Wednesday, December 08, 2010

Swan's second chance

Wayne Swan botched his first attempt to take on the banks and then propped them up and allowed them to swallow competitors during the financial crisis.

They are now stronger than ever and unashamed. Their profits are higher than they have ever been (according to their own Association's submission to the banking inquiry) and the interest margins they charge have widened over the last two years (again according to their own Association).

What annoyed Wayne Swan right from his earliest days as Treasurer was that market mechanisms seemed not to compete that profit away. In a normal industry when profits are high competitors arrive and cut them down to size.

The big banks earn an incredibly impressive 16.1 per cent annual return on their equity - way in excess of what would be needed to make the business attractive. The smaller banks - often offering better deals - get by with just 12.6 per cent.

So why aren't we switching?...

Three years ago Swan thought it was because we found it daunting.

With unfortunate fanfare he unveiled "one single consumer complaints hotline - 1300 300 630 – providing a first contact point for all consumer complaints about basic banking products".

It turned out to be the ASIC switchboard.

He unveiled a "a detailed website providing advice on how to switch and the costs and the benefits of doing so," which turned out to be neither detailed nor to outline the costs of switching.

All this was meant to empower us to "walk across the street, "pass judgment" on our banks and "put them under competitive pressure."

Oh yes, and as we left our banks were required to hand us "accurate information on all direct debits and credits to take to a new bank for easier transferral," something they might have been expected to do anyway.

That it did none of these things would have surprised no-one who had ever attempted to walk across the street.

If you are not known to the new bank you need to prove your identity all over again. AUSTRAC requires driver's licences, passports and signed statements from long-term friends in authority. They want 100 points worth. If it is a joint account they will want them from your partner as well.

Even if you are known to the new lender you will still have to demonstrate your spending and savings habits all over again with months of bank statements and pay slips or group certificates and perhaps a letter from your employer.

The new lender might also want child support statements, even superannuation statements. It will want you to value your house or business all over again. And so on.

None of these things should be needed for a simple transfer between financial institutions. Swan was told so at the time.

Markets work well when transactions are near frictionless. That could be achieved by getting AUSTRAC to accept that an identification satisfactory for one financial institution is good enough for another. A house of business that has been valued by one institution as suitable for a long-term loan shouldn't need to be revalued when the loan is transferred to another.

Customers should no longer need to go to their old financial institutions to get a list of regular debits and credits, but should be able to authorise the new one to act as their agent and sort everything out.

There's every chance Wayne Swan will act to bring this frictionless world about in the new bank package he is about to introduce. But more cleverly, less dramatically.

Instead of promising that customers can "now vote with their feet" as he did last time, he will outline broad goals and begin a consultation process of how to deliver them.

The gold standard in frictionless transactions is a portable bank account number. We would be able to take our existing BSB and account number to a new institution without the need to reenter debits and credits or reprove our identities. But the bank's IT systems would need to be able to talk to each other. Putting the banks and consumer organisations together with Treasury officials and giving them months to test exactly what can be done might lead to a better outcome than a big announcement. And one that will stick.

It's happened before, with mobile phone number portability. What the carriers initially said was too difficult is now routine. Their margins have shrunk because of it.

The Treasurer is also likely to deploy government resources to strengthen the hand of credit unions and building societies when it comes to raising money and attracting deposits.

Along with greater powers for the Competition and Consumer Commission it's a pretty reasonable approach (albeit not as effective as price controls - a tool used to great effect in the early days of deregulated telecommunications).

But it will still make slow progress. There's something else that makes us reluctant to abandon banks that treat us badly.

We may be psychologically programed to reward bad treatment. In March this year the Australia institute asked 1360 Australians about their experiences with banks. One question asked whether a bank's profit helped determine how "safe" they thought it was.

An astonishing one in five thought it is safer to deposit money with a bank with bigger profits. Among customers of the big four it was one in four. Among young Australians it approached one in three.

If we continue to see profits as a sign of safety we will remain sticky for as long as we are being ripped off. Swan's new banking package will be an improvement. But he might have still more work to do.

Published in today's SMH and Age

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