New Zealand banks' resistance to open banking and bank account number portability

Earlier this year, open banking was in the news. For instance, take this NewsHub article from March:

Amid pressure for the Government to do a deep dive into banks and their profits, there are calls to make it easier for Kiwis to switch banks.

That is on its way with open banking legislation and Newshub can reveal how the Government wants to pay for it: fees and another tax.

Remember back in the day when phones were bricks? And if you changed your mobile provider you couldn't take your number with you?

Well that changed, and when number portability came in, Tex Edwards used it to set up 2degrees. Now he wants the same thing for bank accounts.

"It would be a lot easier to change banks," he said. 

Changing banks can be an arduous process but there's a push to make that a whole lot easier.

"Elsewhere in the world you have bank account number portability and that has created more competition and its brought prices down, mortgage rates down and term deposits up," said Sam Stubbs, the managing director at Simplicity.

Bank account portability is on its way as part of open banking, which is two-ish years away.

The banks are in no hurry though.

It should be no surprise that the banks are in no hurry. Open banking increases their costs. However, one particular aspect of open banking, being bank account number portability, is probably the real issue for them. That's because a lack of portability generates profit opportunities, because of switching costs, and customer lock-in.

Switching costs are, unsurprisingly, the costs of switching from one good or service to another, or from one provider to another. Switching costs can be monetary (for example, a contract termination fee), or they can be non-monetary (for example, the time and effort required to make the switch). When bank account numbers are not portable, the switching costs of changing banks are quite high. If a customer wants to change banks, they need to set up new direct debits for all of their regular payments, change their banking details with their employer, with Inland Revenue, and with every other organisation that needs the customer's bank details. Changing all of those details is onerous for the bank customer, constituting a high switching cost.

Switching costs create customer lock-in. They make it unattractive for customers to switch to other providers, because customers would have to first face the switching cost. For banks, this customer lock-in means that bank customers tend to stay with their existing bank for longer than they otherwise might. Banks can then exploit their locked-in customers through higher prices for services (higher interest rates, or higher banking fees), or by selling them complementary products (like credit cards or insurance). Having locked-in customers is incredibly profitable for banks. If their customers weren't locked in, the banks would have to work harder to keep their existing customers, to avoid them being lured away by other banks. And that is why New Zealand banks are so resistant to open banking.