In the Sydney Morning Herald today, an article looking at the issue of bank switching costs. It argues that the government moves last year to make it easier for people to switch banks has been unsuccessful as evidenced by a lack of take-up.
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Despite widespread outrage about mortgage rate increases and the introduction of direct charging of ATM fees, a spokeswoman for the NAB told the Herald only two customers a week had used the “listing and switching” service since it was launched in November.
The chief executive of the Australian Bankers Association, David Bell, also told the Herald that uptake of the service had been very low.
The Government said last year it would inject competition into the banking sector by helping customers “vote with their feet”.
The scheme is a very limited one — allowing customers a list of direct debits and some help re-organising those. But when it comes down to it, that still takes time and paperwork. So it isn’t surprising that there is limited use of what doesn’t look like a very valuable service.
Instead, we need to think larger.
A professor at the Melbourne Business School, Joshua Gans, has called for all bank account numbers to be made portable, like mobile phone numbers, to enable people to switch easily. “The problem is this is not a piecemeal policy issue. This requires a lot of major changes to do it. It does require some serious investment and legislation to be passed.”
There are all manner of estimates as to the cost of this but our experience in telecommunications — an industry with much greater challenges than banking — was that the costs were exagerrated by an order of magnitude and implementation occurred in a timely fashion. The problem is that we also need to deal with switching of accounts in debit (e.g., mortgages) in order to make this work. I don’t have time in this post to outline how that could be done but I think there are mechanisms that could be deployed there too.
That said, the measure of success of any system to reduce switching costs is not how many people use it. Indeed, in principle, the existence of the service is all that is required and by facilitating competition — in particular, to retain customers — it will promote the social good. What we, in fact, want is for consumers to have the option of switching easily so that when they complain to banks about terms and conditions banks will adjust those terms and conditions to stop them from leaving.
Instead, the measure of success is an improvement in competition. And that is where the system is currently not effective. With news that the major banks command major market share and now major profit margins post-GFC, surely the pressure on the government to do something meaningful about bank competition should be on the cards. Resting on the laurels of a functional financial system relative to the mess the rest of the world is in, is simply no excuse.