How your bank is punishing you
AUSTRALIANS are punished for their loyalty to banks by being offered higher interest rates than new customers, according to a damning assessment.
The Australian Government Productivity Commission report into our financial system, released today, has found that "loyal customers are ripe for exploitation" by financial institutions due to the dizzying array of confusing products on offer, many of which are essentially the same.
While the banking system is stable and customers have generally high levels of satisfaction with it, the report found that competition had not led to better deals for consumers.
"Customer loyalty is often unrewarded with existing customers kept on high margin products that boost institution profits," the commission writes in its draft report.
"For this to persist, channels for provision of information and advice (such as mortgage brokers) must be failing."
The report found that customers tended not to switch banks, especially when they had a home loan, because they found it "too much hassle" and because they want to keep all their accounts with the same institution.
"Barriers to switching can make loyal customers ripe for exploitation," the report found.
"The Reserve Bank of Australia reports that the variable interest rate of existing home loan customers average around 0.3 to 0.4 percentage points higher than rates on new home loans.
"These higher rates are paid by around 15 per cent of existing customers and equate to an extra $66 to $87 per month on the average home loan balance."
The market has also been flooded with new products and repackaged old ones that "sometimes have only marginal differences between them". For example, there are nearly 4000 different home loans and 250 credit cards on offer in a country where the Big Four banks still dominate lending.
"The need to decide between a large number of options makes product comparisons difficult and leads to choice overload," the report states.
The report said that "reasonable competition" existed only in markets where it cost little to have multiple versions of similar products, such as transaction accounts or credit cards.
The Productivity Commission says customers are not being given good enough information and advice, and it lays much of the blame at the feet of mortgage brokers, who arrange more than half of all home loans.
"Unlike in wealth management, mortgage brokers are not obliged by law to act in the best interests of the customer," the report states.
"And an important source of advice subsequent to the transaction is compromised, as trailing commissions encourage broker loyalty to the financial institution, not the customer.
"While enabling ready comparisons between a selection of home loan providers and reducing consumer search costs, mortgage brokers do not consistently get lower home loan interest rates for consumers than would be available to the consumer by going directly to the provider."
The report also found that prices of comparable banking products on offer by rival institutions tended to "converge", meaning it was harder for customers to find better deals.
The commission also concluded that consumers had lost their market power to shareholders, in whose interests publicly listed companies are obliged to act.
"This means that [financial institutions] are motivated to keep prices high in order to deliver profits that are in line with market expectations," the report states.
While the report noted that market concentration was very high in the banks, it said external regulatory factors, such as the Reserve Bank setting the cash rate, were also to blame.