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COUNCIL ON THE AGEING (AUSTRALIA)
Submission to the Prices Surveillance Authority Inquiry into
Fees and Charges imposed by Banks and other Financial Institutions
Councils on the Ageing in Australia exist to protect and promote the well-being of all older people.
ISBN: 0 85560 063 2
March 1995
Council on the Ageing (Australia) welcomes the opportunity to make a submission to the Prices Surveillance Authority Inquiry into Fees and Charges imposed on Retail Transaction Accounts by Banks and other Financial Institutions.
"Retail transaction accounts are accounts operated by personal customers into which funds are deposited and against which withdrawals are permitted from time to time, as distinct from being fully withdrawn after a set period. Interest may or may not be payable on these accounts. Such accounts include cheque, savings and credit card accounts where debits may be made against cash balances, cash management accounts and deeming accounts. They do not include term deposits, Christmas club accounts... nor...foreign currency accounts of accounts where a minimum initial balance of $250,000 or more is required." (PSA 1995, p.1)
Council on the Ageing (Australia) is a non-profit organisation that began with the Older People's Welfare Councils in 1951 and is recognised by the Commonwealth Government as a peak body representing the interests of Australians in the 50+ age group.
COTAs in all States and Territories have received letters, telephone calls and visits from many individual and organisational members expressing concern and outrage about the fees, charges and services of financial institutions, and in particular, banks. A press release issued on January 11, 1995 in response to announcements of charges on small accounts (Attachment 1) received wide media coverage.
The Issues Paper identifies many issues and invites participants to address any, or all, of them. It also encourages participants to raise any other issues believed relevant without being constrained to the ones discussed in the paper.
As an independent organisation run for and by older people, our submission will address principally Sections 5.7 Consumer concerns and 5.8 Social responsibilities, particularly related to banks.
Financial institutions as service providers should offer choice and diversity of service, and be responsive to the needs of their customers. Australian banks at present act like unresponsive bureaucracies; Hugh Mackay's comment in 1988 is still true: "they seem less interested in their customers as people: money is a personal matter, but banks are increasingly treating it in an impersonal way" (Mackay 1988). Banks do not act as if they realise that people over 60 represent 16% of the population and that the next wave of older banking consumers will be better educated and influenced by the consumer movement. They will be more demanding of service providers and expect better treatment from financial institutions. The banking industry lags behind overseas counterparts in targeting its services to an older market and could well take steps to understand and better communicate with older customers.
Councils on the Ageing have identified concerns raised by older people that relate to fees and charges as follows.
These are convenient, efficient and secure technological advances with considerable benefits for many people. They have generally been received with enthusiasm after an educative process. However there are some significant issues.
Section 5.7.8 To what extent have banks and other financial institutions, in adopting electronic banking such as ATMs and EFTPOS, overlooked the importance of human contact between banks and their customers? How can a balance between these two aspects best be achieved in a competitive environment where institutions need to maximise their efficiency to ensure their profitability?
Most people believe that banks have a social role, a notion that COTA (A) supports. Supriya Singh's research highlights the importance of consumer contact with bank branches, which represent the physical and personal dimensions of money. "The majority of Australians continue to transact with the bank via the bank branch"; " the more personal the relationship with the bank, the more satisfactory it is seen to be"(Singh 1994 p.14; 42). "An important rationale behind the banks' enormous investment in technology was that it would reduce transaction costs by replacing over the counter transactions and paper-based payments. This was based on the stereotype of the sophisticated consumer who is banking literate and comfortable with machines. It also misjudged the special needs of consumers in relation to money, for in dealing with a bank a customer is dealing with her or his money." (Singh 1994 p.14)
Older people in particular prefer to use counter services and receive the support and assistance of employees on a one-to-one basis, for reasons detailed below. Passbook savings accounts are popular with older people as a means of control by keeping up-to-date-records. It is much more difficult to do this using the records of electronic transactions.
Over the counter service fees which are designed to oblige customers to use electronic banking services discriminate against older people and others who cannot or do not wish to use the technology of ATMs, for the following reasons:
Older people are among groups considered technologically disadvantaged; there is a role for education by both financial institutions and consumer organisations to allay such fears and advise customers of the advantages of electronic transactions, encompassed in a later recommendation.
n where over-the counter fees apply there are exemptions for people with disabilities.
