Tuesday, January 15, 2008

Tuesday Column: Let's terrify our banks!

Worried about what’s happening to your mortgage? The Treasurer Wayne Swan is working on it. But in the meantime he is offering advice straight out of cloud-cuckoo-land.

It’s this: “Vote with your feet.”

As Mr Swan sees things: “The banking system in this country is competitive. If one of the major banks wants to increase its interest rates over and above other banks, then customers should take note of that and they should act accordingly.”

It sounds as if he’s been listening to Smokey Robinson whose 1960 hit song advised young women to “shop around”. Or perhaps to Adam Smith, the father of modern economics. Back in the 18th century Smith said that if everyone shopped around and voted with their feet and if the sellers responded, no-one would end up paying more than they had to.

On the face of it “shopping around” is good advice right now...

For the first time in years most of the big five banks are charging different standard variable mortgage rates. There’s no longer a single standard rate. The National Australia Bank is charging 8.67 per cent, Westpac 8.72 and (much to the Treasurer’s displeasure) the ANZ, the Commonwealth and St George want as much as 8.77 per cent.

As Mr Swan put it last week: “I would be reminding all ANZ customers that there is a competitive market out there, and if they’re unhappy they ought to vote with their feet.”

But voting with your feet and moving from, say, the ANZ to the NAB is difficult if you already have a mortgage. Mr Swan might like to try it.

First he’ll need to prove his identity all over again – it’s often a matter of driver’s licences, passports and signed statements from people such as church ministers who can certify that they know you. If it’s a joint loan his wife will need to do it as well.

And he’ll need to provide reams of bank statements demonstrating his spending and saving habits, as well as pay slips or group certificates along with perhaps a letter from his employer confirming that he works there. The bank might also ask for his child support statements and superannuation statements. He’ll most probably have to value his house (or agree to pay the new bank to do it) and get a copy of his rates notice as well.

Perhaps he’s organised. He might be able to get the package together in a couple of days. Or like many bank customers he might find the whole process daunting.

And he’ll face fees. Most banks charge an exit fee of around $700. (Mine would charge me $3,000.) They charge another $300 to release the title to the property and many seem to delay doing it, perhaps in order to hang on to their lucrative customers a little bit longer.

The new bank might want fees as well, perhaps $600 to set up the new account. And then he’ll have to switch all the paperwork over, filling out form after from - one for each direct debit. He’ll have to let his pay office know, and so on.

And for what?

Perhaps to discover a month or two down the track that the rates on offer have changed. His new bank isn’t the cheapest any more.

That’s why Australians don’t vote with their feet. The banks know this even if the Treasurer does not.

Each bank routinely charges its new customers less than it charges its existing ones, offering them discounts safe in the knowledge that their existing customers are rusted on and won’t attempt to get the cheaper rates by changing.

Customers who have become financially stretched or have lost their jobs are unable to change at all. New lenders won’t take them.

To his credit the Treasurer recognises that there is a problem. He has asked his department to examine the barriers to switching and report on ways to break them down.

It could do worse than examine the market for mobile phone calls.

These days mortgages, like mobile phone calls, are regarded as homogenous. The product is much the same whichever of the big providers you sign up to. What differs is the branding, service and price.

Until 2001 Australian mobile phone users were more or less stuck with the company they had signed up to, just as are Australian bank customers.

Changing your phone company involved changing your phone number, and in some cases changing your phone as well.

These days phone companies are compelled to provide you with an unlock code to switch your phone over should it be locked and to allow your new provider access to your old number.

As Professor Joshua Gans of the Melbourne Business School puts it: “You don’t even have to tell your current provider that you are leaving. Talk about an easy break-up!”

Gans wants it to be just as easy to switch mortgage providers.

He wants you and me to take ownership of our bank account numbers in the same way as we have taken ownership of our mobile phone numbers.

Technologically it should be easy to switch them between providers.

I would also make it easy to switch over identity and income and expenditure documents. Once you had been proved who you were and what you earned to one bank, you shouldn’t have to do it for the next.

Abolishing exit and entry fees might be more difficult. Lenders face genuine costs in setting up and closing accounts. But the fees they charge should be limited by the Competition and Consumer Commission to their actual costs.

Then those of us on variable rate mortgages could vote with our feet. (Those of us on fixed rates could not, but that’s what you expect when you sign a fixed rate contract.)

We would have real market power and we would terrify the lenders by using it. They could hardly object, it would be the free market at work.

I am looking forward to the Treasury’s report.

Update from Goshua Gans.