Big banks' deep pockets allow them to tilt the playing field with mortgage broker incentives and home loan cashbacks, says Heartland chief executive.
New Zealand's banks have presented a united front against the Commerce Commission's inquiry into their profits – until now.
They've said the big profits of the biggest banks are what insulates them from the fluctuations seen in American, Japanese and Swiss banks. Government plans for account number portability and sharing data will make it easier for customers to change banks, they've insisted.
But this week, Heartland Bank's chief executive Leanne Lazarus is turning her fire on the big banks and the "barriers to competition" they set in place.
She says the smaller banks often can't access Reserve Bank funding, so have to rely on credit lines from the big banks – and though it happens only occasionally, these can be cut off at will. "We don’t disclose who our wholesale funders are, but we work closely with them to negotiate the terms of funding when entering into or seeking a renewal or extension of funding."
READ MORE: * Borrowers in 'mortgage prison' as firms quit personal lending * Big banks’ smalltown challengers find hope in profits inquiry * Reserve Bank would back a Commerce Commission probe
In the commission's previous market study into grocery competition, it emerged that small retailers like dairies were forced to queue up and buy from supermarkets at retail prices, because there were no other wholesale options. And in some cases, the supermarkets cut them off – like in the Covid supply chain crisis, or when the Dunedin-based Night ‘n Day convenience stores expanded into the North Island.
It's similar for small banks, Lazarus agrees, that are reliant on big banks for funding, though it also depends on the smaller banks' collateral and the quality of their assets.
Heartland's submission to the bank profits inquiry, provided to Newsroom, argues that mortgage broker incentives and home loan cashbacks are distorting the market. "They have deep pockets," she says.
"It is difficult, because you have to almost work twice as hard to raise awareness around your offering for your customers." – Leanne Lazarus, Heartland Bank
Heartland argues larger banks who have the scale to cover the initial cash outlay that is required when paying broker fees. And seemingly attractive "cashback deals" of up to 1 percent on the mortgage comes with strings attached. For instance, a big bank may require a home buyer to agree to keep their mortgage with that bank for three years, even though it's fixed for only one year.
"Cashbacks can also make it more difficult for customers to compare home loan offers between providers on a ‘like-for-like’ basis and the associated clawback period can also disincentivise customers to switch providers," the Heartland submission says.
Technical solutions like number portability will help, but a big factor that constrains competition will still be customer inertia: "Many customers do not shop around for competitive rates or products," it says. "Heartland believes that inertia is, in part, because customers are unclear or uncertain about the bank switching process or it is too complicated or difficult for customers to do so."
Lazarus, who grew up in South Africa, moved in 1988 to NZ where she's held senior executive roles across Westpac and ANZ. She was appointed Heartland Bank chief executive in May last year.
Under her leadership, Heartland won Canstar's Bank of the Year Savings award this year, for the sixth time in a row – but she says it's still hard to persuade customers to consider moving to a smaller bank.
Out and about in public, people talk to her about the cost of living crisis, she says. "And when you actually talk to them about offerings and interest rates that are available, they are pleasantly surprised."
She was at a charity event recently, and a business leader and influencer came up to talk to her about the Commerce Commission inquiry. "He talked to me about how banks are quick to increase lending rates, but not necessarily quick to pass it on to depositors. I was really pleased to say Heartland has really good competitive rates!
"It is difficult, because you have to almost work twice as hard to raise awareness around your offering for your customers. Because the big banks do have sheer scale of what they can do, and what they do do.
"Bigger banks do have scale. They have deep pools of expertise and deep pockets. The smaller banks don't."
Other banks have declined to disclose their Commerce Commission submissions and, in most cases, declined to make any comment.
That reticence comes despite a call from anti-monopoly campaigner Tex Edwards, in his submission, for the commission to “be brave” and recommend the break-up of ANZ and ASB to improve competition in the banking market.
New Zealand's biggest bank, ANZ, confirms it's submitted on the preliminary issues paper issued by the Commission. "We expect that the Commission will publish the submissions it has received within the next week," says communications head Briar McCormack. "We’ll consider those submissions with interest and look forward to the opportunity to provide further insight.
"New Zealand has a highly competitive market for personal banking services with banks and service providers of all sizes and ownership structures, including a government-owned bank."
But it's clear that lines are being drawn between the big and small banks. As well as Heartland's submission, a group of small banks including Kiwibank, TSB and Co-op have presented a joint submission.
The Banking Association, which represents all 18 registered banks, has not made a submission to the Commerce Commission inquiry, at this stage. Chief executive Roger Beaumont says he doesn’t intend to comment on others’ submissions, including those of the association's member banks.
"We wish to respect the market study process and let it run its course." he says.
