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Further Comments - Labor Members’ and Senators’ Minority Report
Bank Fees: Up, Up and
Away
Labor Members Report
Inquiry into Fees on
Electronic and Telephone Banking
Joint Parliamentary
Committee on Corporations and Securities
February 2001
Executive
Summary
Banks earned fee
income of $1.8 billion from households in 1999. Significantly the revenue
earned from deposits has increased by 44% and the income earned from
transactions has increased by 160% since 1997.
Labor members of
the JPC believe that the charging regimes for bank fees are not efficient and
competitive and are based on extracting an obscene level of profit. The
increase in bank fees has been excessive and is not related to movements in
inflation.
The Commonwealth
Bank presented evidence to the committee that the revenue that the banking
industry earned from fees is only 1/3 of the costs they incur.
The
ramifications of this are clear. If banks charged the full cost of providing
services bank fees would increase by up to three times their current levels. On
current fee levels this would result in an over the counter transaction in a
bank branch costing $9 while an ATM and eftpos transaction would cost $1.80.
This is socially
unacceptable.
There needs to
be a recognition from banks and policy makers that banking is an essential
service. The level and incidence of banks fees has a social implication which
cannot be ignored.
Labor members of
the committee are of the view that there is a point at which the banks must be
told that enough is enough.
It is now
time to draw a line in the sand on bank fees.
Bank fee
increases have been justified on the basis that consumers should pay for the
services that they consume. However Labor members of the JPC are concerned that
it is low income earners who are paying bank fees because they are not able to
access fee exemptions based on levels of lending or deposits and do not use
subsidised services such as internet banking.
Low cost bank
accounts that the banks were said to provide are not widely available and could
not in all cases be regarded as low cost accounts.
Labor members of
the JPC found that cross subsidies still exist in the banking industry but
banks have been selective in choosing which cross subsidies they seek to
remove. While over the counter transaction fees have increased by up to 400% in
the last five years, banks continue to provide fee exemptions for housing loans
and large deposits that are not related to the costs of operating a retail
transaction account.
Banks also
charge some services as loss leaders in order to encourage customer migration
to new channels. Labor members of the JPC are concerned that while the practice
of ‘loss leading’ may lead to economies of scale in one distribution channel it
may also lead to diseconomies of scale in banks’ alternate distribution
channels.
Direct charging of ATM fees allows ATM owners to charge a different fee
for each individual ATMs based on their different costs. Under this fee regime,
ATMs with high volumes of transactions would normally have lower fees than ATMs
with low volumes of transactions.
The ACCC and Reserve Bank have specifically recognised that a direct
charging fee regime for ATMs would allow higher fees to be charged in remote
areas.
Labor members of the JPC are concerned that introducing a direct charging
fee regime for ATMs without a commitment from the banks on the level of bank
fees would lead to increases in ATM fees in rural and regional areas where the
costs of providing ATM services are greater.
Labor members of the JPC do not support the Chairman’s recommendation to
introduce a fee regime for ATMs based upon direct charging without an agreement
on the level of bank fees.
In the UK, banks
have recently agreed to drop all fees for ATMs. Labor members of the JPC
consider that if it is good enough for UK banks to allow their customers to
access cash for free, shouldn’t it be good enough for Australian consumers?
Labor members of
the JPC consider that it is technically possible to introduce a real time
disclosure regime for ATMs within a period of 12-24 months.
While there are
costs involved in establishing a better fee disclosure regime for ATMs, these
should be weighed against the benefits of a more informed market. It would be
unthinkable that a bank could provide its customers with the ability to
purchase a movie ticket through an ATM before it provided information on its
own fees – and yet this is a possibility. Banks invest in technology when they
see they can make a buck but they should also be prepared to invest in
technology to benefit their customers.
Recommendations
1. Labor members of the JPC recommend
that the Government immediately direct the ACCC to formally monitor bank fees
and charges.
2. Labor members of the JPC recommend
that banks accept a moratorium on increasing bank fees for a period of twelve
months.
3. Labor members of the JPC recommend
that banks offer fee free banking to pensioners and social security recipients.
4. Labor members of the JPC recommend
that the Federal Government immediately direct the ACCC to hold an inquiry into
why UK banks have been able to abolish ATM fees while Australian banks say they
cannot.
5. Labor members of the JPC do not
support the Chairman’s recommendation to introduce a fee regime for ATMs based
upon direct charging without an agreement on the level of bank fees.
Disclosure
of Fees
1. Labor members of the JPC recommend
that:
- Banks introduce a
real time fee disclosure regime for ATMs within a period of 12-24 months.
- Banks provide to a
customer information on the cost of a transaction before the transaction is made
so that a consumer has an opportunity to cancel the transaction.
- Banks provide to
customers a break down of fees charged on monthly statements, including a
comparison of fees over previous months so that consumers can compare their
transaction activity.
2. Labor members of the JPC recommend
that ASIC continue its role in facilitating the introduction of a real time fee
disclosure regime through the ASIC Transaction Fee Disclosure Working Group.
