Not that ASB Bank’s approach will cost it very much, at least in the short-term. It is cutting only its one-year fixed rate mortgage to match Kiwibank’s 6.1% offer and only in Palmerston North and Hawkes Bay, the first places Kiwibank will open seven branches on 12 and 13 February.

ASB Bank is following the precedent set by Telecom when it chose to lower prices only in areas where Saturn, now TelstraClear, was providing domestic competition. Telecom’s approach to competition was cleared by the Commerce Commission.

ASB’s one-year fixed rate has been cut from 6.5%, but it is leaving its floating rate at 6.7%. Kiwibank will be offering a 6.1% floating rate.

"In a rising interest rate environment, most people are wanting to fix, so the 12-month rate is the most popular one at the moment," says Barbara Chapman, ASB’s head of retail banking and marketing.

"While we believe interest margins at these levels are not sustainable for any bank in the longer term, we operate in an extremely competitive environment and will take an aggressive response to competitor initiatives of this nature, as we have in the past," she says.

Kiwibank’s and ASB’s one-year rate isn’t the lowest in the market. TSB Bank is still offering a 5.9% one-year rate, unchanged from before Kiwibank’s plans were announced, while ABS Canterbury and Loan Plan have lowered their one-year rates to 5.8%.

As yet, no mortgage lender has matched Kiwibank’s 6.1% floating rate.

Chapman says Kiwibank’s claims to innovation in areas such as free school banking and free banking for retired people "are hardly new." ASB has always offered transaction fee exemption for younger and retired customers and more than 50% of its customers are charged no or partial fees, she says.

Kiwibank is claiming its customers will pay an average 50% less in fees than at other banks. It plans to run its first seven branches as a six week pilot program before moving to open close to 300 branches by mid-year which would give it more outlets than any other bank.