Banks provide two main services:
- a structure through which people can make payments, particularly electronic payments
- a means by which people can save and borrow money.
By the 1990s it was extremely difficult for anyone to function in New Zealand without a bank account for making and receiving payments
Growth of non-cash payment
In 1993 (the first year for which statistics were published) cheques were the most popular method of non-cash payment in New Zealand, making up 54% of the 858 million non-cash payments. Since then their use has significantly declined, to 8% of 2,046 million non-cash payments in 2007.
In the 1990s there was significant growth in the use of bank-issued and branded debit cards designed for electronic access to accounts. These were originally issued to allow bank customers to access ATMs (automatic teller machines), which were introduced in the early 1980s. ATM usage grew relatively slowly between 1993 and 2007, perhaps reflecting the charges that banks sometimes imposed for their use. In 2007 there were 205 million transactions (mainly withdrawals, but some deposits and transfers) from 2,400 ATMs. These were around 10% of all non-cash payments.
EFTPOS (electronic funds transfer at point of sale) transactions have been available in New Zealand since the mid-1980s. The use of EFTPOS is now so prevalent that some people make almost no use of cash. In 2007 there were 998 million EFTPOS transactions through 131,000 terminals, up from 92 million transactions through 11,000 terminals in 1994.
There has also been growth in credit-card usage, encouraged by reward schemes and the absence of any transaction charges to cardholders. The costs of transactions are borne instead by retailers and other payment recipients. Credit-card transactions have grown from 39 million in 1993 (5% of transactions) to 241 million in 2007 (12% of transactions).
Other non-cash payments
In 2007 payment by direct debit and electronic credit accounted for 5% and 17% of transactions, respectively. There were also small numbers of transactions processed through specialist systems, such as Austraclear and SCP (same-day cleared payments) for million-dollar payments, and these account for the majority of the value of transactions that are processed through the New Zealand system.
Before 1995 a cheque was not deemed to be cleared until it was physically moved to the recipient’s bank branch. Since 1995 electronic transmission of cheque information has been acceptable.
Lending and borrowing
Banks hold the savings of people who have surplus income, and are also a source of funds for people who want to borrow. For example, these needs and preferences may depend on life-cycle factors, such as the need to borrow money to buy a house and the need to save for retirement
Home mortgages are a major part of banks’ lending activities, and are one of the most competitive areas of business amongst banks. Banks also lend to individuals, through overdrafts, term loans, credit card accounts and revolving credit facilities; and to businesses, for example a manufacturer who wants to build a new factory.
The net interest income from money lent accounts for around 70% of bank’s income, and fees for around 30%.
In 1997 ASB launched BankDirect, the first bank to service customers solely through ATMs, online or by phone.
Banks have a role as financial intermediaries because they specialise in assessing the creditworthiness of borrowers, who will not be known to depositors. The depositor entrusts their money to the bank with the expectation that the bank will ensure that the value of loans backing the deposit, and therefore the bank’s ability to repay, is maintained.
Non-bank financial institutions also perform an intermediation role. Some are primarily savings institutions – for instance credit unions, which follow conservative lending strategies. Others invest more speculatively, and so offer their investors a higher rate of interest than they would likely get from a bank, but at greater risk that their borrowers will not be able to service the loans. Finance companies have tended to lend particularly in development activity, which banks have preferred not to be involved in.