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