While not an issue addressed in the issues paper on fees and charges, COTA believes that the location, design and accessibility of bank branches and ATMs are important issues for older people and those who prefer counter services to electronic options.
EFTPOS has been promoted by fee-charging banks as a free way to withdraw money, but recently retailers have introduced EFTPOS withdrawal fees, particularly in remote locations which are already disadvantaged by limited bank facilities. With no bank policies in place on EFTPOS charges (The Australian, 7 March 1995) it would seem that consumers will again be subjected to unforeseen charges following electronic innovation.
COTA (A) commends the widespread availability of direct deposit bill-paying facilities offered by financial institutions.
These include transaction fees, account keeping or maintenance charges, fees for dishonoured cheques, bill paying facilities, overdrawn accounts, and government imposed credit and debit charges.
Banks have shifted to user-pays in seeking to cover the costs of transactions. Fees are structured to encourage customers to choose the lowest-cost way of transacting and to make fewer, larger transations. The Australian Financial Review pointed out (Jan 20, 1995) that 70% of bank savings accounts have balances of less than $500, contain less than 5% of total deposits, but account for at least 60% of total transactions. It should however be pointed out that little or no interest is paid on these accounts. It is recognised that "explicit pricing of financial services tends to hit low and middle income consumers most" (Mitchell 1990 p14), over one and a half million aged pensioners for example being among them.
Maintenance fees on small accounts are a particular case in point. New charges to take effect from March 1, 1995 were announced by the Savings Bank of NSW of $2.50 per month on accounts under $500, with no exemptions for pensioners, people with disabilities or students; and by the Commonwealth Bank of $2.00 monthly account keeping fee for new savings accounts under $500 plus a fee of $1.50 per over-the-counter (OTC) transaction after the first six. Current pensioner holders are exempt, however there is no equity involved by imposing charges on new pensioner customers.
The major arguments about the justification or otherwise of fees and charges seem to revolve around the electronic funds transfer of pensions and the issues of cross-subsidisation of banking fees by high bank margins. These will be addressed in turn with regard to the issue of social responsibilities highlighted as Section 5.8 Social Responsibilities in the Issues Paper.
Electronic funds transfer of pensions (EFT)
Section 5.7.11 Are social security recipients exempt from account maintenance and transaction fees? Should they be, to the extent that they are required by the Government to have an account for the payment of benefits?,
Social security recipients are required to have an account with a financial institution for receipt of pensions, sent as files by the Reserve Bank. In justifying fees on these accounts the Australian Bankers' Association and the Commonwealth Bank have argued that this money is not available to banks until Friday but they are meeting cash withdrawals on Thursday (pension day) at their own expense; that pensioners receive interest on the money from Thursday (Wednesday in the case of the Commonwealth); that they receive no compensation from the Commonwealth Government for handling pensions which was previously done by post; and that this handling poses management problems for some branches.
COTA (A) argues that all parties - the Department of Social Security, pensioners, and banks -benefit from EFT in no longer bearing the costs of cheque transactions, of lost cheques, of fraud, and in the case of pensioners, reported fears of robbery. COTA (A) also argued in its press release of January 11 1995 that financial institutions in this financial year will receive $19 billion in pensions, available for use until drawn. While financial institutions argue that they pay out from Thursday, they have not disputed COTA (A)'s claim that they do indeed have access to the balance. Direct depositing makes pensioners dependent on banks so it is critical that there is a range of services available at no added cost to them.
Section 5.7.13 Do consumers confuse fees and charges imposed by FIs with financial institutions duty (FID) and bank accounts debit tax (BAD)? How important, in dollar terms, are these government imposed charges for recipients of social security payments relative to fees and charges?
COTA (A) does not have accurate information to answer the questions posed but believes confusion does exist which would be addressed with clearer information, and advice from institutions on which accounts absorb FID and BAD, and how BAD, which applies only to withdrawals made from accounts with a cheque facility, may be avoided by using accounts without a chequebook.
