Australians are being exploited – as opposed to rewarded – for their longtime
loyalty to the big banks, a draft report by the federal government reveals.
One in two customers are still with the first bank they ever joined.
It's a great statistic for the banks – one that could be wrangled to
showcase lifetime loyalty – until the reason behind it is properly
explained, as it is in the Productivity Commission's draft report on
Competition in the Australian Financial System.
The 638-page report describes an industry where loyal customers end up
being charged more money for select services because – ultimately – brokers are paid by the banks, there are too many nonsensical products, and
switching between banks is arduous.
Other shocking revelations include taxpayers having to cover a windfall of up to $500 million a year after the bank regulator capped interest-only lending. (The move was characterised as shortsighted by the report.)
Another is that the $6.2 billion levy on major banks – announced during
the May 2017 Federal Budget – will likely be passed onto customers.
Loyal customers 'exploited'
The Productivity Commission surmises that most of these issues stem from a
lack of competition, as the focus on regulating the banking industry has
shifted away from promoting positive outcomes for customers in order to
make sure the system can withstand a financial crisis.
"The benefits of competition to the individuals and businesses for whom the
financial system exists are being reduced in the quest for stability,"
write commissioners Peter Harris, Julie Abramson and Stephen King.
"Although financial institutions generally have high customer satisfaction
levels, customer loyalty is often unrewarded with existing customers kept
on high margin products that boost institution profits."
Mortgage brokers put banks first
The report continues by addressing a failure in the channels that are meant
to provide customers with information on cheaper products with better
features – namely mortgage brokers.
The brokering industry has grown from a relatively small and disruptive
industry in the 1990s to a seminal piece of infrastructure where more than
50% of all loans are managed.
"The revolution is now part of the establishment," write the authors of
the report. "Non-transparent fees and trailing commissions, and clear
conflicts of interest created by ownership are inherent."
Brokers don't have a legal obligation to act in the best interests of
customers, the report says, and are commonly paid commissions of
approximately $750 a year to make sure people don't refinance elsewhere.
These commissions "encourage broker loyalty to the financial institution,
not the customer," the authors write, adding that the interest rate on broker
loans is commonly what is on offer by the big banks.
Drowning in white-labelled products
Switching between banks is even harder in a market where there are nearly
4000 different residential property loans and 250 different credit cards,
"with sometimes only marginal differences".
Half of all people with a home loan, savings account and credit card hold
it with the same bank. A third of people choose not to switch banks because
they like keeping their accounts with the same institution.
"Barriers to switching can make loyal customers ripe for exploitation," the
report says, before presenting an example where existing customers are
charged more by not refinancing.
Variable interest rates on existing loans are about 0.3–0.4% higher than
they are on new loans, according to Reserve Bank data. This leads to about
15% of existing customers paying an extra $66–87 per month on the
average home loan balance.
"The current approach to the provision of many financial products still,
ultimately, puts the onus on consumers to find better deals and negotiate
with providers," the report says, "which places many at a