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Chapter 2 - The reasons for and impact of
fee increases
2.1
The first term of reference of the Committee was
the reason for and impact of fee increases on:
- ATM withdrawal (own machine)
- ATM withdrawal (foreign machine)
- Telephone transactions
- Internet transactions
2.2
The Committee isolated one major issue from this
term of reference.
The effect of deregulation and
competition on consumers generally
2.3
The major issue here was whether deregulation
and competition has resulted in a more efficient market with increased benefits
for consumers, or whether market forces have failed, with little benefit for
retail customers.
Submissions on this issue from the banks
2.4
The Committee received submissions on its first
term of reference from the Australian Bankers' Association and from a number of
individual banks. The submissions advised generally that fee levels were set by
the market and by competition, which had increased both in quantitative and
qualitative terms since deregulation of the banking industry in the 1980s. In
relation to the impact of fee increases the submissions advised that these were
mitigated by competition, with banks offering products which would assist
consumers to minimise transaction fees.
2.5
The ABA emphasised that banks and other
financial institutions are subject to competition in pricing their products and
services, including electronic services. The ABA noted that a succession of
public inquiries has recognised that competition, including market based
pricing, is the best way to increase benefits for consumers and the ABA
strongly supports this position.
2.6
In addition, the ABA advised that the
deregulation of financial markets has led inevitably to a user pays principle
for retail transaction accounts and explicit fees for services. Before
deregulation, borrowers paid high interest rates and savers received low
interest rates to subsidise transactions. Now, however, there is an enormous
range of innovative products and the choice of a far larger number of
institutions, which set fees and charges based on costs. Explicit pricing has
resulted in a more efficient financial system and is fairer to consumers, who
pay only for what they use.
2.7
The ABA submitted that a significant number of
bank customers pay no fees at all for a wide range of services and, for those
who do, both the fee and the amount are low in absolute and relative terms. In
any event, rises in fees were not as great as declines in interest margins.
Between a third and three quarters of bank customers pay no fees on personal
transaction accounts.
2.8
Turning to the impact of fees, the ABA advised
that competition has forced banks and other financial institutions to provide
fee discounts and exemptions to a wide range of customers, including children,
students, pensioners and the disabled. Also, customers will usually be eligible
for a fee discount or waiver if they provide their bank with a certain level of
business through a home or other loan or by purchasing services such as funds
management or superannuation. Centrelink has in collaboration with the ABA produced
a popular brochure showing Centrelink customers how to minimise fees.
2.9
The ABA added that an important feature of most
bank accounts was either a number of free transactions a month (usually about
eight) or a set fee with no limit on transactions. This feature enables
customers to minimise fees.
2.10
The ABA noted that most transaction fees have
been steady since mid-1999, with the fees on low cost processes such as
Internet and telephone payments generally lower than fees from higher cost
processes such as over the counter withdrawals.
2.11
The ABA submitted that the impact of these fee
structures is that customers are increasingly using cheap and convenient
telephone and electronic banking services; this applies across age, gender and
regions. These services are also more flexible, with about one third of ATM and
EFTPOS transactions taking place outside traditional branch opening hours.
2.12
The ABA gave details of how a dramatic expansion
by banks of electronic networks has improved customer convenience. For instance,
in the last five years ATM facilities have increased by about 50% to 9,300 and
EFTPOS machines by 32% to 265,000. Most banks also provide Internet banking and
telephone based services. Australian banks arguably lead the world in investing
in electronic banking.
2.13
Individual banks made similar submissions to
that of the ABA. The Commonwealth Bank advised that customers now benefit from
deregulation and greater competition, paying only for services actually
received. Transaction costs can no longer be subsidised by income from other
products and the present position is that fees for each service are more
directly related to the cost of that service. Nevertheless, the costs of
transaction services are still at least three times the fees collected.
2.14
As with the ABA submission, the Commonwealth
Bank emphasised that the use of electronic transactions, including ATM, EFTPOS,
telephone banking and the Internet, has been growing rapidly and now includes
four out of every five Commonwealth Bank transactions. The Bank has invested
heavily in this new technology to give customers cheaper and more efficient
banking services. These new services give customers greater choice, with
consequent benefits. The impact of fees on customers has, therefore, not been
adverse.
