The itch to switch is still not easily scratched
Here we go again - another bank switching package from Wayne Swan. Has Swan got it right this time? Well, yes and no.
There’s no doubt that Wayne Swan’s recent announcement that bank customers will be allowed to sign a single form to switch banks is well overdue. In reality, Swan could and should have pursued the “one form” approach back in 2008 as we all suspected that bank switching can be as simple as filling in just one form.
Should we be excited about Swan’s latest bank switching package? Well, not just yet. Any excitement needs to be tempered by doubts as to whether the latest reforms are to be extended to small business customers.
Swan’s public statements only refer to consumers having the immediate benefit of the new streamlined switching process. Clearly, small businesses should be immediately included and will obviously be disappointed that they have not been included upfront.
The numerous practical challenges of switching financial institutions are not limited to your traditional consumer. Small businesses also want to switch financial institutions from time to time.
We all know that switching banks can be a real pain given that customers need to methodically change any automatic debit and credit transactions linked to the account the customer wants to move to another financial institution.
The time-consuming nature of switching financial institutions will obviously deter all customers from switching institutions and that, in turn, deters competition as customers are more likely to stay with their existing financial institution.
Financial institutions will know this and can play games with customers. These games can include financial institutions acting opportunistically to raise fees on certain accounts or not being as aggressive as they could be on interest rates. Yes, some interest rates on home loans may be coming down slightly but they could come down a whole lot more now that the cost of funding pressures on financial institutions are starting to ease.
As the four major banks continue to increase their market dominance, it’s hardly surprising that the net interest margins of the four major banks are healthy and in some cases actually growing. That’s why it’s important that Swan moves quickly to allow all customers to switch financial institutions as easily as filling in one form.
Anyone interested in having a truly competitive banking sector will recall that the net interest margins of the four major banks had been put under a great deal of sustained pressure by the likes of Aussie Home Loans, RAMS, Wizard and even St George before Swan and the ACCC made the mistake of letting it be taken over by Westpac.
Net interest margins are an excellent measure of the intensity of competition in the banking sector. It’s really quite simple. A fall in net interest margins points to increasingly intense competition, while a jump in net interest margins points to less intense competition. It’s the actual intensity of competition in a market that’s critical rather the mere appearance of competition.
So while the four major banks may say that they are “competitive” with one another, the sad reality is that they are not as intensely competitive with one another as they could be as that would only serve to reduce their net interest margins.
In these circumstances, the easier it is to switch banks the more intense the competition will be for that group of potential new customers. That’s why it’s essential to make switching financial institutions as simple as possible.
While even Swan recognises that bank switching is an important aspect of increasing competition in the banking sector, it’s disappointing to see Swan fumbling the ball so badly on the switching issue.
Here we need to recall that Swan has previously had a go at a bank switching package. In fact, back in 2008 Swan offered us a “simpler” bank switching process. The problem was that Swan’s 2008 bank switching package was a real fizzer.
There is plenty of evidence of Swan’s misguided and failed 2008 bank switching package in Bernie Fraser’s report into switching arrangements released along with Swan’s announcement of a “new and simple” 2011 bank switching process. You could be forgiven if you are getting a little cynical with how the Federal Government has dragged its feet on implementing an effective bank switching mechanism.
Indeed, given that Bernie Fraser was appointed by Swan and that Swan has announced a new switching process to supersede his 2008 package one can only assume that Swan has acknowledged the failure of that 2008 package. Swan’s 2008 bank switching package failed simply because it still required customers to undertake the cumbersome and time consuming tasks associated with switching financial institutions.
Even in 2008 Swan should have known that a streamlined process for switching financial institutions involving just a single form was an obvious way to help all bank customers and promote a little bit of real competition. Surely, it would not have taken very much to recognise that a truly streamlined process for switching financial institutions would be of real benefit to consumers and small businesses.
We didn’t need a review by Bernie Fraser to tell us of the obvious benefits of having just one form that all bank customers could fill in order to switch financial institutions. Sadly, having such a review has further delayed implementing a proposal for a single form for switching financial institutions that would deliver clear benefits to bank customers.
The dragging of feet by Swan doesn’t end there as there will be more delays as Swan is now establishing a Treasury-led working party to finalise the details of the new streamlined process. This is just another talkfest and is really unnecessary as Swan could just instruct Treasury to immediately start drafting the relevant legislation so as to apply to both consumers and small businesses.
We need less talk and more immediate action from Swan on meaningful and effective banking reforms to counter the growing dominance of the four major banks. There is simply no excuse for any further delay in giving all customers the opportunity to immediately switch banks by just filling in one form
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