Recipients of social security and veteran pensions are exempt from FID on pension payments made by electronic funds transfer. An editorial in the Australian Financial Review (8 March 1995, p.16) "...FID and the way in which State Governments impose it on all deposits, even those made by people receiving social security" is misleading by not pointing this out.
The Commonwealth Bank has called for reduction in FID and BAD but COTA (A) does not believe that governments with their current deficit reduction programs are likely to reduce state-collected taxes.
Cross-subsidisation
Section 5.45 To what extent is the cost of transactions 'subsidised' by other bank activities or do the fees charged 'subsidise' other activities? If the latter, which activities and how much?
Financial institutions argue that they cannot cross-subsidise but have not been forthcoming on details on cross-subsidisation. In fact, we understand the industry in past inquiries has provided evidence in confidence. Older consumers without such information are left to draw their own (perhaps cynical) conclusions.
Banks frequently cite the Reserve Bank report titled International Comparison of Bank Margins, Aug 1994, saying that high bank (interest) margins in Australia have been used to cross-subsidise banking fees (ie non-interest income) which are lower than in comparable economies, and arguing that a competitive environment dictates against doing this.
Even if account holders with low balances and high transaction frequency do pay lower fees in Australia, COTA (A) does not accept that raising fees is justified while net interest margins in Australia remain among the highest in comparable economies, as the same report also pointed out. The Economist (18 February 1995) identifies Australia as having the second highest real interest rates in the OECD. Older people find increased fees are particularly hard to accept when it is considered that profits from retail banking, underpinned by increases in interest rate spreads, have been used to subsidise poor performance in overseas ventures and losses from incompetent commercial lending.
The Westpac bank fee experiment in the Newcastle-Hunter Valley region lends credence to perhaps not such a cynical view as that held by a Parliamentary Committee in Canada (Mitchell 1990) that banks charge customers whatever they think they can get away with.
Increased bank charges have not been accompanied by a better interest deal for the retail consumer, despite the fact that since deregulation the retail consumer is contributing more in interest and non-interest income to bank margins and profits (Singh 1990).
Other areas of concern have been variable, high fees for handling dishonoured cheques and increased charges for bank cheques, for example $3.50 up to $5.00 by the Commonwealth Bank of Australia.
COTA (A) concurs with the Prices Surveillance Authority's "aim of the Inquiry ...to help build community understanding of the current pricing arrangements" (PSA p.6). COTA argues that it is essential that the information gained be made public, to redress the imbalance of information between financial institutions and individual consumers, and to enable consumers and their representatives be better informed for making meaningful contributions to the debate.
COTA (A) believes that it is not in the public interest to accede to the wishes of some financial institutions to give evidence in camera.
A major concern expressed by consumers is the need for provision of relevant, accurate information, and indeed many of the concerns discussed in this submission would be addressed by greater efforts towards more extensive disclosure of comprehensible information.
All Australians need information to do their banking. As Singh notes (Singh 1992), the role of information, the way it is presented and distributed in a deregulated financial market, and consumer processing of information, have not been important regulatory or consumer concerns until recently - there are few publicly available studies as to how Australians obtain information to make financial choices. Deregulation was intended to provide consumers with more choice and more information to permit them to make informed choices - this has not been the case - service standards are seen to have declined and costs of banking increased. Research shows that despite the increase in the number of banking products and services, choices have changed rather than increased, particularly considering branch closures. Customers, as they did before deregulation, still use different financial institutions and accounts as physical separators of different kinds of money (Singh 1994). The advent of changing products and services, and the pricing of them, requires consumers to make complex choices for which they are ill-prepared. Recent studies (Singh 1992, 1994; Thomas & Mohr 1993) document these issues and shows that consumers typically do not have sufficient information to know their choices, let alone select the best ones.
Neither economic efficiency nor social justice is possible without informed consumers.
With reference to section 5.7.4 Are the provisions of the Banking Code of Practice adequate to ensure that all the information consumers need to make informed decisions is disclosed to them? What specific changes, if any, should be made (eg to enhance the ability of customers to make comparisons), The Banking Code of Practice provides for disclosure of terms and conditions relating to accounts held or being considered by a customer, but better access to information is needed before choices are made. The Code does not address how information is to be given other than saying it should be made available. Banks answer customer questions at the inquiry counter, but just as customers may not know what questions to ask, banks do not ask the right questions of their customers.
