New Zealand's Bank Switching Costs: The Regulatory Response

Abstract

Switching costs are a recognised issue in banking markets around the world, but in many countries, including New Zealand, regulators give them limited attention. This paper confirms the existence and relative importance of switching costs in the New Zealand banking market. We find seven categories of switching costs are perceived to exist by bank customers, with Hassle being perceived as the strongest. These switching costs are found to deter customers from switching between banks despite a desire to do so. We then consider possible regulatory responses to bank switching costs and recommend three actions for regulators. The recommendations include regulators acknowledging the existence of bank switching costs and accounting for their effects in any assessment of the extent of competition and evaluation of merger and/or acquisition requests. Regulators should also explore bank account number portability, but should leave comparative disclosure of bank products and services to the market to resolve.

Keywords: Switching costs, Bank regulation, Competition, New Zealand

JEL Classification: D12, D14, D40, G21, G28