Retail banking in Australia

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Retail banking in Australia

• Tim Moore

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Outline

• The nature of Australias banking system
• Fees and charges
• Accessing services and credit
• What does all of this mean for banking and
  advocacy

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1. Australias banking system
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Australian retail banking providers

• Authorised deposit-taking institutions
• Retail banks
• Major banks
• Regional banks
• Foreign banks
• Non-bank financial institutions (NBFIs)
• Credit unions
• Building societies

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Banking regulators

• Licensing and stability to regulation by the
  Australian Prudential Regulatory Authority (APRA)
• Took over from Reserve Bank of Australia
• ACCC
• Banking ombudsmen and ombudswomen

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Market dynamics

• Major banks have national coverage and dominate
  retail banking market
• Has led to an oligopoly a market where
• each major bank has market power
• can take account of each others (potential)
  actions
• There is non-price competition
• More competition in particular product areas
• Credit unions and building societies are seen as
  poor substitutes to banks (although not due to
  regulation)

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How do banks make profits?

• Revenue comes from two sources
• Fees and charges
• Interest margins
• the difference between the interest received from
  borrowers and the interest given to depositors
  (or other sources of funds)
• Many of the costs are fixed/scalable
• Profits go to ASX shareholders

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2. Why have fees and charges been increasing
significantly?
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Interest margins have decreased

• Pre-1970s
• It was not possible to receive interest on
  deposits in call accounts (for trading banks)
• But deposits were needed to provide loans
• As a result, there were few fees and high levels
  of servicing (cross-subsidisation)

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Interest margins have decreased

• Then
• Capped and then unrestricted interest allowed
• Alternative sources of money for loans were
  allowed (securitisation market)
• Non-banks allowed to provide loans and also had
  access to the securitisation market
• Banks had to decrease interest margins

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The outcome

• Banks cut costs and charged fees
• Common regulatory response
• If the fees reflect the marginal costs of
  providing the service then that is a good thing
  (also occurring in telecommunications, etc.)
• Limits cross-subsidisation and improves
  efficiency gains greater than losses
• However, it does work against equity and there is
  not much consideration of the distribution of the
  gains and losses

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3. Accessing financial services and credit
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Branch closures

• Net decrease since 1993
• reduction from 7,064 to 4,712 in 2001
• Areas have become branch-less
• 600 towns without a bank branch (1998)
• 106 localities became branch-less between 1981
  and 1998

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Possible reasons to close branches

• Increased competition
• More substitutes to branches
• Decreased importance placed on branches by
  customers
• Demographic changes
• An increase in returns required from branches

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And when you close branches

• Noise not transformed into action
• Financial services are necessary
• Anecdotally, majority of business stays with the
  bank
• Customers likely to leave are least profitable
• Other banks are doing the same thing (non-price
  competition)

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Why is it a problem?

• Transaction costs of accessing alternative
  services greatest for poorest/ least educated
• Travelling elsewhere
• Learning about internet/phone banking
• Having computer, car, etc.
• Done when branches still provide significant
  benefits to community
• But no way to reflect that in the market

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Community banking

• Several characteristics make it more viable
• People who invest locally in exchange for
  benefits of branches rather than return
• Some customer coordination and loyalty
• Voluntary board lowers costs
• Bendigo Bank growing its network
• Still have to deal with broader market changes
  and forces in financial services

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A word about access to credit

• Similar issues, except credit risk and
  information becomes important to banks
• Least well off have greatest risk and lowest
  amount of information (and least profitable)
• Can lead to extra costs or discrimination
• Only credit cards, etc., or
• Can only deal with non-bank lenders
• Hard to know which it is

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4. Banking and advocacy
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Banks are hard to regulate

• Often a fear that regulation will ration credit
  and limit economic growth
• What constitutes minimum services or reasonable
  profits is debatable
• Politically strong
• Self-regulation often okay

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Implications for advocacy

• Some actions such as severing customer
  relationship present no problem at all
• Australian Bankers Assoc. is important
• Working with financial service providers seems
  possible way forward
• Non-price competition creates opportunities
• Can make it more attractive lowering costs/
  risks, coordinating customers