How easy is it to switch banks?

The Treasurer has publicly admonished ANZ over its larger than expected interest rate rise. He urged customers to switch. That is all very well but how is easy is it to switch? And does it make a difference anyway?

It is hard to tell whether a rate rise is “justified” (on the basis of costs or whatever). But there are issues in the market that don’t give us assurances that ANZ or other banks are responding in a competitive way. By this I don’t mean the number of them (more than 4 is pretty good in Australian markets) but the switching costs that are present in current arrangements.

If you have a mortgage with ANZ, switching means reapplying for a loan elsewhere and then going through the large task of changing account numbers, direct debits, etc. If you don’t have a mortgage you still face those latter costs. For a fraction of a percent lower interest rates right now, is either worth the hassle? What is to stop the next bank from doing the same on the next round of interest rate increases? A rational consumer could easily consider sticking with what they have currently got the best options; and that is precisely what banks know when they are thinking of raising interest rates by a higher than expected amount.

In telecommunications, we recognised that switching costs were a barrier to effective competition and introduced things like number portability to reduce these. We surely need to consider a similar treatment in banking. Account numbers are as important as phone numbers these days. And like our phone numbers, surely it is consumers and not banks who should own them.

10 thoughts on “How easy is it to switch banks?”

  1. Account portability is exactly the right issue to be concentrating on.

    But you’re spot on again when you say the switching decision is brutal. A consumer is forced to make a decision about the next 10 or so years of behaviour by several different, hugely complex and non-transparent entities.

    At least in theory, consumers even need to consider the potential solvency of banks when making their choice. Our system of prudential supervision leaves bank customers open to losses in a bank collapse – although in practicve the Reserve Bank has worked hard to ensure this never happens. Will the NAB open itself to a greater danger of collapse by not raising rates further than it has?

    I’m not saying that the prudential supervision system has struck the wrong balance. But as you point out, Josh, the notion of consumer choice is a little ludicrous.

    Like

  2. There’s also a not insignificant financial cost in switching mortgages, with stamp duty on the mortgage potentially running to thousands of dollars, and the potential of loan application fees.

    Like

  3. Couldn’t agree more. I just switched banks and even though I don’t have a mortgage it was a real pain. Even changing my direct debit details with the charities I donate to was time consuming.

    Like

  4. it’s both a practical and a financial pain in the *(&*. Exit costs on any fixed part of the mortgage (entered into after the spate of rises last year), application fees, stamp duty, and no guarantee of rates staying lower with the new bank.

    My broker suggested new products with The Rock (Qld) or BankSA (I think), where you can fix the whole lot and also have 100% offset account. But of course, they have lovely commissions so I didn’t believe the hype…

    Having said that, I’ve left the ANZ once before in disgust. What’s needed is massive consumer pressure. But Aussies are generally too apathetic, individualistic and selfish to band together to force change.

    The other option is a tattslotto ticket and paying out the (&*&(*& mortgage in full.

    Sigh. So young, so cynical.

    Like

  5. Hear hear! The transactional costs are massive and there is no from the retailers to allow greater portability. Surely that is something the government could regulate.

    Like

  6. A neat idea. So to switch accounts you would just sign a form effecting the transfer and things like direct debit arrangements would go to the new bank.

    I assume overdraft arrangements and loans have set up fees that reduce portability and I’ll bet the banks would resist competition in these areas.

    Like

  7. Please, you talk about apathy, and then complain about the painful process… I switched from St George to Members Equity… no, it was not easy, but the break-out cost on a variable rate loan was generally one month’s repayment. Compared to the savings I was making, it was quickly recouped, and I have saved thousands since, s their rates are at least .50% lower than the major banks, if not more. The stamp duty is not in the thousands (hundreds maybe) and I kept my St George account and make my repayments from there. Yes, there are new fees but this is less than $100 a year, and again, I am still saving thousands.
    Please, take stronger action rather than complaining about the hassle. It is this apathy the banks trade on… and profit from.

    Like

  8. At least in theory, consumers even need to consider the potential solvency of banks when making their choice. Our system of prudential supervision leaves bank customers open to losses in a bank collapse – although in practice the Reserve Bank has worked hard to ensure this never happens. Will the NAB open itself to a greater danger of collapse by not raising rates further than it has?

    Depositors are vulnerable to a bank collapse. Borrowers aren’t, at least in the way I understand it.

    Let’s say the unthinkable happens and the NAB goes under. I’ve been paying my mortgage on time, every month, so my mortgage represents a big asset to the bank. Presumably then, the mortgage would be sold on to some other bank.

    If I’ve got a variable home loan rate, the person who bought my loan could then, theoretically, jack up the rate a lot. But if they put the rate up too much, I can refinance – and if reforms such as the ones discussed here are put in place, the inconvenience will be even less than it is now!

    One limitation on easy mortgage and credit card portability, I suppose, is that each bank presumably has their own procedures for calculating creditworthiness. So there would be costs involved in that, regardless of the other conveniences involved.

    Like

  9. Sounds like an opportunity for a “virtual” bank. For a small annual fee you sign up and get issued with the usual BSB and account numbers, but these simply redirect to a real BSB and account number.
    You give out your virtual details for all EFT transactions, and if you want to change banks you just alter the redirection info.

    Like

Comments are closed.

%d bloggers like this: