Today’s Herald Sun has an opinion piece I wrote about bank switching costs [reproduced over the fold].
Switching banks a trying effort
Joshua Gans, Herald Sun, 10th January, 2008.
THE next time you are waiting in the line for a bank teller or at an ATM, think about what you would have to do to find another bank.
First, there are all of the direct debits that employers use to pay you and you use to pay your regular billers (for the mobile phone, utilities, etc).
Change banks, and all of these have to be set up again. New numbers, new forms, new contacts.
That is enough to put anyone off.
The Treasurer, Wayne Swan, has come out forcefully in admonishing ANZ over its latest, larger than expected, rise in home mortgage interest rates.
He called the 0.2 per cent rise by the ANZ excessive, even allowing for pressures from exposure to the US sub-prime mortgage crisis.
“Certainly, I would be reminding all ANZ customers that there is a competitive market out there and, if they are unhappy, they ought to vote with their feet.”
That’s switching to other banks.
But can a market-based form of punishment really work to discipline any of our major banks?
It’s bad enough setting up all your accounts afresh. Things are even worse if you have debt (say, on your credit card or mortgage).
Then you have to go and apply for a loan with someone else, pay their fees, and in some states, pay stamp duty.
Whatever savings you are getting had better be worth it.
The ANZ interest rate is a fraction of a per cent larger than other banks’.
Sure, over time, that can add up on a large debt. But how do you know if, next month, the bank you switch to could have the higher rate?
The problem with all of these switching costs is not just that you know it, but banks know it, too.
When competition works, it should prevent rises greater than costs.
This is because any margin the banks get over the costs of getting funds from savers is something that each will want to grab.
In the process, interest rates should be cost-reflective.
Compared to many industries , we actually have plenty of banks vying for our business, meaning that competition should be working.
But the banks know that by putting up rates, they won’t lose too many customers – except perhaps among those who are just buying homes now.
So it should be no surprise that rates are not driven down to costs and that, in turn, the Treasurer can rail against this behaviour with good cause.
But perhaps the Rudd Government should do more than leave it to market pressures.
In telecommunications, to make competition work, the Government needed to give a helping hand.
It is now child’s play to switch mobile-phone providers, because you can take your number with you.
You don’t even have to tell your current provider that you are leaving.
Talk about an easy break-up!
We can do the same with banking.
We need to transfer ownership of account numbers and loan balances from banks to customers.
Technologically, it is no harder to do this than to export phone numbers.
It would be a wake-up call to big banks that their customer bases are not secure. Customers they have had for years could walk away with little more than an SMS message.
That is real power, and the Government needs to give it to consumers.
That is what will help those worrying that more rate rises will mean they can’t handle their already large debts on home loans and credit cards.
Joshua Gans is professor of economics at Melbourne Business School. He writes at economics.com.au
Core Economics 
I change from Bank X with my account number say 001 to Bank Y but Bank Y all ready has an account number 001 so how do you adjust for that?
Ask the Bank to rewrite their entire database?
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So you can’t transfer finds between banks now because someone has the same number? Doesn’t happen so not a problem.
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What a brilliant idea – this one of those ideas that is so simple and makes so much sense I wonder that I never thought of it before!
People should watch out for ‘deferred establishment fees’ too – basically a fancy name the fee you have to pay if you decide to refinance in the first few years…
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I recently approached both the Commonwealth Bank and the Bank of Queensland to change my two accounts and credit card from the NAB. My one condition to get my business was that they do the work transferring my regular payments and dividend receipts.
I am still not happy with the NAB but not that unhappy that its worth all the mail requests necessary to make the change. Unhappily, I am still with the NAB.
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It’s amazing what threatening emails or even better a rude phone call can achieve. Last month I threatened to take all my banking from the NAB. Every demand was granted: including a drop of 0.25% on the housing loan, no penalty fees at all, including overdraws on cheque accounts (in fact they will ring me up when a cheque is abotu to over-draw so I can transfer money) and no foreign currency fees.
It is just a matter of convincing them you will churn.
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Ahh! If life could be so simple. While technologically very simple, such a straight forward transfer is fraught with numerous problem.
Firstly, vees question should not be dismissed so easily. Account numbers never clash because there are BSB numbers to identify a bank. Take the BSB (logical conclusion of your proposal) and given the limited number of banks in Australia and the statistical probability of matching somebody elses account number when transferring increases exponentially.
Secondly, fraud. The ease of account transfer which you propose raises so many criminal opportunities that one’s motivations for this idea should be questioned. Imagine opening an account to launder money, change banks a couple of times then watch as law enforcement agencies stuggle through privacy issues to find out who has the money and where it is.
Finally, by making products generic in order to ease competition there will be little incentive to provide new products. This would lessen competition in the long run. Hardly the desired outcome.
Yes blu-k the idea is so simple and so obvious, and so are the reasons it has not happened. The fact that something is a hassle (changing banks) doesn’t make it a bad thing. The only way to solve these issues would be total deregulation. That in itself holds so many inherent risks that it is not viable. Yes the banks could do more and as more players are allowed in to the same market place, prices will come down.
The advent of Mortagage originators gave the people home loans cheaper than ever envisaged. Unfortunately the lack of oversight left us with our current problems.
Change and competition are good but, as they say, don’t throw the baby out with the bath water .
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