The Big Four’s stranglehold on fintech innovation

The Commerce Commission this week told us in stark terms what anyone with a bank account and mortgage already knows: the banking sector seriously lacks competition.

The big four Aussie-owned banks are more focused on “price-matching strategies” that see them maintain the highly profitable status quo. Disruption needs to be “baked in” to stimulate competition, says Commerce Commission chair John Small. Currently it's woefully undercooked.

A bank account is needed for any New Zealand adult to function in society, so the banks have an outsized role to play in our lives. They innovative at their pace and to suit their ends, which is about maintaining their existing market shares, happy for Kiwi Bank and a few regional players to compete around the edges. That’s hitting us all in the pocket in the form of high fees and lending rates, but also holding back innovation in open banking and payments technology. 

It’s a big barrier to innovative New Zealand tech startups like Dosh and Aera, who are looking abroad and seeing the incredible innovation in open banking and payment solutions and wondering why we can’t have them here.

“You look at open banking, it's five, six years on, and you can't even do a refund online via open banking,” Jerome Faury, the founder of payments platform company Immersve told me earlier this week.

“No one's using it. The insurance required just to access the open banking API is probably costing you north of $100,000 a year. The integrations with each of the banks… probably $50,000 apiece, technically, at least, plus the same in lawyers' fees to do the paperwork. 

“And you've got less functionality than what you were with doing the old direct debit, direct credit system,” adds Faury who has a global deal with Mastercard that allows cryptocurrency owners to seamlessly pay at any Mastercard-compatible terminal using crypto in their digital wallet.

Another company, Debut, is attempting to enter the market as an alternative to the big banks, offering real-time payments, and aiming to progress to fully-fledged banking services. 

“We're on a mission to put 1 billion dollars back in the pockets of New Zealanders,” its founders say.

“Banks in New Zealand are earning at an all-time high, but most of the profits end up going overseas. Even less goes back into helping customers grow their money. We want to change that with Debut by creating a New Zealand bank that benefits all Kiwis.”

The debanking issue

But its a hard and risky road to take, in no small part because most innovation in financial services involves interacting with the big banks. 

We have not seen disruptive innovations observed overseas from fintechs such as Revolut, Monzo, and Rocket Mortgage, as fintechs here face a range of impediments entering and expanding,” the Commerce Commission points out in its report.

Nor do we observe the sort of innovative responses seen in Australia by the parents of the major banks, for example with digital-only subsidiaries or “flanking brands” (like ubank by NAB and Unloan by CBA).

Even worse, some of our companies that are trying to innovate in payments and alternatives to the banking services currently on offer, are being debanked by the big four banks on the pretext that they are too risky to offer services to. A report I co-authored last year for Callaghan Innovation’s Web3NZ platform, surveyed startups in the sector and found the majority of them had either had banking services withdrawn or faced the prospect of them being pulled. 

Like an individual, A New Zealand business faces great difficulty in functioning without a bank account. Anyone who champions innovation, and the power of digital disruption will be nodding vigorously in approval at the long overdue scrutiny the Commerce Commission is giving the issue, and which the Government will now consider.

There is some merit to the argument that the status quo has created a stable banking environment in New Zealand. The banks are financially healthy, trusted, and not in any danger of collapsing. Stability is important, but the vast profitability of the banks is evidence enough that there’s plenty of room for additional players, and to invest in innovation to create a more open and interoperable system for financial services. Innovation will enhance the longterm stability of the banking sector.

Big Tech’s payment ambitions

Because if we don’t progress this quickly, we face another threat - Big Tech will ride in over the top of the banks.

“I can tell you now what's going to happen is Big Tech, in particular, is going to invest heavily and innovate in payments. You're going to see Apple, Google, Facebook, Samsung, providing consumer payment experiences,” Faury explains.

The innovation in payments and financial services they have pursued to date has been in conjunction with big banks internationally. But if the likes of Apple and Google can persuade consumers to exchange value in their own digital currencies, that may change.

“If you look at history and the importance of currency and taxes and what it means to society, if we lose New Zealand dollar, people start transacting that AU dollar or the Facebook dollar or the Apple dollar,” says Faury. 

“That's not going to be good for this country. But by the time those powers that be figure this stuff out, it's going to be well and truly too late.”