Terms
of Reference
The Joint
Parliamentary Committee on Corporations and Securities has conducted an inquiry
into Fees on Electronic and Telephone Banking.
The Committee
held one public inquiry in Adelaide on Wednesday 23 August 2000.
The Committee’s
terms of reference stated that the Committee would:
Inquire into
the status of fees on electronic fund transactions and telephone banking. In
particular:
- the reasons
for and impact of fee increases on:
- ATM withdrawal
(own machine)
- ATM withdrawal
(foreign machine)
- Telephone
transactions
- Internet
transactions
- the availability and transparency of fee information for consumers who
undertake electronic funds transactions or telephone banking;
- the
feasibility of implementing a fee disclosure regime on electronic fund
transactions and telephone banking; and
- the role
of ASIC in ensuring bank, non-bank financial institutions and non-financial
institution suppliers and operators of those facilities, provide appropriate
fee information on electronic and telephone transaction banking.
Banking
as an Essential Service
In determining
the reason for and impact of bank fee increases it is important to understand
the role of banking in Australian society.
Banking is
fundamental to economic activity.
Every
transaction – even black market ones – at some stage involve banks.
Banks provide
the cash, credit and electronic transactions upon which all economic activity
is based.
One example of
how banking is an essential service is in relation to accessing cash.
The Chairman’s
Report stated that the emergence of ATMs operated by non-financial institutions
illustrate both the demand for ATM services and the willingness of consumers to
pay for them.
This notion of
‘demand’ for ATM services is inaccurate.
Consumers demand
cash, not because it is a normal consumer good like buying shoes or groceries,
but because it is essential to operating in society.
Because banking
is so essential to economic activity it is important that all Australians have
access to affordable banking services so that they can participate on an equal
footing in all forms of economic activity.
It is because
banking is an essential service that banks have a social obligation to provide
accessible and affordable banking services for all Australians.
Access to
affordable banking services is especially important for low-income earners who
are more at risk of becoming socially excluded. In the United States 12 million
households do not have banks accounts. This deprives these families of the
basic ability to participate in economic activity.
Labor Senators
were concerned that when questioned by the Committee on whether banks had
social obligations, Mr Jeff Oughton, Acting Chief Executive of the Australian
Bankers Association replied, ‘no.’
This comment
caused a storm of protest from consumer and community groups.
Mr Oughton
subsequently clarified his position stating that banks had delivered on their
community obligations by being good corporate citizens and by being involved in
a wide range of community based activities.
Labor members of
the JPC believe that banks do have social obligations and that one of the key
social obligations is to ensure that all Australians are able to access
affordable banking.
Bank
Fees: The Facts
According to the
Reserve Bank’s Report Notes on Bank Fees in Australia produced in May
2000, banks earned fee income of $1.8 billion from households in 1999. Of this,
$260 million was earned from deposits and $430 million was earned from
transactions. Significantly the revenue earned from deposits had increased by
44% and the revenue earned from transactions had increased by 160% since 1997.
In the last five
years bank fees have increased significantly. In June 1995 when the Prices
Surveillance Authority (the predecessor to the ACCC) investigated the incidence
of bank fees on retail transaction accounts at the instigation of a Labor
Government, two of the major banks did not charge fees for ATM and EFTPOS
transactions.
Electronic
Bank Fees on Retail Transaction Accounts.
Bank
|
1995 (1)
|
2001 (2)
|
1996
|
2001
|
1995
|
2001
|
|
Own Bank
ATM
|
Foreign
Bank ATM
|
EFTPOS
|
ANZ
|
$0.50
|
$0.65
|
$0.50
|
$1.50
|
$0.50
|
$0.40
|
CBA
|
$0.25
|
$0.60
|
$0.25
|
$1.25
|
$0.25
|
$0.40
|
NAB
|
$0.00
|
$0.60
|
$0.00
|
$1.50
|
$0.00
|
$0.60
|
Westpac
|
$0.00
|
$0.65
|
$0.00
|
$1.25
|
$0.00
|
$0.50
|
- Inquiry into Fees and
Charges Imposed on Retail Accounts by Banks and Other Financial Institutions
and by Retailers on EFTPOS Transactions, Prices Surveillance Authority,
June 1995.
- infochoice.com.au
It should be
noted that the increase in banks revenue from bank fees has been caused not
just by increased fees, but by an increased volume of transactions. According
to statistics from the Australian Payments Clearing Association, in 1995 a
total of 29.1 million EFTPOS transactions were conducted each month. In 1999
the figure was 48.6 million.
The
Efficiency and Competitiveness of Bank Fees
One starting
point for an examination into the efficiency and competitiveness of bank fees
is the Inquiry into the Financial System – the so called Wallis Inquiry.
Wallis
identified the importance of an efficient financial system to the economy and
recommended that a Payments Systems Board be established to regulate the
Payments System. Wallis also recommended that the ACCC conduct an investigation
into interchange fees.
