The Australian Competition and Consumer Commission will not oppose the proposed merger between the Commonwealth Bank and Colonial Limited, but only after significant undertakings were provided by the parties, ACCC Chairman, Professor Allan Fels, said today.
The ACCC conducted extensive market inquiries, contacting financial institution customers, market participants, consumer groups, government and a range of other interested parties.
"In the course of its market inquiries, the ACCC examined the provision of both banking and non-banking financial services markets", ACCC Chairman, Professor Allan Fels, said today. The ACCC concluded that in the product categories of retail insurance, retail investment and retirement savings, wholesale funds management and large corporate banking that the proposed merger was unlikely to lessen competition to any significant extent.
"The main areas of competitive overlap between the Commonwealth Bank and Colonial were in retail banking markets in New South Wales and Tasmania.
"The ACCC's market inquiries identified several areas of retail banking where the proposed merger would be likely to result in a substantial lessening of competition in both Tasmania and NSW.
Those areas relate to deposit / term products in Tasmania, transaction accounts in both NSW and Tasmania, and small and medium enterprise banking in both NSW and Tasmania. The ACCC's concerns in NSW were partially alleviated by the presence of another well-established regional bank. In the absence of such competition in NSW, it is likely that the acquisition would have generated substantial competition concerns.
"The undertakings accepted from the parties address the ACCC's concerns by opening up Tasmanian and NSW retail banking markets to more competition and minimise the ability of the combined entity to abuse any accumulated market power in those markets", Professor Fels said.
"In order to protect consumers in Tasmania and NSW from the prospect of higher prices, reduced service quality and a narrow product range, the Commonwealth Bank has provided behavioural undertakings in relation to price, service quality and product range.
"On price, the Commonwealth Bank will ensure that the rates, fees and charges on products in Tasmania and NSW are equivalent or as favourable as those charged to Commonwealth Bank customers in metropolitan NSW.
"The access undertakings will make it far easier for other financial institutions, such as regional banks, building societies, credit unions and any new entrants, to provide retail banking services in Tasmania and NSW.
"Competition on the ground will be further enhanced in Tasmania and NSW through undertakings to offer vacated bank branch sites to new and small financial institutions.
"To further assist other financial institutions enter and expand their operations in Tasmania and NSW, the Commonwealth Bank has offered undertakings to provide processing and systems support. The Commonwealth Bank will provide access to their credit and debit card processing, and cheque processing, item and loan processing services on reasonable commercial terms and conditions.
"The Commonwealth Bank will also endeavour to make good faith efforts to facilitate the provision of information technology and telecommunication services to new and small financial institutions by providers of these services. The Commonwealth Bank is unable to provide systems support directly as it has contracted out provision of these services from within its own organisation.
"A dispute resolution mechanism is also contained in the undertaking, to address disputes that may arise with regard to processing and systems support.
"The Commonwealth Bank has also provided guarantees with regard to service quality.
"On product range, the Commonwealth Bank has committed to make available to customers residing in Tasmania and regional NSW, subject to certain conditions, the same standard products as are available to Commonwealth Bank customers residing in metropolitan NSW.
"The Commonwealth Bank has also undertaken to appoint an independent monitor to ensure that it complies with the undertakings provided to the ACCC in relation pricing, service quality and product range.
"After taking into consideration the access undertakings provided by the parties, the ACCC considered that any anti-competitive detriment caused by the Commonwealth Bank merger with Colonial will be minimised. Under these circumstances, the ACCC decided not to oppose the proposed merger".
Further information
Professor Allan Fels, Chairman, (02) 6243 1129 or pager (016) 373 536
Mr Ross Jones, Mergers Commissioner, (02) 6243 1161
Ms Lin Enright, Director, Public Relations, (02) 6243 1108 or (0414) 613 520
MR 109/00
30 May 2000
BACKGROUND
On 10 March 2000, the Commonwealth Bank of Australia and Colonial Limited publicly announced their intention to merge. On 27 March 2000, the Australian Competition and Consumer Commission received further details of the proposed merger when it received a detailed submission from the Commonwealth Bank. The ACCC considered that the merger would be likely to impact a large number of markets in Australia relating to the provision of financial services.
