The Australian Competition and Consumer Commission will not oppose the proposed merger between Westpac Banking Corporation and the Bank of Melbourne Limited, but only after significant undertakings by the parties.
"The ACCC conducted extensive market inquiries and concluded that the merger would not be likely to substantially lessen competition, after taking into account the effect of the undertakings", ACCC Chairman, Professor Allan Fels, today announced.
Following the merger, the Victorian operations of both banks will be managed as the Bank of Melbourne by BML management.
Westpac and Bank of Melbourne submitted that the merger would allow Victorian customers of both banks to benefit from the strengths of each - BMLs customer-friendly, competitive focus and Westpac's financial strength as a major trading bank.
"Arguably, the merger has pro-competitive features, capitalising on the complementary strengths of each bank", Professor Fels said. Under section 50 of the Trade Practices Act, the ACCC would only oppose a merger which was likely to substantially lessen competition.
"The undertakings will maintain various existing benefits for BML customers, including: extended trading hours (eight hours on weekdays and three hours on Saturday mornings) and certain fee exemptions for BML personal current account holders.
"As well, access undertakings accepted from the banks are likely to make the Victorian market more competitive.
"The access undertakings, for the first time in the Australian banking sector, effectively open up the Victorian market to competition from a wider range of financial institutions such as regional banks (including regional banks from other states operating in Victoria), building societies, credit unions and any new entrants.
"The access arrangements would allow Victorian customers of deposit taking institutions carrying on business in Victoria to use the ATMs (automated teller machines) of the Westpac group (including Challenge and BML) and use the EFTPOS system (electronic funds transfer at point-of-sale) at a reasonable price. This gives customers a greater choice of institutions that can offer wider electronic access to their accounts both within Victoria and when they travel interstate.
"Because of the customer appeal of wider access, new and small institutions will be able to market their products much more effectively, greatly strengthening their competitive ability.
Commenting on the ACCC decision, Professor Fels said there have been significant changes in the market since the ACCC last made a decision on regional bank mergers in September 1995.
"In particular, increased competition from mortgage originators has not only forced banks to cut rates sharply, but also has led to more product unbundling, ie customers no longer necessarily seek home loans from the banks with which they do their everyday banking", he said.
"This has influenced the ACCCs analysis of the state of competition in the Victorian market.
"Like the Wallis Committee, however, the ACCC still sees significant elements of the banking market as being regional in character.
Developments in the regional bank market have also been relevant. In September 1995 there was a very real prospect that, absent the Trade Practices Act, numerous regional banks around Australia would have been taken over by the majors. Since then, developments such as the St. George/Advance/Bank SA merger; the Bank of Scotland acquisition of BankWest; and the Metway/Suncorp/QIDC merger in Queensland have reduced the likelihood that the diversity which the regional bank sector brings to the market (acknowledged by the Wallis Report) would soon disappear.
"The access undertakings arose because, out of the six product markets identified, the ACCC had concerns about one market - the transaction accounts market - in which increased concentration posed a risk of higher charges. However, the undertakings offered by Westpac and BML offset these concerns. (Transaction accounts are effectively day-to-day banking accounts that include for example, statement, passbook and cheque accounts.)
"There will be considerable independence of state management of the combined Victorian operations of the merged bank, under the BML brand.
"BMLs efficiencies and customer goodwill should help the merged bank compete more effectively against the other three major trading banks - Commonwealth, NAB and ANZ.
"The ACCC had thoroughly examined the proposed merger, seeking comment from more than 100 organisations. Over 60 submissions were received from the finance sector, consumer and business organisations and individual bank customers."
Autonomy
There will be considerable independent BML management of the combined Victorian operations of the merged entity, under the BML brand. The undertakings given by the parties provide that, for three years post-merger:
BML's (the merged entity's) Chief Executive Officer will have authority to decide on interest rates, fees and charges in Victoria (except national base/indicator rates, securitised product pricing and national Westpac branded products);
A minimum of 100 BML branches (which could include some Westpac branches re-branded as BML) will be open between 9 am and 12 noon on Saturdays, and for a minimum of eight hours on weekdays.
