Over $324m in profit reflects another strong year for the non-bank financial sector, reveals KPMG’s Non-Bank Financial Institutions Performance Survey (FIPS) 2019. Net profit after tax (NPAT) increased by 16.49% ($45.87 million) over the year resulting in a total NPAT of $324.01 million.

The review surveyed 24 of New Zealand’s non-bank financial institutions, revealing key industry trends and providing analysis of the sector’s performance to September 2019.

The result was largely driven by the 19 basis point increase in the sector’s net interest margin and strong loan growth (9.32%) as more customers come to the sector. Other drivers include an increase in net interest income (up $116.78), lower non-interest income (down $24.34m), increases in impaired asset expense of $5.82m and operating expense of $24.68m and tax expense of $16.07m.

“What we’ve seen is the margin increases being helped along by a reduction in funding costs, so a strong year as a sector, parts of that sector performing stronger than average and others a little flat,” says John Kensington, KPMG’s Head of Banking and Finance.

An increase in consolidation

2019 has seen an increase in consolidation for the sector. Avanti Finance purchased Branded Finance, Credit Union Baywide merged first with three other credit unions and then consequently with Co-Op Money. To see that much aggregational merger in the sector is unusual.

Disruptors in the market

Aside from Buy Now, Pay Later schemes, disruptors have included new entrants from Australia, such as Prospa, Pepper and Payright. With interest rates low and the economic environment benign, it has been a stable period to enter the market.

In a year with business confidence has been down and unemployment and interest rates low, reduced funding rates have seen term deposit rates become less enticing to investors, resulting in some looking for yield elsewhere. This has been an ideal environment for new entrants to dip a toe in the water.

Regulatory change

2019 has also seen a continuation of increased regulation across the sector. While there is no opposition to regulation in general, there is a sense that existing regulation should be enforced more so, and proposals for new regulations should undergo more thorough consultation. 

“Nobody objects to the thought process behind the regulation, but it has been rushed, there’s not enough time for people to make submissions, and when it is implemented, there are some unintended consequences,” says John.

Buy Now, Pay Later disrupting the market

Buy Now, Pay Later (BNPL) service providers have been the most visible catalysts for disruption within the personal finance sector, with over 228,000 customers signed up to these services and over 1,200 merchants offering BNPL services. However, these providers continue to operate outside of the regulatory regime as they aren’t bound by responsible lending principles.

“Buy Now, Pay Later providers are probably the biggest disruptor that was new in the survey this year, they are definitely an attractive product, particularly for millennials,” says John. “They love it, because they can get something now and then take their time to pay for it, they’re not incurring credit.”

These schemes have had a huge impact not only as a natural competitor to other players in the market, but also in the way they impact an individual’s capacity for further borrowing. Buy Now, Pay Later providers appear to be targeting the most at-risk borrowers, with a focus on the retail market. This in turn may limit borrowers ability to obtain more traditional loans as other needs arise, such as car repairs.

Digital innovation and open banking

A key question for the sector is, are we going to achieve the best customer outcomes from innovation, or regulation? While increased regulation has been the favoured approach in recent months, there is an opportunity to look to industries that have emphasised digital innovation to ease customer pain points, such as telecommunication and utility companies. However, one piece of regulation that could have a positive impact for the sector is the introduction of open banking, opening the market for newer, smaller players.

New capital rules for banks

Rules and regulations not directly applied to the non-bank sector will begin to have an on-flow effect in 2020 as the new capital rules for banks become clearer. This will see banks lend less, and some customers will have to come to the non-bank sector to get the credit they require. 

Fintech opportunites

New Zealand has been slow to adopt fintech products so there are opportunities for new players to bring products to the market, particularly in a benign environment with low interest rates and less lending from banks.

Influence of the global economy

On flow effects from the global economy are one to watch for 2020, be it a cross-pacific trade war or Brexit. Now inextricably linked, New Zealand won't escape the downside of these major global events and trends.

Further regulation

We will see more regulation in the new year, as it would appear regulators take a regulatory approach to achieving better customer outcomes. Whether this could be better achieved through innovation time will tell.

Conduct and culture

The key theme of the past two years remain on the agenda, with the rules constantly changing, conduct and culture will continue to impact the wider financial services sector, including non-banks.

This year’s review also includes insights from Kate Stewart and Quinn Ooi of KPMG on conduct, Lyn McMorran of the Financial Services Federation on regulatory change and Ben Speedy of CoreLogic on mortgage lending in the non-bank financial sector.