In order to assess the competition implications from the proposed Commonwealth Bank/Colonial merger, the ACCC conducted extensive market inquiries and received comments relating to the proposed merger from such interested parties as State Governments, members of State and Federal parliaments, other financial institutions, business organisations, farming organisations, consumer groups, and banking customers.
Relevant Markets
During the course of its examination, the ACCC considered the impact of the merger in product markets for large corporate banking, retail banking services and non-banking financial services.
Non-Banking Financial Services
In its examination of non-banking financial services, the ACCC focused on three broad product categories, namely:
retail insurance products;
- retail investment (funds management) products; and
- wholesale funds management.
The ACCC found that a merger between the Commonwealth Bank and Colonial was unlikely to substantially lessen competition in any of these broad product categories, no matter how narrowly those markets were defined.
Large Corporate Banking
The Commonwealth Bank in its submission claimed that the provision of finance to large corporations, including listed companies and other major institutions, is national or even international in character.
The ACCC agreed that corporate banking is a national market in character and that bank loans are only one of a range of funding sources available to large corporations, including the issuance of debt and equity.
Although the Commonwealth Bank holds a significant position in the corporate banking market in Australia, Colonial does not. Other significant participants in this market include the other three major retail banks as well as international securities houses. Large corporations also enjoy a high degree of countervailing power in this market.
For these reasons, the ACCC found that a merger between the Commonwealth Bank and Colonial is unlikely to create any substantial lessening of competition in the provision of banking services to large corporate entities.
Retail Banking Services
Home Lending
Home lending encompasses mortgage-backed loans issued to households for the purposes of purchasing residential owner-occupied property. Home lending products are supplied by retail banks, non-bank deposit taking institutions, mortgage originators and from other financial institutions such as general and life insurance companies.
This market is national in its geographic scope. This is largely due to the fact mortgage originators and a number of regional banks have been distributing mortgage loans in States where they have no, or little, branch presence.
The ACCC found that a merger between the Commonwealth Bank and Colonial is unlikely to impact adversely on the intensity of competition in this market.
Personal Loans
Although the range of personal lending products has increased markedly, there is still a clear and distinct market for traditional personal loan products. Personal loans are generally secured or unsecured fixed term loans made to personal consumers for purposes other than housing. While there remains some degree of substitutability between personal loans and other credit products, such as credit cards, market inquiries found that there is still a core group of consumers who require personal loans. Although credit cards may be popular for small personal lending requirements, even up to a few thousand dollars, their associated higher interest rates make them prohibitively expensive for larger purchases.
State-based players, including regional banks, building societies and credit unions, have traditionally been strong in the provision of personal loans, as have finance companies. However, it appears that the importance of branch networks for distributing personal lending products is declining. While this is most pronounced for home lending, providers of personal loans can also distribute their product through non-branch means, such as agency arrangements with retailers, by telephone or on-line banking, or through alliances with professional associations and other bodies, and so do not necessarily require a branch presence.
Given the strong presence and competitive influence of non-bank financial institutions in the provision of personal loans, the ACCC found that a merger between the Commonwealth Bank and Colonial is unlikely to have a detrimental effect on competition for personal lending products.
Hybrid Personal Lending Products
A number of hybrid personal lending products, linked to residential property and/or home lending, have been developed in recent years, including home equity loans) and personal lines of credit. These products are priced very differently to traditional personal (fixed term) loan products.
These hybrid personal lending products have reduced the cost of borrowing for those consumers able to access credit through these channels, and given that they are attached to home loans, they tend to be fairly competitive. The ACCC therefore considered it unlikely that a merger between the Commonwealth Bank and Colonial would impact negatively on competition for these products.
