Prev
Next

Sit back and enjoy as the four banks gouge you

Frank Zumbo

by Frank Zumbo

03 Mar 06:00am

Must Reads

The Punch is moving house - this is a caption

The Punch is moving house

385

Will Pope Francis have the vision to tackle this? - this is a caption

Will Pope Francis have the vision to tackle this?

122

Advocating risk management is not “victim blaming” - this is a caption

Advocating risk management is not “victim blaming”

251

Filed under: Banks, Competition, Consumer Affairs, Personal Finance

39 comments

If it wasn’t enough that Australians consistently face some of the fastest growing food prices in the developed world as a result of the dominance of Coles and Woolworths, the major banks have decided to join the price gouging club.

The Australian's Jon Kudelka

With the Commonwealth Bank showing strong profit growth and Westpac announcing a profit upgrade, it’s clear the four major banks are some of most profitable in the world. Profitable banks are a good thing I hear you say. Yes, but profiteering banks are not a good thing for the economy and consumers. When does profitable become profiteering?

Simple. It’s when competition has diminished to a point where the four major banks can raise interest rates at will. It’s competition that keeps everyone honest and where that competition is removed the remaining players can price gouge. It doesn’t take an economics degree to work that out.

There is no doubt that the four major banks dominate the Australian banking sector. Allowing that to happen was a mistake and Australian consumers will pay dearly for that mistake. How did the 4 major banks come to have such a stranglehold over the sector? Again, simple. The Federal Treasurer and the ACCC allowed it to happen by not stopping the four major banks from so aggressively wiping out the competition.

Conveniently, perhaps too conveniently, the four major banks, the Federal Treasurer and the ACCC point to the global financial crisis. The only problem with that excuse is that numerous mergers and acquisitions that allowed the four major banks to become so dominant pre-date the global financial crisis. Over the years the Federal Treasurer and the ACCC allowed the regional banks to be picked off one by one. We have seen the Bank of Melbourne, Bank of South Australia, Challenge Bank taken oven. Then came Westpac’s takeover of St George, a takeover that was kicked off many months before the global financial crisis.

The four major banks were also spreading their tentacles to wealth management firms well before the global financial crisis. With all these mergers and acquisitions having been allowed to slip past the Federal Treasurer and the ACCC before the global financial crisis, it’s a bit disingenuous to try and hide behind the global financial crisis.

Of course, the majors have been very quick to use the global financial crisis to drive in the final nails in the coffin of competition. The majors moved quickly to remove BankWest and to neutralise those specialist non-bank home lenders that had given them such a hard time. The Commonwealth Bank and Westpac took stakes in Aussie Home Loans, Wizard and RAMS. These specialist non-bank home lenders had certainly been keeping the majors honest and there is no doubt that the majors celebrated the taming of these vigorous competitors.

With all those independent vigorous competitors so effectively neutralised by the majors over the years, it’s clear that something more fundamental has gone wrong with our competition laws. Indeed, it’s the failure of our anti-merger laws to stop the 4 major banks from getting such an overwhelming stranglehold that is now costing consumers so dearly. With the Commonwealth Bank already delivering higher profits off the back of higher interest margins and Westpac to follow suit, it’s clear that consumers are paying more in interest than they should as a result of the dominance of the 4 majors.

There is no doubt that the four major banks have been able to continue pushing up interest margins on loans because of the dramatic fall in banking competition in recent years. Allowing the 4 majors to take out vigorous competitors such as St George, BankWest and the various specialist home loan lenders was not only a mistake, but amply demonstrates that our competition laws are in urgent need of repair.

Our current anti-merger law is weak and has allowed the four major banks to eliminate strong independent competitors to the detriment of consumers. With the current anti-merger law allowing the ACCC to consistently approve around 97 per cent of mergers and acquisitions it’s obvious that far too many mergers and acquisitions are being allowed to get past our competition laws and the ACCC. Our weak competition laws mean that Australia has one of the most highly concentrated banking sectors in the developed world and that’s bad news for consumers.

