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Bank fees and financial system efficiency

This page contains information on Bank fees and financial system efficiency from the May 2022 Financial Stability Report.

This page contains information on Bank fees and financial system efficiency from the May 2022 Financial Stability Report.

Financial system efficiency refers to how well the system helps to direct the economy’s scarce resources to their most productive purposes (allocative efficiency), how well the system responds to changing technologies and consumer preferences (dynamic efficiency), and the extent to which the system provides services at a reasonable cost (technical efficiency).6 As one lens on the technical efficiency of New Zealand’s financial system, this Box examines recent trends in registered banks’ lending and service fee charges.

New Zealand’s banks tend to operate relatively straightforward business models, focused on intermediating credit between savers and borrowers. As a result, most of the banks’ income is derived either from net interest income (the difference between what they earn on their lending, and the cost of their funding, such as deposits) and fee income charged to cover the cost of a range of services provided. These include fees for account maintenance, interchange payments, money transfers, and lending facilities.

Fee income has become a relatively less important part of banks’ revenues over time, falling from around 28 percent of total income in 2001 to around 13 percent today. Adjusted for inflation, per capita bank fees are around 40 percent lower today than 20 years ago (figure B.1). A cross-country comparison also suggests that New Zealand banks’ fee income is relatively low (figure B.2).

New Zealand banks’ fees have also trended downwards when viewed at a product level. Fees for lending and credit facilities (such as application, overdraft, and default fees) and for transaction and deposit accounts (such as account maintenance and manual transaction fees) have declined relative to the total value of these products. This mirrors trends seen in Australia (figure B.3).

To a large extent, the declining value of bank fees in New Zealand reflects ongoing declines in banks’ operating costs due to the digitalisation of banking and economies of scale. For example, all major banks now offer free personal transaction accounts, with no fees charged for most electronic transactions. Amendments to consumer laws in 2015 have also limited lenders’ ability to charge credit and default fees on consumer lending beyond what is reasonably necessary to recover their costs.

Offsetting a general downward trend in fees, consumers’ greater use of scheme debit and credit cards (Visa and Mastercard) issued by banks had led to a growth in banks’ income from this source in recent years (figure B.4). EFTPOS transactions are free in New Zealand, while payments using scheme cards involve interchange fees, which are charged per transaction and generally paid to card-issuing banks and borne by merchants.

Banks have lowered their interchange rates somewhat in recent years, and in some cases temporarily waived fees for contactless payments to support the country’s response to COVID-19. However, interchange fees in New Zealand remain high compared to peer countries, and legislation to introduce a new regulatory framework and limits on interchange fees is currently before Parliament.

Reflecting an ongoing trend of digitalisation and operating cost efficiencies, fee income has become a relatively less important part of New Zealand banks’ business models in recent decades. New Zealand households and businesses are paying significantly less in bank fees than in prior decades, and future changes to the regulation of retail payment systems look set to continue this trend.