Credit Card Issuing
Market inquiries suggest that the geographic market for credit card issuing is now likely to be approaching national. It now appears that consumers are unbundling their credit card usage from their transaction accounts and this has also facilitated non-branch distribution and payment. Unbundling has been driven in large part by the attraction of loyalty cards and their associated rewards schemes. Multiple credit card holdings, each held for different purposes (eg low interest rates, loyalty schemes and rewards), are now more commonplace than they were.
The ACCC took the view that a merger between the Commonwealth Bank and Colonial is unlikely to result in a substantial lessening of competition in the product market for credit card issuing, although it remains concerned at the high degree of market concentration exhibited by the four major banks in this product line.
Credit Card - Merchant Servicing
Merchant services are provided by banks to retail businesses whereby banks agree to clear and settle the merchant's credit card transactions with other card issuing institutions that are a part of the same credit card network.
For smaller businesses, these services usually include the rental of terminals to process credit card transactions and the provision of switching services to route electronically based credit card transactions for clearance and settlement. Because most terminals now have dual credit and debit card functionality, the merchant servicing for credit cards is almost always the retailer's servicing provider for debit card transactions as well.
Small and medium enterprise retailers, and especially smaller businesses, would generally purchase their merchant services as part of a "cluster" of banking services from their main (relationship) bank. This reflects the high search and transactions costs in purchasing these products separately. The geographic dimension for small and medium enterprises credit card merchant servicing is thus considered to be local to State-based.
Large retail chains seek to aggregate their merchant services requirements into national contracts so as to achieve volume discounts and improve their bargaining power with financial institutions. For these businesses the market for merchant services is national. These customers enjoy considerable countervailing power and are unlikely to be adversely affected by the merger.
The four major banks enjoy an extremely strong position with regard to the provision of merchant services. Based on data obtained by the ACCC, it appears that the four majors account for well over 90% of this market, based on both the number and value of credit card transactions. Colonial has an extremely small market share.
In these circumstances, it is difficult for the ACCC to conclude that a merger between the Commonwealth Bank and Colonial will, of itself, be likely to result in a substantial lessening of competition in this market. However, the importance of merchant services to many small to medium businesses does raise adverse implications for the level of competition in the provision of banking services to small to medium businesses (see below).
Deposits/Term Products
This market primarily consists of longer term savings products which are not "at call", such as bank term deposits and credit union and building society fixed deposits.
In their submission, the Commonwealth Bank suggested that transaction accounts should also be included in the same market as deposits, due to the broad functionality of different savings and investment products. However, there are inherent differences in customers' motivations and intentions in opening a long-term savings account on the one hand, as opposed to opening a transaction account, which is "at call" and has greater payments functionality, on the other.
The geographic dimension for the deposits market was considered to be State-based.
During the course of market inquiries, it was found that deposit taking institutions require a physical presence, through the existence of a branch network, to be able to succeed in generating a large volume of transaction and deposit products.
Evidence on the importance of State-based markets for deposit products can also be observed through the balance sheets of State-based regional banks, which show that it is more difficult for them to generate liabilities (ie deposit and transaction accounts) out of State than it is to generate assets (eg selling home loan and personal credit products) out of State.
In Tasmania, the proposed merger between the Commonwealth Bank and Colonial would appear to give the combined entity a market share at or over 50%, a level of concentration in excess of the ACCC's unilateral threshold. On this basis, the ACCC found that there is likely to be a substantial lessening of competition for deposit and term products in Tasmania as a consequence of the merger. This view was buttressed by the importance of branch networks in generating deposits, which would act as a major barrier to entry into rural and regional areas, like Tasmania.
Transaction Accounts
The types of products included in this market are day-to-day transaction accounts which are "current" or "at call".
Transaction products include bank issued cheque accounts and similar accounts provided by building societies and credit unions, such as passbook accounts and pensioner accounts. Payments functionality can include cheques, debit cards (for use at branches, ATMs and EFTPOS facilities), telephone banking, direct debit facilities and on-line banking.
The ACCC believes that transaction accounts are a distinct product market, based in large part on their payments functionality.