The ACCC,
together with the newly created Payments System Board, recently completed this
inquiry into interchange fees. The ACCC and RBA report, Debit and Credit
Card Schemes in Australia: A Study of Interchange Fees and Access revealed
inefficiency in Australia’s payments system and that banks were in some cases
earning fees that were double the cost of providing services.
The report
examined a number of issues that were relevant to the Committee’s inquiry.
In respect to
ATM fees, the report stated that the average cost of an ATM withdrawal is $0.49
while the average foreign ATM fee is around $1.35.
According to the
report, ATM interchange fees have changed little since they were introduced,
despite the fact that ATMs themselves have become cheaper as have
telecommunications costs. The costs of supplying ATMs with cash have also
fallen as interest rates have fallen.
The ACCC and RBA
conclude that if ATM interchange fees were initially based on costs, they have
not shown any flexibility in responding to costs in recent years.
The ACCC and RBA
were of the view that the substantial margin between ATM interchange fees and
costs could be expected to attract new entrants into the provision of ATM
services.
According to the
ACCC and RBA, ATM interchange fees are based on bilateral price agreements. A
major explanation for the fact that interchange fees have not fallen is that
there are no clear incentives for financial institutions to negotiate lower
fees. This is because bargaining power of participants negotiating ATM
interchange agreements favour large financial institutions over smaller new
entrants.
The ACCC and
RBA’s report concluded that banks earn substantially more revenue from ATM
services supplied to customers of other financial institutions than they do for
transaction fees on their own customers. The impact of this is not just to
raise additional revenue for the banks but to restrict competition and make it
hard for new entrants without large ATM networks to compete.
The Chairman’s
Report stated that “there is substantial evidence to indicate that financial
institutions have historically underpriced the cost of electronic banking
transactions, but are now aligning charges more closely with the marginal cost
of providing the service.”
While the
evidence from the ACCC and RBA was that banks earned fee revenues on
interchange fees that were double the cost of providing the service, banks
themselves provided evidence to the JPC that their bank fees did not in fact
cover costs.
The Commonwealth
Bank’s submission to the JPC stated:
On an
industry wide basis, the costs involved in providing these transaction services
are still at least three times the level of fees collected. Reserve Bank
research has shown that $460 million is recovered from Australian household
sector by way of deposit and transaction fees, compared to total costs of the
order of $1.5 billion.
If banks did
charge fees according to their costs on current fee levels this would result in
an over the counter transaction in a bank branch costing $9, an ATM transaction
would cost $1.80 and an eftpos transaction would cost $1.80.
This is socially
unacceptable.
If banks earn
revenues that are only one third of the cost of providing services, at what
point do we say that fees have gone up enough?
Labor
members of the JPC are of the view that it is now time to draw a line in the
sand on bank fees. Labor members of the JPC recommend that banks accept a
moratorium on increasing bank fees.
Winners
and Losers
The Australian
Bankers Association stated in their submission to the inquiry that, depending
on the provider up to 75% of customers do not pay bank fees.
The Chairman’s
Report accepted the ABA’s evidence, stating:
“The
Committee accepts the evidence presented that up to 75% of customers pay no
fees at all on personal accounts and that most banks provide substantial fee
discounts and exemptions for people who are financially disadvantaged or
disabled, and for pensioners and students.”
Labor members of
the JPC do not accept this as fact.
Firstly let us
be clear what the ABA actually said about bank fees. They stated, “ABA
analysis shows that, depending on the provider, 30-75% of customers do not pay
fees and charges for services associated with transaction accounts.”
One way of
reading this statement is to say that up to 75% of customers do not pay bank
fees. Another way is to say that up to 70% of customers do pay fees.
The ABA’s
statement gives the impression that bank fees are a small issue relevant to a
small number of Australians. With the Reserve Bank confirming that banks earn
$1.8 billion in fee revenue from households it is clear that the level of bank
fees is not a small issue.
The significance
of bank fees as an item of consumer expenditure is evident from the fact that
the ABS now add bank fees to the basket of goods and services used to calculate
the CPI.
Chris Connolly,
from the Financial Services Consumer Policy Centre stated to the Committee
that, “they (ABS) have decided that on their figures bank fees amount to a
higher proportion of household spending that either heating or public
transport....It is a reflection that the other costs to households, especially in
telecommunications, postage and electricity, have either reduced or remained in
contact with inflation rather than by increasing 50%, 23%, 400%.”
The Chairman’s
report notes that most banks provide substantial fee discounts and exemptions
for people who are financially disadvantaged or disabled, and for pensioners
and students.
Labor members of the
JPC dispute that these accounts are widely available and are concerned that
they can not in all cases be regarded as low costs accounts.
A survey
recently produced by the Australia Pensioners and Superannuants Federation
questioned whether banks do actually provide adequate basic bank products. The
APSF’s Banking Affordability Report Card found that:
- The Commonwealth and
ANZ passbook accounts offered pensioners only two over the counter transactions
in a month.