With just four major banks being so powerful Australian consumers are now at the mercy of the 4 majors and the majors know it as they push up their net interest margins. Why the focus on net interest margins? Simple. With net interest margins a key measure of the competitive pressure on interest margins, a careful review of net interest margins becomes an excellent way to determine the level of competition in the banking sector. Indeed, as competition intensifies that puts downward pressure on net interest margins as consumers get better deals on interest rates. Dangerously for consumers, however, as the level of competition falls, net interest margins rise as consumers are forced to pay higher interest rates.

While consumers benefit from greater competition and falling net interest margins, consumers clearly suffer from a reduction in competition and rising net interest margins. Figures from the Reserve Bank show that as banking competition intensified between 2000-2008 with strong competition from St George, BankWest and the various specialist home loan lenders, the net interest margin of the four major banks fell. Conversely, as St George, BankWest and the various specialist home loan lenders were acquired by the majors around 2008, net interest margins of the majors started to rise and have continued to do so. This continued rise in net interest margins by the four majors has been confirmed with the Commonwealth Bank revealing a rise in their net interest margin during the past year.

Consumers deserve better and that’s why we not only need strong and effective anti-merger laws, but we also need the ACCC to lift its game and stop the four major banks from spreading their tentacles even further in the banking sector, as well as into the wealth management sector. Unless the dominance of the 4 majors is directly tackled by the Federal Government and the ACCC, consumers will continue to be price gouged by the four major banks.

Most commented

39 comments

Show oldest | newest first

    • John A Neve says:

      05:36am | 03/03/10

      I am sorry yo have to say it, but Frank talks a lot of rubbish..
      A company/business can raise it’s prices any time it likes, it is up to the consumer as to whether they go there. Ask any of the banks shareholders would they be happy to take a reduction in their dividend?

      What Frank should really tell us is, does he oppose the Free Enterprise? system?

      Reply

    • Toby says:

      11:20am | 03/03/10

      John,

      Frank is talking about bodies that are put in place to protect the general population not doing an adequate job of it!  Regulations exist in the market place for a number of reasons and Frank was pointing out that a lack of regulation in this case has stifled competition and consumers will lose in the end. 
      Every country in the world regulates enterprise so it is and Frank has simply brought to our attention the relative free reign of the Australian financial sector.

    • John A Neve says:

      11:36am | 03/03/10

      Toby,

      Frank is doing a con job on consumers, we, the western world chose the path of Free Enterprise. Whether that was the correct decision or not is open to debate. But we have been conned, we don’t have Free Enterprise, what we have is a hodge podge, we have Free Enterprise with government contro,l or partial control. It does not and cannot work .

      We want cheap prices, but high wages, we want competition, but we don’t want successfull companies buying out their opposiion!!

      We want small business to compete with bulk buyers!!!

      We want cheap food, but we want the farmers to get a “fair go”.

      Why go on, what we want is not possible, the system cannot provide what we want and never will.

    • Cameron Price-Austin says:

      12:03pm | 03/03/10

      Good idea John A Neve. What we need is a completely deregulated financial system, just like what has worked so well recently in the US.

      Oh, wait ...

    • John A Neve says:

      12:29pm | 03/03/10

      Cameron Price-Austin,

      That is where you are wrong Cameron, America does not have a “deregulated financial system”. There system is much like ours a hodge podge and for the same reasons, the wheelers and dealers want it that way.

      There are that many restrictions of both business and people in this country it’s not funny. These restrictions are on the increase every day.

      If you want to debate Cameron, debate on fact.

    • Toby says:

      12:52pm | 03/03/10

      John,

      What do you suggest?  Pure market driven capitalism is unrealistic idealism in the same sense as its polar opposite, communism.  I’d much rather live in the fair and balanced society we have than either extreme

    • Alex says:

      12:52pm | 03/03/10

      No but a true free market involves competition. What Frank is talking about is a monopolisation.  Of course they can charge whatever they want.  But if there is a competition it means that the consumer will get value for money.  When someone raises their price someone else will think, well if I drop mine slightly people will come to me instead.

      When you only have 4 banks, which seem to collude quite freely, considering they all have the same sort of rates, the consumer does not get value for money.  You have no real choice.

    • John A Neve says:

      01:11pm | 03/03/10

      Toby,

      I like you, now tell me, do you believe we live in a “fair and balanced society”?