Accordingly, bank issued deposit/term products and retail investment products with payments facilities attached, such as cash management trusts, should not be included in this market.
The ACCC believes that the geographic scope of this market is State-based.
The key factor here is the day-to-day nature of transaction accounts, which necessarily requires that customers are able to readily access their funds with convenience and at minimum cost. Given present consumer behaviour, this tends to favour those financial institutions that have a physical (branch, agency and ATM) presence in close proximity to their customer base.
Overall, the ACCC found that barriers to entry in the form of branch and ATM networks are high, customer inertia and product bundling compound these entry barriers, and that fees and charges for transaction services have been rising, especially in regard to electronic and telephone banking.
Based on data that was available to the ACCC, it appears that in Tasmania the merged entity would have close to 50% of the market, exceeding the ACCC's unilateral threshold for market concentration. In NSW, the four largest banks would appear to have a combined market share in the vicinity of 80%, and the merged entity would have 30% or more of the market in its own right, raising concerns about coordinated conduct.
Overall, the ACCC concluded that a merger between the Commonwealth Bank and Colonial would be likely to result in a substantial lessening of competition for transaction accounts in Tasmania. The ACCC also concluded that the merger would be likely to result in a substantial lessening of competition for transaction accounts in NSW.
Small and Medium Enterprise Banking
The ACCC took the view that this is a "cluster" market consisting of banking products encompassing; credit provision, transaction/cash facilities, banking advice/relationship, and credit card merchant services.
The geographic dimension for this product cluster is considered to be local to State.
Markets are considered to operate locally for small business banking because in seeking credit, many small businesses lever-off a personal banking relationship, which is already local in nature. In addition, key aspects of the small business banking cluster require ready access to cash handling and deposit facilities, which is best accessed at nearby branches. For those larger small to medium enterprise businesses, the geographic dimension of their banking services would likely be wider than local and may approximate regional or State-based markets.
Survey data on bank lending to small businesses and the banking relationships forged by small businesses were used by the ACCC to assess market shares in this product line. For Tasmania, this information suggested that a merger between the Commonwealth Bank and Colonial would result in the combined entity having a market share of around 50%, exceeding the ACCC's unilateral threshold for market concentration. In NSW, a merger between the Commonwealth Bank and Colonial would result in the four major retail banks having a combined market share at or near 80%, and the merged entity having around 25% of the market in its own right, raising concerns about coordinated market conduct. It is also likely these shares would be significantly higher in regional NSW, where both banks have traditionally had a strong branch presence.
The ACCC concluded that a merger between the Commonwealth Bank and Colonial is likely to result in a substantial lessening of competition for this product market in both Tasmania and NSW.
Agri-business Banking
The ACCC believes that lending to the agricultural sector can be separated from the provision of other business financial services.
Agricultural lending requires a physical presence of some sort. Banks and other financial institutions generally have teams of specialist lenders travelling the countryside assessing loan applications and progress towards repayment.
In Tasmania, Colonial through the former Trust Bank was found to have a relatively small loan book by comparison to its position in other retail banking markets. Significant market share had also been captured by local non-bank financial institutions that have generated vigorous competition in the market.
In NSW, the merger would probably result in the four major banks capturing a market share of around 75%. However, it was found that Colonial has been reducing its exposure in this market. The presence of a specialist rural lending bank and of pastoral houses in rural lending was also found to be an important driver of competition in this market.
Overall, the ACCC took the view that a merger between the Commonwealth Bank and Colonial is unlikely to lead to a substantial lessening of competition in Tasmania and in NSW in this product market.
Undertakings
The ACCC considered whether the anti-competitive effect that it had identified as arising from the proposed Commonwealth Bank/Colonial merger could be reduced by appropriate remedies in the form of court-enforceable undertakings under section 87B of the TPA, which, if sufficient, would allow the merger to proceed.
In such situations, the ACCC usually favours "structural" undertakings. Structural undertakings involve the divestiture of certain clearly identifiable assets of the acquired businesses to a new entrant or an existing smaller player in a particular market or markets. Such undertakings are considered to be more effective in maintaining competition and are more easily established, monitored and enforced. This is always the ACCC's "first best" solution.