- The ANZ’s High
Performance Passbook Deeming Account charged pensioners a $6 a month account
keeping fees if they could not maintain an account balance of more than $2,000
- The Commonwealth
Bank’s special rebate of $6.00 a month for age and service pensioners is only
available to customers who were retired as at 31 October 1997. A person who
retired after this date would need $12,000 in savings to be able to conduct
just one branch withdrawal in a week.
Labor Senators
are also concerned that, where banks provide a low cost banking product, that
they do not market it to their customers.
Ms Sharon
Barker, Policy Officer from the Financial and Consumer Rights Council told the
Committee that consumers did not know about the existence of fee free banking
accounts. She stated, “certainly some people have contacted me at the
Financial and Consumer Rights Council stating that they have contacted banks to
ask specifically about those accounts, their staff have not known either. I
think it raises this issue of relationships with banks and the consumer having
responsibility to contact the bank and ask about these services, when in some
cases the bank staff do not even know these services exist.”
The argument
proffered by the banks for the reason that bank fees have increased
significantly is that following the deregulation of the financial system, user
pays pricing was introduced to replace existing cross subsidies.
The banking
industry’s argument is that banks have subsidised the provision of low cost
banking products by paying lower interest on deposits and higher interest on
lending. Increased competition, the banks argue, has resulted in reduced
interest margins and this has been compensated for by the removal of existing
cross subsidies on retail transaction accounts.
The Reserve Bank
in its report, Notes on Bank Fees in Australia concluded that falling
interest margins have not, on average, been offset by higher fees. However,
bank customers without a loan but with low balances and high transactions would
not have benefited from these trends in banks’ pricing practices.
The ABA in their
submission to the JPC inquiry stated that competitive pricing is the best way
to achieve benefits for customers. The ABA stated that, “the move towards
the pricing principle of explicit fees on banking and financial services was an
inevitable consequence of the financial market deregulation policies pursued by
successive Governments since the early 1980s.”
The ABA go on to
say, “pricing services efficiently provides consumers with choice to use
lower cost distribution channels and, therefore, facilitates a more efficient
financial system.”
The argument
that the removal of cross subsidies justifies fee increases on retail
transaction accounts has been used selectively by the banks.
While the banks
would argue that the removal of cross subsidies justifies increasing the fee
for an over the counter transaction in a banking branch to $3, it appears that
banks have been reluctant to remove cross subsidies which they perceive are
beneficial to their business and marketing plans.
In particular,
banks charge fees for some products as ‘loss leaders’, and exempt some
customers from fees based on the level of deposits and lending.
If efficiency
was the sole criteria of a bank they would charge a customer for a transaction,
regardless of how much money they had.
Of course in the
banking industry there will always be cross subsidies to an extent. For
instance, in a bank branch it is difficult for a bank to work out what costs
should be attributed to conducting a transaction when the branch also serves a
marketing purpose and bank tellers are explicitly directed to sell products to
the customers that they serve.
Banks not only
cross subsidise some customers, they cross subsidise some products.
In its
submission to the inquiry, St. George Bank stated that “the bank’s telephone
and internet banking fees are currently set as loss leaders to encourage the
migration of customers to these new channels.”
St. George Bank
went onto to say in their submission that, “once confidence in the channel
is established, pricing will be adjusted to a basis which more closely reflects
the Bank’s own costs in developing and providing the channel. In the long term,
the only way the Bank can sustain a channel economically is by high volume
usage.”
St George Bank’s
comments raise a number of issues.
It is clear the
banks are seeking to migrate their customers from branch banking to electronic
banking. St. George Bank has acknowledged that the only way that it can
economically sustain a distribution channel is through high volume usage. But
the result of migration of customers to electronic banking must be that the
volumes of usage in other areas fall. As volumes of usage in these alternative
distribution channels fall the banks will argue that they are not economic to
sustain.
The result is
clear. Banks will seek to migrate customers to electronic banking by charging
less than the cost of these services. The migration of customers will mean that
branch banking will become increasingly unsustainable. This will justify the
banks increasing the fees for services conducted in a branch and will in turn
justify the closure of ‘non economic’ branches. Having reduced their branch
networks to a core level, banks will increase the fees on electronic banking,
justifying their increases by pointing out that they were never charging the
true cost of providing the service. In the case of ATMs this in fact happened.
Five years ago two of the major banks did not charge fees for ATM transactions.
Now all banks charge fees of around $0.60 for access to their own banks network
of ATMs.
ANZ acknowledged
to the Committee that the importance of their branch network as a proportion of
total transactions is declining. The ANZ stated in their submission that branch
transactions now account for 12% of transactions, compared to 20% three years ago.
The reality is
that the banks different distribution channels compete with each other.
Economies of scale in one channel can mean diseconomies of scale in other
channels.
An example of
the competition between the bank distribution channels is the Commonwealth
Bank’s current series of TV advertisements promoting internet banking in which
a model skites that using internet banking means that she doesn’t have to
queue.
It is open to
question whether it is a direct strategy of banks to force consumers to queue
in order to force consumers to adopt other forms of banking.
On 30 June 2000
the Herald Sun newspaper released a survey of bank queues. The longest that a
customer had to wait for service was 14 minutes and 5 seconds at a Bank of
Melbourne Branch in the central business district.
What we are in
fact witnessing is a ‘reverse’ cross subsidy. The promotion of electronic
banking by charging services as loss leaders is directly undermining the
viability of the branch network. The impact of these practices is to hurt those
consumers who rely on branches for their banking services, predominantly the
elderly and the poor.
According to the
National Office for the Information Economy Australian adult Internet
users tend to be younger, male, earning in excess of $75,000, employed, and
living in metropolitan areas.
By subsiding
internet banking by charging services as loss leaders, banks are effectively
giving the wealthy a subsidy at the expense of poorer customers.
The fact that
there are ‘winners and losers’ from the banks’ fee regimes raises significant
policy issues of how to ensure that banking services are provided to all
Australians on an affordable basis.
Direct
Charging of ATMs
The Chairman’s
Report recommended that to reduce ATM fees, banks be allowed to direct charge
for ATMs.
Direct charging of ATM fees allows ATM owners to charge a different fee
for each individual ATMs based on their different costs. Under this fee regime,
ATMs with high volumes of transactions would normally have lower fees than ATMs
with low volumes of transactions.
The ACCC and Reserve Bank have specifically recognised that a direct
charging fee regime for ATMs would allow higher fees to be charged in remote
areas.
The Chairman’s
recommendation to introduce a direct charging fee regime for ATMs was taken
from the ACCC and RBA’s Report, Debit and Credit Card Schemes in Australia.
The ACCC and RBA stated in their report that ATM owners could choose to charge
card-holders directly at the time the transaction was undertaken. The report
stated:
“..they could
choose to charge such cardholders directly at the time the transaction is
undertaken. Under this form of direct charging regime each ATM owner would
decide how much to charge...”
The ACCC and RBA
go on to say, “under current arrangement the ATM owner receives the same
interchange fee for an ATM withdrawal from a given issuer, regardless of where
that transaction is undertaken. High cost locations are therefore subsidised by
low cost ATMs. Under a direct charging regime, in contrast, ATM owners could
vary the transaction fee according to the per-unit cost of individual machines.
This would provide an incentive to place more ATMs in higher cost (eg remote)
locations, offering greater convenience for consumers willing to pay.”
It is clear that
the result of the Chairman’s recommendation would be to allow banks and other
ATM providers to charge ATMs on the basis of cost. Under this kind of fee
regime, an ATM in a remote area that had few transactions per day, and had
increased telecommunication and cash handling costs, would be far more
expensive than an ATM in the heart of Collins St or George St.
The question
must be asked, do we want to create a situation where consumers in remote towns
such as Port Hedland in Western Australia, that have significant cash handling
and telecommunication costs for their ATMs and are likely to have fewer
transactions per day than city ATMs, pay significantly more to access cash than
city consumers?
Rural and
regional consumers have already been hit hard by the closure of local branches.
They should not be hit harder by increasing fees on ATMs which consumers in the
city will not have to bear.
Labor members of the JPC are concerned that introducing a direct charging
fee regime for ATMs without a commitment from the banks on the level of bank
fees would lead to increases in ATM fees in rural and regional areas where the
costs of providing ATM services are greater.
Labor members of the JPC do not support the Chairman’s recommendation to
introduce a fee regime for ATMs based upon direct charging without an agreement
on the level of bank fees.
Got
you, hook, line and sinker
The fact that
banks have been able to raise bank fees, and significantly raise bank revenue
without losing customers suggests that there is a lack of competition in the
market for retail transaction accounts.
In a competitive
market we would expect that consumers who were dissatisfied with their banking
services would change banks.
And yet,
according to a survey conducted by the Australian Consumers Association in
March 2000 despite the fact that only 13% of customers were satisfied with the
larger banks, only 22% had changed institution in the last 5 years. Over 50% of
respondents to the ACA survey had had their accounts at the same institution
for 11 years or more.
One question
that needs to be asked is why don’t consumers change banks?
There are many
reasons why the relationship between banks and consumers is ‘sticky’.
Consumers may
feel that there is no point going to another financial institution because ‘all
banks are the same.’
Banks are also
able to ‘hook’ their customers. Once a consumer has a housing loan or a credit
card, the process of changing financial institution is not costless.
In the case of a
housing loan, transferring to another financial institution means re-financing
the loan, including paying application fees and mortgage registration fees.
Even the simple
case of opening a bank account requires proof of identity and a waiting period
for new debit cards to be produced. Once an account is open, payroll
departments need to be notified and direct debits need to be rearranged.
Consumers also must pay Government taxes for transferring balances to the new
bank account.
Another reason
that consumers may be reluctant to change their bank may relate to the location
of alternative banking branches and ATMs.
