Big banks laughing all the way to the… bank

Let’s be very clear. The failure of both the Federal Treasurer Wayne Swan and the ACCC to stop the major banks from taking over St George and BankWest was a big mistake and has allowed the 4 major banks to heavily dominate the Australian banking sector. This mistake was made worse by the Treasurer’s and ACCC’s failure to stop the major banks from cleaning up or taking strategic interests in the non bank mortgage specialists such as RAMS, Aussie Home Loans and Wizard. These non-bank mortgage specialists were instrumental in driving competition and strong putting downward pressure on mortgage rates. By seeking to neutralise these players the 4 major banks have been able to cement their dominance of the Australian banking sector to the ongoing detriment of consumers.

Now, there is no doubt that the defenders of the four major banks will come out to stick up for the “poor” banks. Leave the banks alone they will say. The banks are doing it “tough” you may also hear them say. Sadly, there is nothing “poor” about the four major banks. They are rock solid thanks to their dominance of the market and because of a world’s best prudential regulatory system.  Of course, you will also get the bank’s shareholders who love the bumper profits and don’t like “their” banks to be criticised. That’s understandable as they have a vested interest in the banks making as much money as possible and may not be too concerned about the “poor” bank customers.

Yes, it’s good when banks are profitable. We do want our banks to be strong, but similarly we don’t want our banks to gouge consumers. Clearly, there comes a point where profit making becomes profiteering. When is the line crossed? Quite simply, the line is crossed when the level of real competition in the market is so weak that the 4 major banks can keep making record profits. Record profits suggest that there is a lack of real competition to keep downward pressure on interest rates and fees. Naturally, defenders of the 4 major banks will suggest that the banks are “well managed.” Yes, the banks may be well managed, but it’s a lot easier for management to make record profits when the competition is weak or where competitors act as a cosy club.

Once we acknowledge that we have a cosy club in the Australian banking sector it’s important to understand how that’s happened and what can be done to fix the problem. First, the willingness of Wayne Swan and the ACCC to allow the majors to take out vigorous competitors so easily is one of the key reasons we now have 4 dominant major banks. Yes, we may have weak anti-merger laws that allow the ACCC to regularly wave through all but a handful of mergers that the ACCC considers, but we also need to remember that the Federal Treasurer has a veto power under our banking laws to stop bank mergers and acquisitions. Now the answer is simple. We need stronger anti-merger laws that prevent large and powerful companies from so easily taking out vigorous competitors. We also need the Federal Treasurer to be a bit more “hairy-chested” and veto some future mergers and acquisitions involving the 4 major banks in both the banking and the wealth management sectors.

With Australia having one of the most concentrated banking sectors in the world where the four major banks act as a cosy club on interest rates and fees to the detriment of consumers, it’s clear that new competitors are urgently needed to help drive down mortgage and credit card rates. Given the ongoing failure of the Federal Government’s “bank switching” package it’s also essential that we also have effective competition laws. With Australia having some of the weakest competition laws in the world it’s time to update our competition law framework to help drive competitive outcomes for the benefit of consumers and small businesses.

Ultimately, we need new independent competitors to emerge to take on the 4 major banks. That’s where Virgin Money’s launch of new credit cards and an online savings account is good news for consumers who have been victims of gouging by the 4 major banks. In fact, Virgin Money’s new credit cards and online savings account represent a vital step forward in ensuring effective competition in the banking sector.

More however is needed from players like Virgin Money. For example, we should look forward to Virgin Money offering mortgage products as that’s where consumers need to see real competition and that’s where the old players like RAMS, Aussie Home Loans and Wizard were once so very effective in driving competition and keeping the four majors very honest. Clearly, Virgin Money has a unique opportunity to leverage the very strong brand recognition enjoyed by Virgin in Australia into a much needed strong new competitive force in the banking sector.

All in all, the overwhelming dominance that the four major banks have been allowed to achieve is yet another failure of this Federal Labor Government to deal with the numerous gaps and weaknesses in our competition and consumer laws. It’s those weakness and gaps that continue to be so effectively exploited by the banks, major supermarket chains and oil companies to the detriment of consumers. That’s why it’s important for governments of all persuasion to implement effective competition and consumers laws for the benefit of Aussie families.