Heartland says big banks use scale to block competition

Heartland Bank is arguing that it is challenging for the smaller banks to offer retail products because the major banks use their scale as a kind of barrier to entry.

Tuesday, September 19th 2023, 6:36AM

by Jenny Ruth

For example, “mortgage brokers help ensure homeowners are aware of home loan options available to them, including from smaller banks like Heartland,” the bank, which is owned by the NZX-listed Heartland Group, says in its submission to the Commerce Commission's inquiry into competition in personal banking services.

“But bank-to-broker mortgage incentive structures possibly distort that picture in favour of larger banks who have the scale to cover the initial cash outlay that is required when paying broker fees,” the submission says.

Similarly, some banks offer customers cashbacks with an associated clawback period.

“These cashbacks can have a similar distorting impact to mortgage broker incentives due to also requiring an initial cash outlay which favours larger banks who have the scale to cover this outlay,” it says.

“In addition, 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.”

Heartland also complains about the “fixed” costs of regulatory compliance, saying that compliance costs are disproportionately expensive for the smaller banks than for the larger banks which have larger businesses over which to spread such costs.

It singles out the Credit Contracts and Consumer Finance Act and the Reserve Banks prudential requirements as being particularly onerous to comply with for the smaller banks.

Last month, when it presented its annual results, Heartland complained again that it was unable to access the cheap funding RBNZ provided under its funding for lending (FLP) programme and it repeated that complaint in its submission.

The RBNZ's FLP provided banks with nearly $19 billion in three-year loans with participating banks paying whatever the official cash rate is, currently 5.5%, in interest. Heartland is currently offering to pay 5.85% for three-year term deposits.

Heartland has a “best or only” strategy and mainly offers products, particularly reverse mortgages, that most of the other banks don't offer. Its reverse mortgages businesses in Australia and New Zealand both grew at rates above 20% in the year ended June.

Heartland's online-only mainstream home loans business saw more subdued but still double-digit growth of 14.1% to $313.4 million in the latest year after more than quadrupling the previous year.

It said that despite fierce competition, it had managed to retain more than 90% of customers using this product when their fixed terms came up for renewal.

Group chief executive Jeff Greenlade pointed to his company's cost-to-income ratio of 42% being comparable to that of the major banks and much lower than the 60% to 80% CTIs of other smaller banks.

“What that says is we've used technology to replace scale,” Greenslade said.

None of the other banks were willing to provide copies of their submissions.

Tags: banks