      What we have and it’s getting worse is a polarized poliical environment.
      Politicians of both camps are divisive, keep the people off guard.
      Financially we are in the same position, the haves are drawing furher away from the havenots.

      We have two parties that join forces to stop new parties or people joining the race. Politics today is more about money than ideals.

      “Fair and balance society” come on Toby, get real.

    • Cameron Price-Austin says:

      01:14pm | 03/03/10

      John A Neve, you’re such a troll.

      Regardless of the level of regulation in the US financial system, my point is that the purist perspective of free enterprise that you espouse is naive. All markets require some level of regulation—from trademark protection through to acquisition laws.

    • Grumbles says:

      01:34pm | 03/03/10

      There is NO free market in the banking sector. If there was I personally could start a bank and undertake the practice of fractional reserve lending. When only select companies are allowed to operate like this competition is stifled. The is NO free market in any banking sector in the world and as such the ACCC needs to pull up its socks and start properly regulating a market condition it has mistakingly allowed to occur.

    • John A Neve says:

      01:46pm | 03/03/10

      Cameron Price- Austin,

      I like you to, but I won’t call you names.
      However, trademarks and acquisition laws have little if anything to do with a free market. Most if not all systems have ownership laws.

      Your clutching at straws Cameron.

    • Toby says:

      03:47pm | 03/03/10

      John,

      Yes fair and balanced, but not perfect!  If the scales tip in one groups favour too far then the power of democracy allows us to re-establish the balance as happened in the last election.  Now I am by no means saying that what we have is perfect but I prefer it to the alternative. 

      Two questions; What would you suggest and what is so Unfair about the current system?

    • Davido says:

      06:31pm | 03/03/10

      Four banks controlling an entire banking system for a whole country is not free enterprise.

      True free enterprise would see many banks competing for your business.

    • Tom says:

      01:38pm | 04/03/10

      Interesting argument John.  Does anyone really truly want free enterprise?

      The English attempted to embrace pure capitalism in the past.  If you look at Ireland during the time of the potato famine, food was still being exported from Ireland by English landlords at a time when millions were starving.  They believed that capitalism would solve all problems.  If people worked hard enough then they could move ahead.  Governments shouldn’t intervene no matter what is happening.  Perhaps it worked but in the meantime was the cost in lives worth it? 

      Maybe its just human nature, we like to form monopolies.  You can’t expect the big banks to truly promote competition that’s not in their interests.  No different to what Microsoft has done in the IT sector.  Companies aren’t altruistic; they exist to make a profit (contrary to all the bank ads on TV).  There’s nothing wrong with that but if you truly had free enterprise would it be a good thing for society?  Governments exist to ensure there are checks place to protect the society we live in i.e. the need for award wages.

    • Public Record says:

      06:21am | 03/03/10

      This fellow is no longer a credible commentator.  For those careful with debt and savings, the shenanagins of the finance sector are not news, nor unavoidable. 

      First home buyers are not the be-all and end-all of the national economy, and they cannot all be devoid of wit either.  Buy with in your means and, at the blindingly obvious bottom of an interest rate cycle, pay off at above the booked rate - increase either the frequency or amount.  Likewise those with existing borrowings: pay off at above the listed rate, and keep payments up as rates fall.

      For those with savings, check your accounts, interest and fees. Put most of your money in a high-interest low-fee account, and move it to an everyday account when you need to pay bills. Automate your payments, keep track of your balances, and dodge the charges for “excess” withdrawals, late penalties and etc.

      If you have a credit card, make sure its an annual fee-free one, use it sparingly, and pay the dashed thing off in full every month. More than one card? Why? Go and get advice on debt management. And forget loyalty point plans on cards.

      Reply

    • persephone says:

      06:24am | 03/03/10

      There’s a contradiction here.

      You rightly say that banks began merging prior to the GFC and that therefore the GFC is only being used as an excuse.

      You also say that banks merging reduces competition.

      Then you point to competition increasing in the years 2000-8.

      So I’m confused (noone will be surprised at that!).

      If bank mergers were well and truly happening before the GFC, and fewer banks mean less competition, why did competitiveness on interest rates increase during this period?

      It looks to me as if blaming the problems on the GFC is correct, because that appears to be when the anti competitive behaviour you refer to began.

