Published in KPMG’s Financial Institutions Performance Survey Review of 2022, 14 March 2023
We continue to live in interesting times. Since the arrival of Covid-19 three years ago, provoking an unprecedented response around the world and in New Zealand, nothing seems quite the same. While New Zealand weathered the Covid onslaught relatively well compared to other countries, the economic consequences are still very much with us. Added to that, in the last year we’ve seen war in Ukraine, devastating flooding and cyclone damage in the North Island, and an occupation at Parliament. We’ve also seen our borders re-open with New Zealanders travelling overseas again, and we’re welcoming tourists and migrants.
Supporting customers through the rising cost of living
After a very eventful year, the biggest single issue affecting most New Zealanders is the high cost of living driven by rates of inflation we haven’t seen in decades. That moved the Reserve Bank to raise the official cash rate sharply from 0.75 per cent in January 2022 to 4.25 per cent in December, with more rate rises in the offing. New Zealand is now braced for a potential recession this year.
The rising OCR and cost of borrowing means that some New Zealand households and businesses are already doing it tough and more will face financial challenges in the year ahead. Our banks are well-placed to support customers and the economy through difficult times. They are well capitalised and are regularly stress-tested by the Reserve Bank.
Banks are proactively contacting customers in cases where those customers are moving from a relatively low interest rate loan to a higher interest rate loan. Banks understand that the rate difference can have a significant impact, especially in the current climate, and they are able to talk though options with affected customers. In other cases, where a change in a customer’s circumstances may not be so obvious, customers are encouraged to contact their bank as soon as possible. For customers experiencing difficulties, early engagement with their bank means the bank will be more likely have more options to offer assistance.
Depending on the circumstances, there are a number of ways in which banks can help people facing financial difficulty. Banks can work with customers to develop a plan to suit their particular needs.
Banks are responsible lenders and when assessing a loan application they apply higher ‘serviceability’ rates to see if the borrower could still repay the loan if interest rates go up. So typically, there’s a buffer already built in for borrowers.
Some borrowers also built in their own buffer against rising interest rates. When rates fell to historic lows, many borrowers maintained or increased their minimum loan repayments. That left them well placed to face an increase in interest rates because they were ahead on repaying their loan. In June last year nearly 46 per cent of people with a home loan were ahead on their loan repayments. This shows good financial capability among many borrowers.
There’s a similar story for people with credit cards. Around two thirds of card holders pay off their balance without incurring any interest costs.
Responding to climate change
Recent unprecedented flooding in the North Island and the devastating impact of Cyclone Gabrielle has presented a further challenge to households and businesses struggling with the cost of living. It also shows that we are now living with the effects of climate change.
Banks responded quickly to affected customers by offering a range of support including cash payments, reduced loan repayments, waived fees, access to term deposits, and donations to flood relief funds.
For the longer-term response to climate change, we are working with the government and other stakeholders to improve access to meaningful climate data. It’s only with the right information, in a format that’s easily understood, that banks can assess the relevant risks when assessing credit applications for households and businesses. It also assists them to make meaningful climate-related disclosures.
We will engage with the government on the Climate Adaption Bill, which should help provide a coordinated response for at risk areas and address issues around funding of climate adaptation.
We’ve previously worked closely with the External Reporting Board in their development of the climate-rated disclosure regime. We are assisting with further engagement as banks work through their first year of reporting the effects of climate change across their business.
Raising scam awareness
Adding to the pressures of a challenging economy and climate change, the spectre of financial crime is an ever-present threat to banks and their customers. Banks have a range of systems and processes in place to help protect their customers from scams. Many customers enjoy the convenience of banking online or on mobile apps. Fraudsters can take advantage of this and pretend to be a trusted person or organisation who then persuade people to make payments to them or hand over personal information to access their bank accounts.
Scams are constantly evolving and increasingly sophisticated. While bank security systems can help detect and prevent financial crime, customer vigilance is also essential to tackling scams and stemming financial losses.
Earlier this year NZBA ran an advertising campaign to encourage people to ‘take a sec to check’ before they parted with their money or personal information. The aim was to raise awareness of the risks, what they looked like, and how to respond. People were encouraged to be alert to suspicious emails, texts and phone calls, to be proactive in protecting access to their banking, to take their time and not be pressured by demands from potential criminals, and to report any suspicious activity to their bank.
Testing new ways to access banking services
Access to banking services and meeting the needs of all customers is a priority for the banking industry, and especially relevant in the current economic climate. Last year NZBA and the six participating banks decided to expand the Regional Banking Hubs trial until the end of 2023, opening four new model hubs and adapting the existing four.
The original trial was launched in November 2020, with hubs opened in Martinborough, Ōpunake, Stoke and Twizel. The four new hubs will be in Whangamatā, Ōpōtiki, Tūrangi and Waimate and, subject to consultation with the local communities, are expected to open by the middle of 2023.
The original four hubs are largely based in towns with fewer than 2000 people. The new hubs, with increased services, will test demand in larger towns. The criteria for new model hubs are towns with more than 3000 people, at least half an hour’s drive from an existing bank branch.
The four new hubs will have a Smart ATM and full cash change services, a full-time dedicated concierge, an employee from each bank available on site for a few hours on separate weekdays, a private meeting room, and private areas for phone and internet banking.
The second phase of the trial is based on lessons learnt from the first phase.
The participating banks have also renewed their commitment to not close regional branches until the end of 2023. The renewed commitment is the same as before – it does not include branches within the six main urban centres of Auckland, Tauranga, Hamilton, Wellington, Christchurch, and Dunedin. It also does not cover TSB’s network in Taranaki.
Another important part of the industry’s support for access to banking services in small towns where branches are no longer viable, or never existed, comes through NZBA’s funding partnership with FinCap. We have committed $5 million over five years to help financial mentors make a real difference for people in the communities they support. Part of the funding is for banking collaboration projects where mentors help clients access banking services.
Facing into the headwinds
This year is already proving to be a challenge for many households and businesses. The ride may get bumpier and it’s a case of fastening your seatbelts and hanging on as we face into the economic headwinds. The banking industry is well-placed to help their customers through, and to support the economy.