Wallis's Winners And Losers
Sydney Morning Herald
Friday April 11, 1997
Despite what the Treasurer promises, consumers won't be outright winners in the latest banking shake-up, writes PAUL CLEARY .
JUST over a year ago, the major banks had a stranglehold on the home mortgage market and profit margins were among the highest in the world. Then, suddenly, the banking cartel collapsed when new competition emerged with the right formula that combined the toll-free telephone, smart advertising and cheap funds from the money markets.
Tangible benefits materialised when the major banks began to hurt. The new players made deep inroads into the major banks' most profitable business, and mortgage rates came down by 1.5 percentage points (on top of the official Reserve Bank cuts).
When launching the Wallis report this week, the Treasurer, Peter Costello, said the rise of the new lenders in 1996 was a watershed in the history of Australian banking. The Wallis report, Costello said, exposed the banks for sitting on mortgage profit margins that were "high" and "always were high" by world standards.
The new players, "mortgage originators" such as Aussie Home Loans, turned the humble home borrower into a consumer king. It's this success story that Costello wants to replicate across the financial system. It's the model he needs to demonstrate that real consumer benefits will flow from revamping the financial system.
In a pithy statement on the consumer benefits to flow from Wallis, Costello said: "I hope that consumers get more choice and lower prices. This is all about increased competition, more choice, lower prices."
But there is ample evidence in the Wallis report to suggest that ordinary bank customers stand to lose in a big way in the looming financial shake-up.
Consumers are being asked to make big sacrifices in personal privacy in the name of efficiency, and they will have to pay more for basic bank transactions that are now heavily subsidised. The report acknowledges the downside for low-income earners, but this is addressed in just one small paragraph of the rambling 771-page tome. Wallis says the Government should look at "low-cost transaction services" for social security recipients. Presumably, other low-income earners who do not receive benefits will simply have to pay more.
Stan Wallis's blueprint for future banking will be a boon for borrowers, as is shown by the experience of the past 12 months, but the flipside is that low-income people who rely on banks for bread-and-butter services will have to pay for the full cost of banking services.
Wallis urged an end to so-called cross-subsidisation of basic transaction services. This is where banks have subsidised the cost of transaction services by charging relatively higher margins on their loans. The report makes a clear link between the end of cross-subsidies and higher or more extensive bank fees. On the same page of the report on cross-subsidies, it says financial institutions should be "free to set fees and charges for retail, financial and transaction services based generally on the cost of provision of those services, without government intervention or suasion". It recommends open slather on bank fees, despite its admission that the system remains uncompetitive.
Costello confirmed this week that the Government had no intention of using the consumer watchdog, the Australian Consumer and Competition Commission (ACCC), to monitor and report on the level of bank fees. He said competition from new entrants and new technology would not only prevent fees from rising but would work to bring them down.
Electronic banking could offer these transactions in the future at a fraction of the cost of bank branch services. This may well ameliorate the costs. But this benefit will come at the expense of large-scale rationalisation of the bank branch network, with the loss of tens of thousands of jobs. The Wallis blueprint also envisages the entry of new players into the payments system.
But proof that fees are likely to rise in this bank revolution can be found in a study produced last year by the Reserve Bank, "The Future of the Financial System".
It says banks will be "unable to compete" while subsidising payments which their new competitors do not offer. The existing fee structure recovers only a small fraction of the cost of these transaction services.
The National Australia Bank said in its submission to the inquiry that banks recovered little more than 10 per cent of the cost of retail transaction services from fees, compared with about 20 per cent in New Zealand and more than 70 per cent on some accounts in the United States and Canada.
The user-payers downside of Wallis is one that will hit the consumers in their pockets, but a less tangible though potentially more pervasive impact on consumers is the recommendations on privacy. Wallis says that privacy concerns are a major issue among ordinary consumers - but then paves the way for large scale "data mining" of consumer credit information.
It proposes steps to introduce the highly contentious "positive reporting" for consumer credit records and the dismantling of safeguards on information sharing within financial institutions.
Wallis says technology will increase the capacity of financial institutions to "generate information about individuals", and that this information is of "significant commercial value" to the industry.
The report acknowledges that polls by the Privacy Commissioner show that "individuals are placing increasing importance on maintaining the confidentiality of their personal information".
But the right to privacy is "not absolute" - even the Privacy Commissioner acknowledges this. "There are other interests that need to be balanced against the claim to privacy," the report says.
It endorses "positive reporting" and recommends a working party to examine the restrictions which prevent the adoption of "world best practice" in credit assessment. It says the "economic loss" should be evaluated against the extent to which "privacy is impaired by their removal".
Australia relies only on negative reporting of credit delinquencies for credit records. Positive reporting involves the use of information on everyday banking transactions to assess someone's credit record.
The report says it may help consumers obtain finance more readily, but it also quotes a Mastercard International study which says consumers are "generally most concerned if organisations had access to information relating to their finances, particularly information about everyday banking transactions".
If the Government introduces the main thrust of the report, as expected, the changes will be so cathartic that identifying winners and losers will take some time.
© 1997 Sydney Morning Herald