      (Basically I agree with most of what you’re saying, despite your ususual shifty attempt to make it all Labor’s fault).

      Reply

    • formersnag says:

      08:26am | 03/03/10

      We all know the banks have been gouging us for decades. How about some real journalism, for once? Like telling us more, about the reasons why, they have been gouging us? Apart from maintaining those profits & excessive pay, perks, bonuses, etc. They DO have, our own Australian, “sub prime mortgage” crisis to deal with. “Low Doc” loans & 100% loans to young couples have been going on for years. As the economy worsens, more people lose jobs, get pregnant, divorced, etc, some of these loans will fall over. The banks need to overcharge you, to cross subsidise losses, on those mortgages with overvalued homes.

      Dear persephone, he was not saying that it is all, labour’s fault, alone. Successive governments on both sides have been allowing takeovers & mergers for decades. The “earlier history” mergers he referred to, that led to the big4, becoming that way, mostly occurred during the 80’s on Hawke & Keating’s watch. 2000 to 2008 were “booming economy”, years that allowed new, small, start up, competitors to be born & grow. During those boom years, mergers & takeovers, with Howard & Costello in charge, also occurred, just in, other industries.

    • DG says:

      07:40am | 03/03/10

      STOP PRESS - Banks are trying to make the biggest profit that consumers will allow.

      As a shareholder in one of Australia’s 4 major banks (only a couple of hundred shares but still…) I would like to thank all of those people that pay bank fees for ensuring that my share prices rise and that I get decent dividends.

      Do not, under any circumstances, do as I did and move your account to an institution that doesn’t charge fees. That’s right, I changed banks (from the one I had shares in) to one that offered a product that I wanted that has no fees for the services I use. If enough people followed my steps, banks would reduce interest rates to lure you back. Such is the price of apathy.

      I don’t think it is as much lack of competition, but a lack of consumers trust in the capacity of the smaller lenders to survive the GFC, and their lack of willingness to change banks if they don’t like the deal they are getting.

      As for consumers deserving better, I disagree. Consumers deserve whatever they are willing to pay for. If they are willing to pay $2 per transaction rather than walking two blocks to another ATM that’s their choice. If they choose to remain with a bank that doesn’t have ATM’s where they need them, that’s their choice.

      Please remember - consumers aren’t forced to pay higher interest rates. It is a choice. They choose to go into debt hence they pay interest. Instead of living a debt financed life (where interest is payable) they can choose to live with what they can afford.

      Reply

    • Bruce says:

      07:54am | 03/03/10

      Generally agree with your comments. However, there are many other institutions who get involved in “gouging”. One example is the unbelieveable 21% increase in ELECTRICTY COSTS in NSW, which happened in one big hit late last year. Can anyone tell me of any other industry that would be allowd to INCREASE there costs by a MASSIVE 21%.

      Reply

    • John A Neve says:

      08:22am | 03/03/10

      Bruce,

      Can I reverse the question and ask; What is there to stop any private company increasing it’s chargs by whatever amount it likes?

    • Gavin says:

      08:36am | 03/03/10

      Nothing at all. But if business A charges 70% higher than B, C, D, E and F then Business A would not last long given the options. However, get rid of the latter four businesses and Business A and Business B could both charge whatever they like knowing they only have the one opponent.

    • Bruce says:

      09:15am | 03/03/10

      John A Neve: Your right. However, a price hike of 21% you might do at your own business’s peril. The consumer may vary or vote with their feet and take up other options. No other realistic options with electricity. Having said that, I have thought about purchasing a “large fuel generator”, “storage batteries” and a few “solar panels” for internal lighting and hot water, arranging for my electricity to be disconnected and see how it goes cost wise !! The way I see it, it maybe a cheaper option going into the future !!

    • juicyblue says:

      03:01pm | 03/03/10

      Liner Shipping wink

      10-fold increases 2009 v 2010.

      Lovely.

    • Jamers Hunter says:

      08:29am | 04/03/10

      good comment
      the gas companies doing the same thing
      it is now cheaper for me to use bottle gas for cooking
      the connection fee alone is a bigger cost then what i would use in gas
      even after a one off cost to convert my gas range to LPF my payback is under 12 months.
      the gas hort water similar except i will change it to electric heat pump.
      the gas co can take a hike after allits fair they have just given us all a hike..think they have us in a corner.
      ha de ha

    • Kevan Jones the 2nd says:

      08:40am | 03/03/10

      1. Do not forget the staff and ex-staff that also have contributed to the profit - in harder conditions beyond reasonable expectations.
      2. The takeover of banks may not or may have prevented International take overs.
      3. Interest rate increases lead to real unemployment as the measure of employment is incorrect - unfair and not logical as it is designed to make the governments [ past and current] and their departments good[!] - higher unemployment lower exoected inflation therefor we must increase unemployment and RBA cannot address Discretional spending.

      Forget that the people affected are Some ones Mother Some ones Father Some ones Bother, daughter Son and so on ie real people of Australia and not stats.!!!!!!!!!!

      Reply

    • AdamC says:

      08:47am | 03/03/10

      I agree with Frank about much of this. While a banking crisis is always going to result in less competition as weaker or insolvent institutions are soaked up bigger, more secure rivals, banks have been able to merge themselves to dominance for years.

      While I don’t have a particular issue with horizontal expansion into wealth management (I am not sure why that is a problem) the hoovering up by the big four of smaller, regional competitors on an ongoing basis cannot be good for consumers. The online deposit and (until recently) home loan markets showed how effective vigorous competitors can be in shaking things up to the punter’s benefit.

      Reply

    • Steve says:

      09:29am | 03/03/10

      What needs to happen is to allow, large overseas banks into the marketplace, lets have the Bank Of America, the Scotia Bank opening there doors alongside the big 4, maybe we should allow 6 banks from overseas in, to compete with the big 4 on a level playing field, we could make sure that for say a period of 10 years, that all staff involved with this 6 re phone banking anything like this is in Australia, the big 4, would say jobs would be lost but they wouldnt.

      The other option is for the government to have its own bank, where rates are say minimial in line with reserve bank a not for profit bank, to make the big 4, bring down all the over charges, and huge rates

      Reply

    • Bruce says:

      10:00am | 03/03/10

      Steve: Overseas banks tried to get into the Australian market back in the mid 1980’s. Unfortunately, after a period of time most closed up shop or were taken over eg St.George took over Barclays. The overseas banks could not compete in the Australian market. As far as government owned bank, it sounds good, but unfortunately it would cost a huge amount of money to run, and that money has to come from somewhere. If not from making profits, then the tax payer will have to foot the bill. I think there is a very simple statement that might cover this - Money costs money !

    • persephone says:

      10:19am | 03/03/10

      Steve

      Absolutely nothing stopping this happening, it was the whole point of bank deregulation.

      A few international banks took this up, but that they haven’t taken it further suggests it isn’t worth the investment.

      Reply

    • formersnag says:

      11:05am | 03/03/10

      you never answered my earlier comment, dear?

    • SN says:

      12:02pm | 03/03/10

      Interestingly, the lack of competition in the banking sector in Australia went a long way towards insulating us from the GFC, specifically the banking collapses as observed in the US and Europe. With a functioning oligopoly, the banks have no real need to compete on rates. Reductions in rates (ie. prices), lead to thinner margins and less appropriate risk coverage for banks. 
      So, on a day to day basis the four pillars system sucks, but when it comes to the (credit) crunch, it actually has some merit.

      Reply

    • Ian Johnston says:

      02:04pm | 03/03/10

      You lot have been hammering the banks lately, how about laying off for a bit.
      Many of us old folks rely on regular healthy dividends to provide us with an income so we don’t have to go on the pension and take money from you working stiffs - think on that and give the banks a go. We love ‘em.
      Self funded retiree

      Reply

    • Zeta says:

      03:03pm | 03/03/10

      Sorry, self funded retiree’s. We really should thank you. Thank you for participating in the real estate con job that now prohibits young people from owning their own homes until you die. Thank you for buying so many homes you didn’t need, and for ratcheting up the rents on said homes so that our inner cities are cost prohibitive for artists, students, and have become enclaves for douche bags.