2.15
The Commonwealth Bank submitted that EFTPOS
transactions are particularly popular, with over 100,000 outlets. Shop
assistants guide customers through transactions, with many customers
considering EFTPOS to be face to face banking within a safe transacting environment.
In December 1998 the Bank reduced EFTPOS fees and direct entry withdrawals by
12.5%, from 45 to 40 cents. This could be done because of economies of scale.
2.16
The Commonwealth Bank advised that its ATM
network is similarly large, with 3,900 terminals. ATM fees for customers using
its own machines relate to transactions in excess of a number of fee free
transactions over a period, but include relationship rebates and other
exemptions. Because these fees depend on transaction activity over the period,
it is not possible to determine at a time during the period whether a
particular transaction will or will not be subject to a fee. For this reason
any fee notification requirement at the time of the transaction would itself
have an impact on fees, resulting in a different approach to fee setting, as
well as significant compliance costs, both of which could jeopardise the
present rebates and concessions.
2.17
The Commonwealth Bank submission also addressed
the reasons for foreign ATM fees, levied by banks on customers who use an ATM
of another financial institution or ATM provider to recover costs charged by
that provider. Foreign ATM fees are a fixed amount depending on the nature of
the transaction. The emergence of ATM operated by non-financial institutions
illustrate both the demand for ATM services and the willingness of consumers to
pay for them; these non-financial institutions usually charge more than
financial institutions.
2.18
The Commonwealth Bank confirmed that telephone
and Internet banking was particularly convenient and flexible. Over two thirds
of Commonwealth Bank customers do not pay transaction fees. One Bank product
with 2.4 million accounts provides up to 10 free electronic withdrawals per
month, with over 75% of these customers making fewer than 10 such withdrawals.
The product has no minimum monthly balance requirement. The Bank in alliance
with Woolworths provides a product that can be used in more than 600 Woolworths
and related stores. The product includes 50 free in-store withdrawals each
month with a further five free electronic withdrawals per month at any
Commonwealth Bank ATM, EFTPOS, Internet or telephone banking. The product has
no account keeping fee, no minimum balance requirement, a rewards program and
interest rates comparable to a cash management trust. Access is through stores,
a dedicated call centre (24 hours, 7 days), a dedicated Internet banking site,
EFTPOS terminals, the ATM network and worldwide by credit card.
2.19
The Commonwealth Bank also offers a customer
relationship fee rebate based on the amounts held by the customer in selected
accounts. In addition, the Bank makes special arrangements for children,
students, aged and war veteran pensioners and community groups. For instance,
the majority of age and war veteran pensioner customers are entitled to a
rebate of $6 per month, which allows additional fee free transactions such as
three over the counter withdrawals, ten ATM, fifteen EFTPOS, or a combination
of these.
2.20
The ANZ Bank also advised of the effect of
competitive pressures and deregulation, which has resulted in less
cross-subsidisation and in explicit fees for services. The old system of
services, such as lending for housing subsidising individual customer
transactions, could not be sustained in a competitive deregulated environment.
The shift to differential pricing of delivery channels has resulted in a more
efficient financial sector and in advantages for consumers, who are now able to
shop around for the products which suit them.
2.21
The ANZ Bank submitted that there has been a
major shift in the last 15 years in the way that customers access financial
services. This change was caused by financial deregulation and the revolution
in telecommunications technologies. Competition has forced the banks to unwind
cross-subsidies, reduce mispricing and impose explicit fees for service, such
as fees on transaction accounts. These fees have caused customers to use
cheaper and more efficient financial services, in particular electronic
banking.
