… both sounding like one and government policy. Usual scenario: (1) RBA changes interest rates, (2) banks immediate react but don’t do the same thing — almost always passing on less or, apparently, taking more — (3) Treasurer says consumers should use their feet and switch banks; (4) consumers work out that is costly; (5) journalists call me to so I can be quoted saying the same thing; (6) nothing gets done. Today’s step (5) journalist is Peter Martin.
The problem with bank switching costs is that to minimise them likely requires all banks to implement common standards, technologies and maybe even some new financial products that would enable this. The latter would be, say, mortgage products whereby there is an underlying secured stream of income from the mortgage but when a customer switches, they switch the front end or residual holder of the variable stream of returns as interest rates vary. In each case, it is likely to be better if either (i) the government mandates a right to switch, thereby, forcing banks to work something out or (ii) provides that means of switching themselves. The latter is a structural intervention into the market, not unlike the competition-enhancing policy behind the NBN, that will allow switching to be cheaply implemented. The costs could then be recovered through, say, stamp duty on the loans. Wow, stamp duty actually used to provide something related to the industry rather than a revenue grab from government. How radical is that?