Given, the competition problems identified in Tasmania, the divestiture of Colonial's recently acquired Trust Bank operations was a potential structural remedy that was considered by the ACCC. A number of complications existed, however, with the pursuit of a structural remedy involving Colonial's Trust Bank operations. These included:
- major problems in establishing a clearly identifiable package of assets to offer for sale to potential bidders, due to the advanced stage of the integration process for embedding the Trust Bank operations within Colonial State Bank;
- concerns about any further disruption to the customers of Trust Bank, which would flow from the uncertainty generated by another sale process only a matter of months after the previous change of ownership; and
- limitations on the potential field of bidders as a consequence of competition and other constraints.
Given the above, and the fact that competition problems were also identified in NSW markets, the ACCC considered whether a mix of "quasi-structural" and "behavioural" undertakings would be sufficient to remedy the competition problems identified. The fact that the ACCC has considered such options on this occasion must be seen in light of the above constraints and should not be seen as providing precedential direction for how it will deal with future bank mergers.
In the event, Commonwealth Bank offered section 87B undertakings which were considered sufficient to address the ACCC's concerns in relation to the problems that were identified with regard to this specific transaction. The undertakings have two main objectives:
- to make retail banking markets in Tasmania and NSW more contestable post-merger (quasi-structural); and
- to minimise the ability of the combined Commonwealth Bank/Colonial entity to exercise market power in Tasmania and NSW post-merger (behavioural).
Specifically, the parties have provided quasi-structural undertakings that provide access to their EFTPOS and ATM networks on reasonable commercial terms and conditions for new and small financial institutions entering or expanding their operations in Tasmania and NSW. There is also a dispute resolution mechanism contained in the undertakings.
The parties have also given an undertaking in relation to the vacation of banking sites for Tasmania and NSW. In the event that there is both a Commonwealth Bank and Colonial Bank site in close proximity, and the Commonwealth Bank proposes to sell or lease one of the sites, then the Commonwealth Bank will offer that site to a new or small financial institution in the first instance, provided that the new or small institution offers fair value for the site. This undertaking will be in force for 24 months.
The parties have also provided undertakings in regard to information technology and telecommunications (IT&T) systems support and processing support for new entrants and small financial institutions.
Specifically, the Commonwealth Bank will make good faith efforts to facilitate the provision of IT&T services to new and small financial institutions in Tasmania and regional NSW. The Commonwealth Bank is unable to provide these services directly as it has contracted out service provision from within its own organisation. The Commonwealth Bank will also provide access on reasonable terms and conditions to its credit and debit card processing, and cheque, item and loan processing services. The undertakings also contain provisions for the resolution of disputes relating to IT&T system support and processing support.
In order to address ACCC concerns regarding the exercise of market power in the aftermath of the merger, the parties have also provided behavioural undertakings in relation to price, service quality and product range.
The Commonwealth Bank will set rates, fees and charges on all products to customers in Tasmania and regional NSW so that they are equivalent or more favourable than the rates, fees and charges imposed on Commonwealth Bank customers residing in metropolitan NSW.
The Commonwealth Bank will maintain the quality of service to customers in Tasmania and regional NSW to an equivalent or more favourable standard than in metropolitan NSW. A variation in service quality of no more than 5% below the average for metropolitan NSW for each measurement period will be considered acceptable.
The Commonwealth Bank will provide to customers in Tasmania and regional NSW the same product range, subject to certain conditions, as is available to customers in metropolitan NSW.
Independent monitors will be appointed in Tasmania and in regional NSW to ensure that undertakings in relation to price, service quality and product range are complied with.
With the exception to the undertaking regarding the vacation of banking sites, the undertakings will be in place for a period of five years post-merger. Provision exists for the Commonwealth Bank to be released from the undertakings after three years if the ACCC and the Commonwealth Bank agree there has been no material breaches of any of its clauses.