount.
“But, it’s too steep a hurdle. We’d say $10m is closer to the starting mark to encourage competition but ensure consumers aren’t at risk. This can then be scaled depending on the companies’ age and stage.”
Jermain says it makes sense to support Kiwibank to provide  local competition to the Aussie banks, but that’s not enough. “They also suffer from a lot of the same challenges the Australian incumbents face – too large and unwieldy to meaningfully innovate at pace, outdated technology, the list goes on…”
And one existing bank agrees.
Kerry Boielle, TSB’s chief executive, says strong, genuine competition is needed in the New Zealand retail banking market, and focusing just on Kiwibank to remedy the market malaise isn’t enough.
“TSB is poised to disrupt the market, but we are hamstrung by regulations that entrench the dominant position of Australian-owned banks rather than creating a competitive market,” she says.
“TSB believes banking regulations should have a stronger focus on creating a level playing field, with proportionality baked in, while still ensuring customers are protected.
“It’s crucial for New Zealanders who want a competitive banking market that policymakers get these settings right, and we look forward to continuing to engage with the Government on this.”
Kiwibank says a key aspect of its purpose is ensuring all New Zealanders have simple and easy access to the right personal banking services for them – and a truly competitive market will work to ensure that outcome for all.
Chief executive Steve Jurkovich says Kiwibank is up for the challenge of fulfilling the role of “maverick” and taking on the larger banks.
“We remain very competitive on both lending and deposits and as a result more customers are joining Kiwibank and we continue to grow at a faster rate than our competitors,” he says.
“We’d welcome more access to capital over time to deliver on our purpose. Our multi-year transformation will deliver more scalable systems that will mean we can further accelerate our current growth. That said, any decision around capital, and the sources of that capital, sits with our shareholder, Kiwi Group Capital, and the Crown as the 100 percent shareholder.”
Newsroom asked Willis whether the Government would directly back Kiwibank by shifting its own Crown banking from Australian-owned Westpac to the smaller publicly-owned bank.
The government banking contract doesn’t come up until 2027, she replies. “I think it’s important that in any tendering or procurement, that the government doesn’t necessarily favour one supplier over another, but that that should be a competitive process.”
She acknowledges ministers have previously been advised that Kiwibank isn’t set up to provide those government services. “I haven’t asked to look at that. I’m focused. The focus here is, how do we put Kiwibank in a position to disrupt this very cosy oligopoly, and we’re working at pace on that.”
Willis says she’s asked Treasury to engage with Kiwibank’s parent company, Kiwi Group Capital, on options for raising new capital. This might include from KiwiSaver funds, New Zealand investment funds and investment from everyday New Zealanders – though there’s no mention of new direct investment from the Government.
She says she’ll take proposals to the Cabinet by Christmas.
But New Zealand’s biggest bank, ANZ, is hitting back. Chief executive Antonia Watson says ANZ disagrees with the Commerce Cmmission’s characterisation of New Zealand’s banking sector as lacking genuine competition, “because our staff go out every day to win and keep customers in a highly competitive market”.
Watson says New Zealand’s market structure of five larger banks is consistent with other countries of both similar and larger sizes. “International experience shows that successful banks require scale because of the complex technologies, capital and costs involved,” she argues.
“And in return this creates a stable financial system that plays an important role in an economy, attracting capital into a country and providing a safe environment for people to go about their lives, run businesses and create wealth.
“ANZ’s more than half a million shareholders around the world – which include most KiwiSaver funds – have over $17b of capital invested in ANZ NZ and this helps people buy homes, start and run businesses, and trade with the world. In return for that capital invested we make around $2 billion a year in net profit after tax.”
Watson says when assessing the returns of New Zealand banks, it’s important to compare apples with apples. “Our return on equity is around 12 percent, which we think is a fair and balanced return in line with similar banks globally, and many other New Zealand companies in other industries.”
Newsroom asked NZ Banking Association chief executive Roger Beaumont whether the organisation would open up its membership to new fintech banks, should they be approved to use that moniker.
He replies that full membership is currently open to banks registered under the Reserve Bank of New Zealand Act 1989. “We will be interested to see how the Reserve Bank responds to the Commission’s recommendation. Only then could we consider the implications, if any, for our membership requirements.”
He acknowledges the balancing act to be struck between financial stability and competition in the banking sector. “We are interested to see how any changes to the policy remit might influence the tension between the two and deliver different outcomes.”