Banks are exploiting loyal customers, report reveals


A federal government report describes the banking sector as institutionally anti-competitive.

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  • Difficulties in switching banks leads to the exploitation of loyal customers
  • The role of mortgage brokers has changed to put consumer needs second
  • Customers are confused by a myriad of similar products

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."

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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 disadvantage".


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