2.22
The ANZ bank noted that this increase in electronic
banking has been rapid and widespread, starting with ATM and moving to EFTPOS,
telephone and Internet. In the last three years branch transactions have fallen
from 20% to 12% and ATM from 16% to 13%, while EFTPOS has increased to from 41%
to 43%. Telephone and Internet banking, which were introduced only during those
last three years, now account for 6% and 1% respectively and are growing very
rapidly. The reasons for the increase in electronic banking are rising levels
of computer literacy, cheaper hardware and Internet access, consumer lifestyle
and lower costs compared to traditional branch delivery.
2.23
The ANZ Bank charges transaction fees only for
withdrawals in excess of a free number. Fees differ according to the channel
used, as set out in the next table:
|
Channel
|
Excess
withdrawal fee
|
Branch
ATM
EFTPOS
Telephone
Internet
|
2.50
.65
.40
.40
.20
|
2.2
The ANZ Bank calculates excess withdrawal fees
at the end of each month, reviewing all withdrawals and counting the most
expensive withdrawals first to include them in the free withdrawals. The
incidence of excess withdrawal fees is low, with about 80% of customers in any
given month not paying these fees. About 30% of customers are exempt, including
full time students, children and customers with home loans.
2.3
The balance of ANZ Bank customers stay within
the fee free limit. Fewer than 40% of withdrawals from all channels incur
excess withdrawal fees. Customers therefore tend to ensure that they stay
within their fee free limits. In particular, customers restrain their use of
the more expensive channels. Also, the low proportion of excess withdrawal fees
reflects the ANZ practice of first allocating expensive withdrawals to the
allowance of free withdrawals.
2.4
The ANZ Bank has priced its delivering channels
differentially since January 1997. Since that time excess withdrawal fees for
branches have doubled, while those for EFTPOS and telephone have come down from
$1.25 to .40 cents. This last reduction was based on economies of scale as
customer usage increased. The Internet excess withdrawal fee at 20 cents
represents a loss, but is designed to encourage customer usage in the
expectation that it will grow and produce economies of scale which should cut
the loss.
2.5
The St George Bank submission advised that at
present telephone and Internet banking fees are set as loss leaders to
encourage customers to use these new channels. The reasons for the loss were
high development costs and low use of the new channel in its initial phase.
Once customers start to use the new channels prices will be adjusted. A channel
must have high volumes to operate in an economically sustainable manner. The
reason for any fee increase is to ensure the commercial validity of the
services provided. Cost recovery, competitive pressures and general commercial
considerations are also taken into account.
2.6
The St George Bank noted that increases in
electronic banking fees have not resulted in a decline in the use of those
services, which indicates that customers use them by choice at that level of
fee. In addition, customers are given information on how to minimise
transaction fees, both when the account is opened and at any other time on
request. This information also assists customers to minimise government
charges.
2.7
The St George Bank advised that it charges
customers a fee to use a foreign ATM, but in return it does not generate fees
from substantial related costs, such as free minimum transactions and
concessions for customers who maintain a minimum balance.
2.8
The Australian Association of Permanent Building
Societies (AAPBS) generally made the same points as the banks, advising that
there was an extraordinary contrast in customer services and convenience
between the building society of today and that in the previous regulated
environment. Building societies, because of the nature of their business, have
always been reluctant to impose transaction fees, but the competitive
environment now makes this difficult to avoid. Building societies have many
customers who have large numbers of transactions on limited savings, accepting
more Centrelink customers than their market share would suggest. The building
societies support the need of these customers for a low cost transaction
service, but there is a limit to moving against the trend to fee income.
Building societies must have the flexibility to price their products in a
competitive market to generate a reasonable return. Interference in the pricing
mechanism can generate instability and lead to unsustainable low margins and
loss of confidence. Competition will result in appropriate fee outcomes.
Submissions on this issue from consumer groups
2.9
The Committee also received submissions on its
first term of reference from consumer groups and individual consumers. These
differed significantly from submissions from the banks in that they disputed
that effective competition existed between banks, asserting that supposed
competition was of little benefit to retail customers. The submissions advised
generally that the effects of deregulation were adverse to consumers, with the
impact of fee increases falling most on the vulnerable and disadvantaged
segments of society.
