Banks in Australia have suffered a very poor image over the past decade. Yesterday saw the release of a review of banking practice by Richard Viney. The review was set up by the banks themselves. Mr Viney called for more low-cost accounts, a three-month community consultation period before bank branches were closed and better ways of ensuring that banks only lend money to people who can afford to pay their debts. The report was welcomed by the Federal Government which urged the banks to adopt its recommendations voluntarily.
The banks are the first to admit that their image is poor. The poor image comes from change itself. The beneficiaries of change are at best luke-warm about it, or even fail to notice the benefits. Those, on the other hand, who suffer because of change are usually very noisy about it. Heavy competitive pressure in the banking industry in the past decade has resulted in banks ending cross-subsidies of services. For decades previously, people repaying home loans subsidised other banks users. Those with home loans paid higher interest rates than the market would otherwise dictate and they paid higher fees. Meanwhile, people using over-the-counter services at local branches we paying nowhere near the cost of those services. But once the banks started to charge the full cost of over-the-counter services, or just stop them by closing branches, those affected squealed loudly. Home-buyers, however, did not congratulate the banks for their excellent work. Rather they assumed the lower fees and lower interest rates were their birthright.
Aside from changes in cross-subsiding, computerisation has also caused much change. Direct debiting of accounts (especially payrolls), phone banks and internet banking have caused the demand for over-the-counter branch banking to fall to the extent that many branches are uneconomic. Banks felt the need to close them in the face of competitive pressure. Keeping them open would have resulted in higher mortgage costs which in turn would have driven customers away so branches would have closed in the long run anyway.
Unfortunately, it has meant that the less well-off and the less mobile have been greatly affected. They have to travel further for banking services and they do not have the wherewithal to engage in phone or internet banking.
The big four banks have withstood calls for re-subsidisation, though from time to time they have admitted to insensitivity to customer needs.
It may well be that the banks will get some image value in adopting the Viney recommendations, however, it would be a mistake for the Government to re-regulate. Bank customers cannot have it both ways. They cannot have cheaper home loans – just a percentage point or two above the cash rate compared to four or five points above it a decade ago – and have subsidised over-the-counter services. Re-regulation would unnecessarily increase costs which would be passed on. It would also cause Australian banks to be less internationally competitive. It may be a brutal transition, but to some extent it is being ameliorated by competition as smaller community banks, like the Bendigo Bank, pick up customers that the big four have alienated through lack of service.
Re-regulation poses another danger. Realistic over-the-counter fees are giving an incentive to people to do smarter banking – by phone and internet, which in turn makes the economy more efficient and enable resources to go to other things.
Even with credit provision, there is an argument that it is cheaper for banks to engage in less vetting – which is labour-intensive and expensive – in return for copping a few more defaults. It is for consumers to determine their capacity to repay.