More on switching

The Treasurer seems to be interested in making the banking sector more competitive. In today’s Canberra Times, Peter Martin claims that banks could hardly object to the free market being made able to work. Actually, I’m sure they will. Here are the likely claims:

1. “It isn’t technically possible”: this is unlikely to be true. Phone companies said the same about number portability and let’s face it, there were all manner of difficulties that needed to be overcome there and it was done and it works well. We already have interconnected bank transfers which rely on your BSB and account numbers. The BSB operates like a ‘call prefix’ (you know the 0414) and like the case with phones could be part of the account number a customer can own. What is more, as bank transfers are ‘low bandwidth’ and ‘non-continuous,’ the porting issues that faced phone companies are simply not there.

2. “The market is competitive anyway”: they will argue that there are lots of banks and providers, so we don’t need this. Maybe. But if the market is competitive, this won’t hurt. A risk-adjusted approach would ask us to ensure the fundamentals support competition even if there are other mechanisms that will assist. Indeed, a better objection would be “the market isn’t competitive anyway.” In this case, there is no reason to reduce switching costs because there is no one to switch to. Fortunately, that line is neither true nor likely to be made.

3. “There are prudential issues”: this is a bank’s objection to regulation just as utilities react against regulation because it will reduce investment returns and discourage innovation. When you hear ‘prudential’ issues, translate that to, “this will reduce profitability.” To which I say, that is the point. No one wants to see banks go under, but if it is allowing consumers the right to use competitive forces that will cause bankrupcy then there are bigger problems with the banking sector to contend with than retail customer mobility. It would also indicate that retail customers are cross-subsidising, other more risky parts of bank operations. That neither seems fair nor efficient.

4. “There will be privacy concerns”: you know this will be raised as an objection. There are privacy concerns now. Owning a bank number won’t change that but it will allow you to choose banks more easily based on their security record.

5. “Mortgages will have fees because you need to verify borrower riskiness”: While it is true that banks need to know that people they lend money too can repay their loans, when switching providers, this doesn’t seem clear at all. Perhaps this is where the government could help by setting up independent verification processes or something like it to ensure such things occur at cost. I don’t have all the answers here but to throw up our hands and say it is impossible just because it is a little more difficult is giving up way too easily. In any case, even if there are great costs here, where is the 25 year fixed interest mortgage as seen in the US that provides incentives for maximal competition upfront even if there is no switching later on?

3 thoughts on “More on switching”

  1. I agree completely. I’ve done lots of competetion work and expert testimony in large Trade Practice cases and I believe the banks exhibit many signs of low competitiveness. Firstly, the banks adjust rates together like the petrol company oligopoly adjusts prices (not by explicit collusion but by moving in unison). Secondly, fees have increased across the board over a decade, in more-or-less unison, implying a cosy oligopoly, where no party really wants to ‘fight’ for market share. Thirdly, the lock-ins including exit fees are high in comparison with other ‘subscription industries’ such as PayTV, Phone, Satellite services etc. Fourth, the complete lack of a long-term fixed-rate contract option is only because the banks have seen no need to build a longer-term fixed market…. yet some customers would clearly avail themselves of such an option were it available as is the case overseas. Finally, returns and salaries within the sector confirm that it is not on a knife-edge – it is more ‘status quo’ than being forced to adapt each year or face extinction.
    Account number portability would achieve a lot, and so would independent third-party verification measures as proposed, to allow easy churning. And to think that earlier governments toyed with the idea of dropping a ‘four pillars policy’ in favour of having just two large banks!
    Graeme (prof at-symbol


  2. 5. is addressed by APRs; and if you’re going to tear away exit fees, you really ought to symmetrically leave entry fees in place – it’s not like you can’t shop around for lower entry fees.

    6. “Security concerns”, where someone steals your bank account. But the whole opening a new account requires 100-point proof of identity, so that’s no argument.


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