BML customers who maintain more than $400 in their personal current accounts for five out of eight months starting from 15 May 1997, will be exempt from account keeping and transaction fees in any month in which they maintain at least $400. In addition, BML debit card customers will avoid account keeping fees for any month in which they use their debit card at least once.
Access
The undertakings will make access available on reasonable commercial terms to small and new competitors in Victoria, including interstate based regional banks, building societies and credit unions etc, so long as they carry on business in Victoria.
Victorian customers of access seekers will be able to use Westpac's national ATM and EFTPOS networks (including those of Challenge and BML) at a better price.
The terms of access for these institutions, including price, will be agreed between the parties where possible. However any disputes will be determined by an independent expert, approved by the ACCC. The likely lower price of access is a key aspect of the access arrangements and will influence competition significantly in the longer term.
Competition analysis
The ACCCs evaluation of the merger is based on the conclusion that although some product clustering still occurs, there are a large number of consumers who will shop-around from different suppliers to get the best deal.
Since the ACCCs last substantial decision in September 1995, there have been significant changes in the banking industry. A highly significant change has occurred in the housing loan market with increased competition from mortgage originators. This has, amongst other things, forced banks to reduce sharply their own housing loan interest rates to a point where they largely match the originators rates. In turn, these changes have put pressure on any subsidies there may have been from high home lending rates to fees, charges and other interest rates.
A further consequence has been a significant change in customers attitudes to their relationships with banks.
Customer loyalty to banks with whom they do their everyday banking has reduced in regard to housing lending. Further, banks have no longer found it so easy to bundle their products, ie to sell a group of products simultaneously where this includes a home loan.
This has influenced the ACCC in moving to a multi-product approach to market definition. Such an approach is consistent with the findings of the Financial System (Wallis) Inquiry.
Under this multi-product approach the ACCC separately assessed the geographic boundaries of each product market, following a detailed analysis of consumer and supplier behaviour. The ACCC reached the conclusion that while the home loan market is effectively national, a number of other retail banking markets are still state based at this time. This also is consistent with the Wallis Reports comments on market definition, which generally upheld the view that most retail banking markets are state based.
The ACCC concluded that in the Victorian deposits market there was sufficient non-bank competition (from, for example, cash management trusts) that offer viable product alternatives and so competition is not likely to be substantially lessened as a result of the merger.
"BML has traditionally been strong in the home loan sector. However, the national market for home loans is not highly concentrated, and competition from non-bank financial institutions has forced interest rates down to a competitive level," Professor Fels said. This is likely to continue after the merger and so there should be no competition problem in this market."
"The Victorian market for personal loans is not highly concentrated and banks are constrained by non-bank providers such as finance companies, credit unions and motoring organisations. So, again, the merger is not likely to result in a substantial lessening of competition in this market.
"While the Victorian small business banking market is highly concentrated, BML currently only has a small share," Professor Fels said.
Small and new institutions will now also be better equipped to target the small business market by offering a full range of services to this sector, including transaction accounts with wide electronic network access. In the long term, enhanced access to electronic networks may make a contribution to easing entry and encouraging expansion in the supply of transaction account services to small businesses in Victoria, thereby enhancing competition in this market.
The Victorian markets for transaction accounts and credit cards are highly concentrated and barriers to entry are also prohibitively high," Professor Fels said. "However, BML does not currently offer credit cards and it was difficult to assess potential competition, so the ACCC concluded that competition was not likely to be substantially lessened for credit cards, but it had concerns about transaction accounts."
The ACCC formed the preliminary view that competition was likely to be substantially lessened only in the transaction accounts market in Victoria but after taking into account the enhanced access to electronic networks, arising from the undertakings given, considers that damage to competition in that market should be minimised.
On this basis, the ACCC decided not to oppose the proposed merger.
Further information: Professor Allan Fels, Chairman, (03) 9290 1812 or pager (016) 373 536. Ms Lin Enright, Director, Public Relations, (06) 264 2808. MR 92/97 25 July 1997
A more detailed assessment of the competition consequences of the merger, on which the ACCC's decision is based, will be available on the ACCCs Internet website.