      Thank you and your super funds for investing so heavily in consolidated debt, despite the warnings of responsible analysts. I’m sure you thought giant, life destroying mega corporations like Goldman Sachs were only trying to do the right thing by you. Gosh, who ever would have seen that one coming. Good thing you all retired already so you didn’t lose your jobs when the finance sector crashed.

      Thank you for consuming the Earth’s resources at an unsustainable rate, so the future you leave your children with most closely resembles the spec script for Mad Max.

      And thank you for your unquestioning devotion to the economic and social systems that have given us all so much personal and spiritual fulfillment these last fifty years.

      I can’t believe you guys ever dropped acid and considering over throwing them in the 60s. What would we do without you?

    • Shane From Melbourne says:

      04:38am | 04/03/10

      Where’s the “Like” button so press it a couple thousand times for Zeta’s comment….

    • Jamers Hunter says:

      08:35am | 04/03/10

      then why go to the big banks?
      you can do better else where

    • Andrew Goff says:

      09:58pm | 03/03/10

      Two words: “Credit Union”.

      If you are silly enough to be with a bank, then you get what you get.

      Reply

    • James Hunter says:

      07:33am | 04/03/10

      in a democracy with weak leadership especially,it is difficult if not impossible for government to control capitalist greed.
      only answere now is Nationalisation.
      Nationalise is the one thing that the big banks fear
      does any Australian Govt’ have the balls?
      I think not .
      All we can do now is dispare at chances and choices lost
      and dispare at pain to come

      Reply

    • Brian says:

      02:30pm | 04/03/10

      What about the government - the tax system still favours those doing nothing - and Ken Henry will only exacerbate that fact.

      Reply

    • Ian Johnston says:

      12:47pm | 05/03/10

      If I can have just one extra word on this subject, in particular in regard to poor Zeta, I forgot to mention that I killed Jesus and Adolf Hitler was my lovechild.

      Reply
 
Sorry, comments are now closed for this article.

Facebook Recommendations

Read all about it

Punch live

Up to the minute Twitter chatter

Malcolm Farr

farrm51 21 May 13 05:40PM

KRudd gives marriage equality folk hope, but odds still against it passing on June 6. http://t.co/QmQffMkSvH

Malcolm Farr

farrm51 21 May 13 04:29PM

ACL says gay marriage would lead to gay sex (how to do it) being taught in schools. You really haver to credit them with vivid imagination.

ToryShepherd

ToryShepherd 21 May 13 04:23PM

Welcome to your wombiverse. On orgasmic births and being so happy you could cry http://t.co/7JrbQSCV6j

Daniel Piotrowski

drpiotrowski 21 May 13 04:22PM

RT @GordyPls: So much is wrong with this article but the last setence is absolutely astonishing http://t.co/IpoXoCiN8Y

See all tweets

Recent posts

The latest and greatest

The Punch is moving house

by The Punch Team

385

The Punch is moving house

Good morning Punchers. After four years of excellent fun and great conversation, this is the final post…

Will Pope Francis have the vision to tackle this?

by Hannah Harborow

122

Will Pope Francis have the vision to tackle this?

I have had some close calls, one that involved what looked to me like an AK47 pointed my way, followed…

Advocating risk management is not “victim blaming”

by Sarrah Le Marquand

251

Advocating risk management is not “victim blaming”

In a world in which there are still people who subscribe to the vile notion that certain victims of sexual…

Nosebleed Section

choice ringside rantings

From: Hasbro, go straight to gaol, do not pass go

Tim says:

They should update other things in the game too. Instead of a get out of jail free card, they should have a Dodgy Lawyer card that not only gets you out of jail straight away but also gives you a fat payout in compensation for daring to arrest you in the first place. Instead of getting a hotel when you… [read more]

From: A guide to summer festivals especially if you wouldn’t go

Kel says:

If you want a festival for older people or for families alike, get amongst the respectable punters at Bluesfest. A truly amazing festival experience to be had of ALL AGES. And all the young "festivalgoers" usually write themselves off on the first night, only to never hear from them again the rest of… [read more]

Light weight

Gentle jabs to the ribs

Superman needs saving

Superman needs saving

Can somebody please save Superman? He seems to be going through a bit of a crisis. Eighteen months ago,… Read more

28 comments

Newsletter

Read all about it

Sign up to the free News.com.au newsletter