Another ‘hook’
that banks use is to offer frequent flyer points to consumers who use their
credit cards to make payments. Banks do not charge consumers directly for
making a credit card transaction which provides a price incentive compared to
the cost of accessing ATMs, eftpos and cheques.
The effect of
banks promoting credit cards has been that many consumers have chosen to use
credit cards ahead of other forms of payment such as cash or eftpos. According
to statistics from the Australian Payments Clearing Association, in the last
three years alone the value of credit card transactions has increased from $2.5
billion a month to $6.4 billion a month. In the same period the volume of
eftpos transactions only increased from $2.1 billion a month to $3.1 billion a
month.
In its
submission to the JPC inquiry, Telstra discussed the relationship between
credit card payments and other forms of payment.
Telstra stated to
the inquiry that in 1995-96, 9% of Telstra bills were paid by credit card. In
the last financial year, 20% of credit cards were paid by credit card. Telstra
attributed the increase in credit card payments to the prevalence of credit
card loyalty schemes, which offered frequent flyer points in return for making
transactions.
Telstra
complained that the increase in credit card payments had a significant impact
on the company’s bottom line because credit card payments were based on a
percentage of the value of the transaction rather than a flat fee.
Telstra
indicated that they paid an interchange fee of 1.2% and that each credit card
transaction averaged $166. Therefore Telstra’s bank earned around $1.99 for
each credit card transaction. According to Telstra’s own figures, if 16.5
million transactions were made by credit card, Telstra alone contributed around
$33 million in fee revenue to its bank.
The ACCC and
Reserve Bank’s recent report into Credit and Debit Card Schemes raised the
issue of the impact of the current range of incentives to use credit cards on
other payments methods.
The ACCC and RBA
stated in its report that, “under current arrangements, cardholders are
effectively being paid by card issuers to use credit card as a payment
instrument, but face a transaction fee for using a debit card (after a number
of fee free transactions). This structure of incentives has encouraged the
growth of the credit card network the expense of other payment instruments,
particularly debit cards and direct debits, that consume fewer resources. As
a result, Australia has a higher cost retail payments system than necessary,
and much of this higher cost is borne by consumers who do not use credit
cards.”
It is clear that
banks’ promotion of credit cards is not only inefficient but distorts consumer
choices. This in turn affects the ability of other distribution channels to
achieve economies of scale and therefore lower costs to consumers. Ultimately
it is low-income earners who are hit hardest by the banks promotion of credit
cards, not only because they face higher retail prices but also because they
are not able to avoid being charged bank fees on other payments channels such
as eftpos and ATMs.
Banks seek to
‘hook’ those consumers whose business they want.
An example of
this is the ‘bait’ that is thrown to ‘super rich’ customers. ‘Super rich’
consumers are offered individually tailored services, available 24 hours a day.
To qualify for
these special banking services however, most banks require that their customers
have an annual income of over $250,000 and will only offer services by
invitation.
By comparison
while banks are trying to pull in wealthy customers by offering enhanced
service, the impact of branch closures and fee increases is to push out
customers who do not generate substantial profits.
The problem is
that low-income consumers have nowhere to go. They still require a banking
service but banks do not believe that it is profitable to provide that service.
The closure of bank branches and the increase of bank fees can be seen as a
direct result of banks desire that each customer generates profits, whether or
not they have the capacity to pay.
Bank
Fees: What’s to Come?
In the UK the
major banks recently agreed to drop all ATM fees and charges.
It seems that
banks have a different attitude to fees in Australia and this can largely be
attributed to the attitude of the Australian Federal Governments to bank fees.
The Federal
Government have in the past endorsed banks increasing their fees.
Mr Joe Hockey
MP, the Minister for Financial Services and Regulation told Parliament on the
24th November 1998 that the trade off for lower interest rates is
higher fees. He stated, “the trade off has been that people are starting to
pay for some of the services that they are demanding of the bank.”
Despite the fact
that there is clear evidence that banks have abused their market power to earn
obscene levels of profit, the Federal Government does not believe that it needs
to take action.
The Federal
Government has time and time again rejected calls to direct the ACCC to
formally monitor bank fees and charges.
It seems that
the Federal Government not only endorses fee increases, they fully expect that
bank fees will continue to increase.
The Chairman’s
Report stated that “the present position is that the fees for service are
more directly related to the cost of providing that service. Nevertheless, the
costs of transaction services are still at least three times the fees
collected.”
The warning for
consumers is that bank fees will continue to increase until the banks feel that
they are making a sufficient profit – or until the Federal Government takes
action.
There is however
an alternative to continuing bank fee increases.
In the UK, the
major banks have recently agreed to drop all ATM fees and charges.
This followed a
report into the UK payments system, the Cruickshank Report, which demonstrated
that consumers were paying between £3-5 billion more for banking services than
they should.
If it is good
enough for UK banks to allow their customers to access cash for free, why
shouldn’t it be good enough for Australian customers?
Labor members of
the committee are of the view that there is a point at which the banks must be
told that enough is enough.
