The revelation that Australian banks have reaped a record $6.26 billion from account fees in the past year has caused an outcry from consumers and the opposition Labor Party. A Reserve Bank report showed that charges by banks have gone up by 50 per cent since 1997. They accounted for 24 per cent of bank income in 2000, up from a 21 per cent in 1997.
Transaction fees for households rose 49 per cent in the past three years and credit card charges rose 27 per cent. The average number of free transactions has shrunk from 11 to eight and the average minimum balance required for fee-free banking rose from $500 to $2,000. Businesses, on the other hand, paid 12 per cent more in fees over the three years.
On their face, these figures appear fairly damning. They were certainly enough for Opposition Leader Kim Beazley to reaffirm his commitment to legislate for a social contract with banks to provide fee-free accounts for pensioners and families unless the banks came up with a satisfactory voluntary scheme. They were enough for the Australian Consumers Association to call for government regulation to set some minimum standards for the banking industry.
However, the increase in fees is only one side of the story. The other side is that the banks have provided much lower interest rates mark-ups in the past three years. It means that interest rates on home loans are now lower than they would otherwise have been if fees had continued to be artificially low.
Consumers cannot have it both ways.
The trouble with regulation is it that it adds inefficiencies to the system. A user-pays system will ultimately be more efficient and therefore more beneficial to consumers than a regulated system. If banks impose realistic fees on transactions which are costly for them to provide, there will be an incentive on consumers to avoid doing those sorts of transactions – typically across-counter services. This is happening now as people outraged by high fees do it their banking in newer, smarter and cheaper ways.
True, not all consumers are comfortable with the newer ways of banking, but that happens in it many fields other than banking and it would be folly for governments to legislate to enforce continued subsidy of older less-efficient ways – – that is the route to lower wealth.
Another avenue for consumers is to take up the suggestion put by the federal treasurer, Peter Costello, who argues that consumers who are unhappy with fees charged by the major banks should consider moving their accounts to institutions that offer lower fees.
Either way, pressure will be put on banks and consumers to go for the most cost-effective service. Regulation, on the other hand, will require banks to provide services that will cost them more than they retrieve in fees. Ultimately, those losses will be passed on to consumers in other ways such as higher fees for non-regulated services or higher mark-ups for interest on mortgages and personal loans. Moreover, artificially subsidised services will attract more customers than if it they were not subsidised. There will be no incentive for consumers to move away from costly services.
Consumer fury at-bank fees is best directed at shopping around for smarter ways to-do it to the same thing or for a different bank to do it. It is only when consumers start voting with their feet that competitive forces will give them a better deal. They would be naive to expect that government regulation will be some sort of magic pudding where the lower fees can come without paying the price of higher interest rate mark ups.
Since deregulation of the financial system the in the mid-1980s consumers have it never had it so good when it comes to obtaining and paying off and a home loan. It would be sad to see those benefits lost in and the costs of the heavy hand of regulation.