RBNZ Settlement Account Access: Game Changer for NZ Financial Services Competition

The Reserve Bank of New Zealand (RBNZ) has dropped a significant announcement that could

shake up our financial services landscape. They are looking to open up their settlement accounts

to non-bank deposit takers, and potentially even payment service providers, overseas deposit takers

and financial market infrastructure operators.

This move to broaden access to the Exchange Settlement Account System (ESAS) follows an RBNZ

review and comes after years of complaints from non-bank deposit takers that the current system

gives banks an unfair competitive advantage. The Commerce Commission’s market study on

personal banking services highlighted this issue too, specifically recommending widening access.

What exactly is the Exchange Settlement Account System (ESAS)?

Let me break this down in simple terms. ESAS is essentially the plumbing of our financial system –

the infrastructure that allows money to move between financial institutions safely and efficiently.

When you transfer money from your bank account to someone at another bank, that transaction

needs to be settled between the institutions. This doesn’t happen by your bank physically sending

cash to the other bank. Instead, these transactions are settled through the Exchange Settlement

Account System operated by the Reserve Bank.

Currently, only registered banks have direct access to ESAS. This means they can settle transactions

directly with each other through the Reserve Bank’s system. Non-bank institutions have had to rely

on sponsorship arrangements with banks to access these settlement services – adding complexity,

cost, and dependency on competitors.

How will this change benefit non-bank deposit takers?

This is where things get interesting. By giving non-bank deposit takers direct access to settlement

accounts, the RBNZ is essentially removing a significant barrier to competition.

Direct access to settlement accounts means non-bank institutions will no longer need to rely on their

direct competitors (banks) for essential financial infrastructure. This independence translates to

greater operational flexibility and the ability to develop services without navigating through bank-

controlled channels. The reduction in intermediary services should lower operational costs for non-

bank deposit takers, potentially creating savings that could be passed on to their customers through

more competitive rates and reduced fees.

With direct access to settlement systems, these institutions can develop and launch new payment

and financial services more rapidly, without the need to negotiate access through banks that might

view these innovations as competitive threats. This direct settlement capability also improves risk

management for non-bank institutions by reducing counterparty risk, contributing to a more stable

overall financial system.

What does this mean for competition in NZ financial services?

The New Zealand banking market has long been dominated by a small number of large institutions.

These changes could significantly level the playing field.

For consumers, this regulatory shift promises more choice, better rates, improved customer service,

and innovative financial products. Credit unions and fintechs will be able to compete more

effectively without having one hand tied behind their back.

We’ve already seen how non-bank lenders have carved out niches in the mortgage and personal

loan markets despite operating at a structural disadvantage. Imagine what they could achieve with

direct settlement access.

The timing couldn’t be better, with consumers increasingly looking for alternatives to traditional

banking. This change removes a significant roadblock that has historically prevented smaller players

from scaling effectively.

While the implementation details are still to come, this RBNZ decision signals a clear intent to foster

greater competition in our financial system. For a market that has sometimes been criticized for its

concentration and lack of competitive dynamics, this could be the catalyst for meaningful change.

Watch this space – the next few years in NZ financial services just got a lot more interesting.