A line must be
drawn in the sand on bank fees.
Labor
members of the JPC believe that it is time for action. It is recommended that
the Federal Government immediately formally direct the ACCC to monitor bank
fees and charges. Labor members of the JPC recommend that banks accept a
moratorium on increasing bank fees for a period of twelve months.
Disclosure
of Fee Information
On December 15
2000, NatWest Bank in the UK removed all charges from cash machines in the UK.
Making the announcement, NatWest Bank stated to its customers that even where
the owner of an ATM machine charged a fee, “you will however be notified on
screen of any charge before you withdraw cash. You can then stop the
transaction if you do not wish to pay a fee.”
In the UK, banks
have been able to publicly commit that they will provide fee information before
a transaction is made so that a consumer can cancel the transaction.
Why can’t this
happen in Australia?
In Australia it
appears that it is technically difficult to provide this solution to consumers.
Submissions to
the JPC inquiry from banks stated that it was technically difficult to provide
real time disclosure of fee information.
ANZ provided to
the Committee a detailed break down of the steps that would be required to
provide real time fee disclosure. The ANZ stated to the Committee that it
estimated that its Transaction Banking System would require eight times the
storage capacity to deliver complete real time disclosure. ANZ’s supplementary
submission went on to reject a ‘halfway house’ solution of providing consumers
with the number of transactions that they had made in a month. ANZ said that
while such a solution was technically possible it would require substantial
duplication of systems.
ANZ Bank
recently confirmed that it is considering using ATMs to advertise products and
services. The Bank has stated that it conducting a trial on 92 ATMs and is
considering rolling out an advertising program on 500 ATMs by July of this
year.
It is ironic
that at a time when Banks are arguing that it is technically difficult to
provide real time disclosure of bank fees on ATMs, a new generation of ATMs is
being marketed which will allow consumers to use ATMs to buy movie tickets,
prepaid phone vouchers and stamps.
This new
generation of ATMs is being market by US based company Diebold which three out
of the four major banks use for their ATMs.
Diebold promote
that banks can use their ATMs to:
- Dispense tickets,
stamps, prepaid phone vouchers, coupons and other revenue-generating items
- Print coupons,
statements, tickets and more
- Sell on-screen
advertising
- Use screens to
cross-sell other financial products and services
It would be
unthinkable that a bank could provide its customers with the ability to
purchase a movie ticket before it provided information on its own fees.
There is no
doubt that when banks perceive that there is ‘a buck to be made’ that they are
prepared to invest in new technology. However banks appear to regard investment
in new technology that provides consumers with improved service as a cost.
Labor members of
the JPC believe that it is technically possible to introduce a new few
disclosure regime for ATMs.
It is difficult
to understand how a UK bank, which uses the same types of ATMs and has the same
kind of legacy computer systems is able to achieve real time disclosure, yet
Australian banks cannot.
Labor members of
the JPC accept that there are costs involved in establishing a better fee
disclosure regime, but consider that these should be weighed against the
benefits of a more informed market.
Labor members of
the JPC note that the growth in the provision of ATMs by private operators has
the potential to increase the level of uncertainty amongst consumers as to the
level of fees for accessing ATMs. Without the introduction of a fee disclosure
regime consumers will increasingly be uncertain as to how much they will be
charged for using an ATM and will continue to find it difficult to manage their
own transaction behaviour.
Labor members of
the JPC believe that if there is commitment from the banks it is possible to
introduce a new fee disclosure regime for ATM fees within a period of 12-24
months.
The key issue at
stake is whether banks are committed to introducing change.
The recent
uptake of internet banking by the major banks has demonstrated that if the
banks have the internal commitment to introduce a new service then they can
achieve it quickly and efficiently.
If the banks
applied the same commitment that they applied to the introduction of internet
banking to introducing a new fee disclosure regime for ATMs then there is no
doubt that a disclosure regime would soon be operational.
Labor members of
the JPC consider that ASIC has an important to play in facilitating the
introduction of a real time fee disclosure regime and should continue with
their role in facilitating the ASIC Transaction Fee Disclosure Working Group.
Recommendations
Reasons
For and Impact of Bank Fee Increases
1. Labor members of the JPC recommend
that the Government immediately direct the ACCC to formally monitor bank fees
and charges.
2. Labor members of the JPC recommend
that banks accept a moratorium on increasing bank fees for a period of twelve
months.
3. Labor members of the JPC recommend
that banks offer fee free banking to pensioners and social security recipients.
4. Labor members of the JPC recommend
that the Federal Government immediately direct the ACCC to hold an inquiry into
why UK banks have been able to abolish ATM fees while Australian banks say they
cannot.
5. Labor members of
the JPC do not support the Chairman’s recommendation to introduce a fee regime
for ATMs based upon direct charging without an agreement on the level of bank
fees.
Labor Senators
believe that the charging regimes for bank fees are not efficient and
competitive and are based on extracting an obscene level of profit.
