The commission believes Kiwibank needs to strengthened and open banking must be brought in.
Its final report on personal banking repeated there was little competition in the sector, with the dominant big four Australian owned banks ANZ, ASB, BNZ and Westpac making high profits, while the Reserve Bank of New Zealand's rules make it difficult for smaller banks and new entrants to challenge.
Commission chair John Small said a properly functioning market would have stronger competition and more aggressive efforts to compete for customers.
"What we see in New Zealand is that the major banks have little strategic differentiation, and their growth targets focus on maintaining market share and protecting margins and profitability."
Small said changes were needed to "bake in" disruption particularly to encourage the development of open banking to allow consumers easier bank switching or being offered competing services and products from third party finance concerns.
"We believe that the best prospect for driving change in the sector will come over time from accelerating open banking and ensuring that the regulatory environment better supports competition."
Banks had been too slow in developing open banking, he believed, and it would need the government and industry to work together to bring it in.
The report said disruption was needed to shake up the sector ranging from easing the financial requirements needed for small banks to compete or new companies to enter the market.
"We also see a need for progressive regulation, where competition is given a higher weighting to ensure an appropriate balance between financial stability and competition."
'Cosy pillow fight'
Willis told reporters this morning the government welcomed the report and joined in calling out market behaviour of the four big banks that make up 90% of the market.
"They are highly profitable compared with international pairs, they lack innovation and they do not aggressively compete for customers."
She acknowledged the banking lobby was strong, but "democracy is stronger, and our government won't be cowered by the big four banks".
The sector was less like a battle between retail banks and more like a "cosy pillow fight", she said.
The commission had conducted its work "fearlessly" and its conclusions were robust.
"It has provided actionable insights and our government is responding with urgency."
The commission had confirmed what Kiwis had long suspected - "we are not getting a good deal from the big banks", she said.
Open banking
Commerce and Consumer Affairs Minister Andrew Bayly added that the government accepted the challenge laid out to it by the Commerce Commission and has wasted no time.
"We have already scrapped the overly prescriptive affordability regulations in the Credit Contracts and Consumer Finance Act, so Kiwis will benefit from easier and faster loan processing.
"We are implementing 'open banking' and are on track to meet the timeline the commission has recommended."
He said open banking would make it easier for Kiwis to find services that met their needs and would make an environment for start-ups "to challenge the big established banks".
"We agree with the commission that open banking has the greatest potential to promote ongoing disruptive competition in the medium to long-term and are committed to facilitating its uptake as quickly as possible."
Bayly said one of the key findings from Tuesday's report was that customers rarely switched providers.
They found it hard to compare offers and find the best deal, especially when it came to home loans and the application process.
It also found mortgage advisers were aligned with banks and often only put forward one home loan offer to clients.
Bayly said he would be encouraging the Financial Markets Authority to "pull every lever" they could to ensure mortgage advisers were transparent about who they acted for and what commission structures were in place.
Open banking would be a driving force for positive change, Bayly indicated, and once in place, he believed it would spark innovation and enable the development of new products and services, including better payment options, safer payment options, and better options for business.
Bayly intends to make it easier for people to switch banks, just as they would phone providers.
In Australia, the same banks that operate in New Zealand could switch an account in 10-15 minutes through open banking.
"We need to have that regime in New Zealand and that is one of the key benefits of open banking."
Kiwibank's future
The commission said the government should find ways to increase the capital funding of Kiwibank, which has about 7% market share, so it could be a more effective competitor and seek out new customers.
"The time to act on that is now, and we are seeking advice," Finance Minister Nicola Willis said.
She has asked Treasury to engage with Kiwibank's parent company Kiwi Group Capital on options for raising new capital, including from KiwiSaver funds, New Zealand investment funds and investment from everyday New Zealanders.
In terms of those options, the minister acknowledged she wanted it to remain "New Zealand's bank".
"I see the government retaining a majority interest well into the future."
Willis said she heard every week from Kiwis wanting to invest more in New Zealand. She would love to create a pathway that would allow Kiwi mums and dads via their KiwiSaver accounts to beef up Kiwibank.
"That's exciting to me. If we removed that capital constraint and allowed KiwiBank to really go for the growth that's out there ... it would actually knock the big four banks out of their complacency."
Willis said she will take proposals to Cabinet no later than December this year, but acknowledged Kiwibank won't be able to focus on raising capital until 2026 at the earliest.
Willis viewed today's report as a call to action, and will be issuing a new Financial Policy Remit this year to make clear the government's expectation that the Reserve Bank, in its policies and actions, supported a more competitive banking sector.
"The judgment this report essentially makes is we've got the balance too far in favour of financial stability, such that it's making it almost impossible for new entrants.
"One of the clear areas for action is the Reserve Bank's approach in using its tools to promote competition. So I expect action.
"I'm accountable to New Zealanders. If ultimately that means that we need to weigh changes to the Acts governing the Reserve Bank then of course we should consider that. Financial stability for New Zealand is critical, however, I agree with this report that we've let the balance go so far that in fact we're promoting financial stability at the cost of competition
The commission also called for rule changes to reduce the financial burden on smaller banks and other finance concerns wanting to enter the sector.
"We also see a need for progressive regulation, where competition is given a higher weighting to ensure an appropriate balance between financial stability and competition."
Changes were also needed to put more power in the hands of consumers, Small said, including improving the bank switching process, changes to the way mortgage offers were presented, and mortgage advisers and banks to promote price competition and choice.
The recommendations are little changed from the draft report in March and steer clear of suggesting that the four Australian banks should be broken up.