2.10
The most comprehensive submission on behalf of
consumers was prepared collaboratively by a number of groups and submitted by
the Consumer Law Centre Victoria Limited (CLC). The CLC submission concentrated
on the impact of electronic bank fees on vulnerable customers, especially low
income earners, benefit recipients, the elderly, the disabled and non-English
speakers.
2.11
The CLC submitted that the free market does not
deliver banking services to all who need them, as shown by unprecedented lack
of consumer confidence in the banks. Increased profits together with increased
fees and charges raise the question of whether the banks have any social responsibility
towards vulnerable customers. Banks should be forced to adopt corporate
citizenship responsibility.
2.12
The CLC questioned the proposition that the free
market will control fee increases. The free market in banking benefits wealthy
individuals and companies but disadvantages lower and fixed income consumers
and customers with high transaction and low balance accounts.
2.13
The CLC submitted that new banking technology is
driven more by the banks themselves than by consumer demand. Over the last 10
years banks have successfully changed the banking habits of consumers by
discouraging the use of over the counter services in favour of EFTPOS services,
initially by increasing fees on the former with no fees or transaction number
limits on the latter. Once this was achieved, however, the banks then
introduced fees on electronic services.
2.14
The CLC advised that the needs of all consumers
are not the same and all customers are not disadvantaged in the same way. Needs
are diverse and, in particular, fees on over the counter services discriminate
against those with literacy, language or other disabilities due to the
difficulties that these people have with electronic banking.
2.15
The CLC suggested that the above conclusions are
reinforced by data showing increased use of electronic and telephone banking,
with a significant reduction in branch numbers, particularly in non-city
branches. All customers, however, need to use branches for certain services and
vulnerable customers find the new technologies hard to access.
2.16
The CLC submitted that consumer groups are
concerned about the impact of fee increases. Electronic and telephone banking
continue to be marketed as more cost-effective transaction methods than over
the counter products. However, there have been massive increases in fees for
these services, with no regulatory control over either the fees or the
increases. There is also significant variation between fees depending on the
terms and conditions of different accounts and the form and number of
transactions. Fees are also important because a larger proportion of bank
profits are deriving from non-interest income. Specifically, consumer issues in
relation to fee increases are:
-
it is hard to determine the actual cost of
banking services, given the limited range of information provided by banks on
how charges are set and applied;
- different fee structures and complicated terms
and conditions limit the ability of consumers to make informed, low cost
decisions about banking services;
- regulation of bank fees and charges is inadequate;
- services in remote areas have been particularly
affected by branch closures and reductions in service, accompanied by
invitations to use poorly explained electronic banking services which are
followed by dramatic fee increases;
- fees do not apply equitably, with high value
customers given exemptions while high transaction and low balance customers pay
disproportionately more for what is fundamentally an essential service.
2.17
One of the groups which contributed to the CLC
submission was the Finance Sector Union (FSU), which represents 85,000 members
employed throughout the finance industry, including the banks. The FSU advised
that it has felt the impact of relentless cost cutting by banks, accompanied by
waves of retrenchments. This has led to chronic understaffing of branches,
together with a culture of overwork and expectation of overtime and increased
hours. In addition, staff often bear the brunt of public outrage against fee
increases, adding to existing high levels of work stress.
2.18
The FSU advised that fees to cover the costs of
services are legitimate, but that there is concern about their level. There is,
for instance, no link between fees and job security. Also, the FSU was
concerned about the use of fees to modify customer services, particularly when
there is no link between the cost of services and the fee charged and the
introduction of fee free channels which are changed to fee based once customers
have started to use them. There is also certain confusion about fees and
charges, which have become so complex that it is hard for customers and staff
to keep fully informed about them.
2.19
The FSU submitted that it sought the outcomes of
an improvement in the relationship between the industry, customers and the
general public, promoted by an open exchange of information, with a genuine
commitment to ensuring access to low cost financial services for all. These
outcomes would be facilitated by:
- monitoring of all fees, not just those on
electronic transactions;
- a regular examination of the impact of fees on
the cost of providing essential banking services;
-
the development of core information which must
be provided to customers when new fees and charges are introduced; and
- requirements that bank staff are fully trained
in relation to new and existing fees and charges.