The fact that
banks have been able to significantly increase fees and charges without losing
market share is an indication that the market for retail transaction accounts
is not competitive.
The Commonwealth
Bank presented evidence to the committee that the revenue that banks earn from
fees is only 1/3 of their costs.
The
ramifications of this are clear. If user pays pricing was fully adopted bank
fees would increase by up to three times their current levels. On current fee
levels this would result in an over the counter transaction in a bank branch
costing $9. Access to another banks ATM would cost $4.50 and an eftpos
transaction would cost $1.80.
This is socially
unacceptable. Banking is an essential service. Because banking is so essential
to economic activity it is important that all Australians have access to
affordable banking services so that they can participate on an equal footing in
all forms of economic activity.
Banks have a
social obligation to provide accessible and affordable banking services for all
Australians. The impact of bank fees is falling disproportionately on consumers
who do not qualify for fee exemptions. Low fee bank accounts that the banks
were said to provide are not widely available and could not in all cases be
regarded as low costs accounts.
Banks in the UK
recently announced that they will no longer charge fees to access cash from
ATMs. This followed a report into the UK payments system, the Cruickshank
Report, which demonstrated that consumers were paying between £3-5 billion more
for banking services than they should.
If it is good
enough for UK banks to allow their customers to access cash for free, why
shouldn’t it be good enough for Australian customers?
Direct charging of ATM fees allows ATM owners to charge a different fee
for each individual ATMs based on their different costs. Under this fee regime,
ATMs with high volumes of transactions would normally have lower fees than ATMs
with low volumes of transactions.
The ACCC and Reserve Bank have specifically recognised that a direct
charging fee regime for ATMs would allow higher fees to be charged in remote
areas.
Labor members of the JPC are concerned that introducing a direct charging
fee regime for ATMs without a commitment from the banks on the level of bank
fees would lead to increases in ATM fees in rural and regional areas where the
costs of providing ATM services are greater.
Disclosure
of Fees
Labor members of the JPC recommend that:
- Banks introduce a
real time fee disclosure regime for ATMs within a period of 12-24 months.
- Banks provide to a
customer information on the cost of a transaction before the transaction is
made so that a consumer has an opportunity to cancel the transaction.
- Banks provide to
customers a break down of fees charged on monthly statements, including a
comparison of fees over previous months so that consumers can compare their
transaction activity.
Labor members of the JPC recommend that
ASIC continue its role in facilitating the introduction of a real time fee
disclosure regime through the ASIC Transaction Fee Disclosure Working Group.
Labor members of
the JPC note that in the UK, banks have been able to publicly commit that they
will provide fee information before a transaction is made so that a consumer
can cancel the transaction. If this can happen in the UK, which has similar
ATMs and legacy computer systems, why can’t it happen in Australia?
Labor members of
the JPC believe that it is technically possible to introduce a new few
disclosure regime for ATMs.
Labor members of
the JPC accept that there are costs involved in establishing a better fee
disclosure regime, but consider that these should be weighed against the
benefits of a more informed market.
Labor members of
the JPC believe that if there is commitment from the banks it is possible to
introduce a new fee disclosure regime for ATM fees within a period of 12-24
months.
Labor members specifically reject the
Chairman’s Report Findings of Fact that:
- Bank fees have increased ‘as a result
of the adoption of a user-pays charging structure by financial institutions on
a range of services.’
- There is also substantial evidence to
indicate that financial institutions have historically under-priced the cost of
electronic ‘banking’ transactions, but are now aligning charges more closely
with the marginal cost of providing the service.’
- The Committee accepts the evidence presented that up to 75% of
customers pay no fees at all on personal accounts and that most banks provide
substantial fee discounts and exemptions for people who are financially
disadvantaged or disabled, and for pensioners and students.
- The Chairman’s report notes that most
banks provide substantial fee discounts and exemptions for people who are
financially disadvantaged or disabled, and for pensioners and students.
- Cross subsidies still
exist in the banking system however cross subsidies tend to favour wealthy
consumers at the expense of poorer consumers. Exemptions are available to
consumers with housing loans and large deposits. Banks also charge some
services as ‘loss leaders.’ This advantages wealthier consumers who are more
likely to use subsidised services such as internet banking.
- Substantial evidence
was presented to the Committee from the ACCC and RBA that bank fees are not
efficient and competitive. Bank fees are based, not upon aligning charges with
marginal costs, but with extracting obscene levels of profit.
- The ABA actually said that , “depending on the provider, 30-75% of customers do not pay fees and
charges for services associated with transaction accounts.” One way of reading
this statement is to say that up to 75% of customers do not pay bank fees.
Another way is to say that up to 70% of customers do pay fees.
- Labor members of the
JPC dispute low cost banking accounts are widely available and are concerned
that they can not in all cases be regarded as low costs accounts.
___________________________ ___________________________
Mr Bob Sercombe, MP Senator
Stephen Conroy
___________________________ ___________________________
Senator Barney
Cooney Mr Kevin Rudd, MP
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