2.20
The CLC expressly addressed issues for rural and
regional customers, advising that in these areas branches are closing due to
new technology, cost cutting and mergers, with queues forming at the branches
which remain. Customers especially in rural areas have become accustomed to
face to face banking and find it difficult to adjust to electronic banking,
apart from the extra cost of branch banking.
2.21
The CLC submitted that physically, mentally or
socially disadvantaged people do not find electronic banking to be user
friendly. Also, such people often pay more in fees and charges because they are
unable to select the most cost-effective package for them out of the large
number of alternative banking services and electronic options available.
2.22
The CLC made a number of recommendations about
fees and education in relation to electronic banking, as follows:
- if a bank closes a branch and does not provide
the local community with an ATM, and the only nearby service is not the user's
bank, then the user's bank must pay the cost of any extra transaction fees;
- people with a disability who must deal directly
with a teller because they are unable to operate an ATM should not be charged a
fee;
- people with different levels of financial
knowledge should have explained to them at their level how best to use a
product;
- banks have a responsibility to inform individual
customers of products which will assist the customer's specific circumstances
and to encourage them to use those products;
-
access to electronic cash or credit in hotels
and clubs can entice people into gambling habits; which is a problem which
should be addressed by education; and
- a fund should be established, paid for by the
banks, to educate users of banking services, although if such education is
successful, aided by the demise of the generation not brought up with
electronic banking, then the fund need only be transitional.
2.23
The CLC submitted that numerous government
inquiries have made many recommendations to benefit consumers but few have been
adopted. The Prime Minister has stated that the banks have a community
responsibility and that the government would take action if this responsibility
is not met. The CLC suggested that the banks are not meeting these obligations,
with unprecedented disapproval and mistrust of banks by the public. Therefore
the government should act urgently and intervene to regulate fee increases.
2.24
Mr John Watkins MP, the NSW Minister for Fair
Trading, submitted that the deregulation of the banking system which had
commenced in 1985 had changed the delivery of banking services. Previously
there was a choice of branches in suburbs and small towns, which provided
services free of fees. Now many banks pursue niche markets, with more
off-street outlets in shopping centres and stores but fewer full branches.
2.25
Mr Watkins advised that before deregulation the
banks recovered the costs of transaction services through interest margins.
However, in the present competitive environment the banks attract the most
profitable customers by waiving fees, while imposing fees on the smaller,
higher cost accounts. The banks now encourage the use of electronic banking,
but while older and less able people can use ATM and EFTPOS, telephone banking
is more complicated and Internet banking is irrelevant for many customers. The
impact of these developments has been a consumer backlash.
2.26
The National Council of Women of Victoria (NCWV)
submitted that fee levels reflect the fact that banks are more interested in
the business sector than in individuals or families. It was deplorable that the
banks pressured customers to use ATM by placing fees on counter transactions,
then imposed fees on ATM transactions. In particular, the number of free ATM
transactions per month disadvantages the elderly who do not wish to keep money
in the house. People are also disadvantaged when a local branch closes and the
nearest ATM is not operated by their own bank.
2.27
The NCWV advised that telephone banking is
difficult for the elderly, those for whom English is a second language, the
intellectually challenged and those with hearing difficulties. There is also a
range of problems with the actual operation of telephone banking and with bank
staff in branches not being trained to explain Internet banking. The banks,
however, have pressured retail customers to use these channels.
2.28
Submissions received from other individual
consumers made similar points to the above submissions. For instance, Mr Bill
Watson, a retired bank manager with 34 years experience in the industry,
advised that when ATMs were first installed there was free interchange between
all banks, even overseas. This was because each bank would incur the same
operating costs. The free service soon attracted customers. Later, however,
each bank decided to impose a fee on transactions by customers of the other
banks and to pass on this fee to customers. The same process occurred with
EFTPOS. Now the banks encourage customers to use ATMs and EFTPOS by imposing
fees on over-the-counter transactions.
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