Many older people have money in accounts which are not paying the best rates of interest and are unaware of better options. This is particularly true of deeming products - a study in 1993 (Thomas & Mohr 1993) showed that less than 30% of older people in the study took advantage of deeming accounts paying higher rates of interest. There are discriminatory barriers to the availability of deeming accounts for non-pensioner retirees in some banks, namely the Advance, ANZ, Commonwealth, and Westpac, sometimes stemming from false information about the deeming legislation held by the institution concerned (Quill 1995).
Staff should draw attention to these options rather than leaving the onus on the customer to be informed. Ideally customers would approach a financial institution with a list of individual requirements rather than ask for a range of brochures which the customer must then analyse.
Current information is usually produced in a advertising and promotional context, making it difficult to glean the factual information.
Increasingly there are charges for information such as additional statement details, or for details which are now only available from head offices instead of bank branches.
Less than 20% of older people in a recent study were aware of avenues that exist to solve complaints (Thomas & Mohr 1993) and consumer surveys confirm COTA experience that there are many complaints. The issue of older people, among others, guaranteeing loans for other people is also a concern which has been recognised by the Australian Banking Industry Ombudsman. The extent of the anger over the recent Westpac experiment highlights the need for more open and less secret dealings with consumers.
The problem of communication for people of non-English speaking background (NESB) is particularly severe for older people. Nearly half the older NESB women and a third of older NESB men cannot speak English well or at all (Hugo, cited in Singh 1992 p.6).
There is further scope for funding consumer organisations to provide comparative information and advice to assist consumers to make choices, as for example the Australian Pensioners' and Superannuants' Federation has done (APSF 1993).
For communication of information to be successful, training is needed.
Information is one element of service, others are staff attitude and efficiency. Service is cited by consumer surveys as of primary importance in choosing a financial institution but is rated poorly, particularly for the four big banks (Healy 1989, Thomas & Mohr 1993, Australian Consumers Association 1994). Many older people complain of discourteous service, referring at an individual level to tellers or managers. They also point to improvements in speed and efficiency. Singh's research led her to conclude that "every story of bank satisfaction is a story of personal interaction" (Singh 1994 p.42). Considering that banks feel their real competitive edge lies in service it would seem good business to redress the emphasis on cost and access in favour of extending personalised service and satisfaction of customer needs to the market at large as well as to private clients with substantial accounts.
Section 5.8.1 For what reasons might it be argued that banks have a social responsibility to provide retail transaction accounts to customers at low or subsidised cost? Should this responsibility be open-ended as to the number of accounts and transactions? Should it extend to other services, and if so, which ones? Should it extend to all customers or only specific customer groups such as social security recipients, low income groups etc.
COTA (A) commends the widening of the Inquiry to include debate on the issue of social responsibilities, and supports the notion that banks have a responsibility as part of their community service obligations to offer basic retail transaction accounts to all customers at low or subsidised cost.
COTA (A) recognises the conflicts with banks' stated missions to maximise shareholder benefits, but argues that choice is increasingly limited to institutions geared towards profit maximisation. As stated above, direct deposits make pensioners dependent on financial institutions, and the trend to explicit pricing of banking services tends to hit low and middle income consumers most, in effect disenfranchising them from full participation in the economy. As the ACT Minister for Consumer Affairs, Terry Connolly said - "The pursuit of record profits does not justify targeting the less well-off consumers". COTA (A) believes that it is important to offer a basic service universally for reasons of choice and equity, both among institutions and customers. Targeting only low income Australians would have the effect of further marginalising them in the banking sector. Higher income earners would be unlikely to limit their choice to a basic service.
COTA (A) agrees with the statement made by peak consumer organisations at a meeting on 19 February with the federal Minister for Consumer Affairs that essential consumer services should not be subsidised by government.
It should however be a responsibility of the Commonwealth Government to ensure that all sectors of the community have access to banking services.
Who subsidises who is subject to claim and counter claim by governments and the financial institutions. It would be in all parties' interests to cease using consumers as the pawns in the war of cost-shifting rhetoric. COTA (A) is reluctant to recommend statutory measures ie legislation to ensure access to basic banking, but it certainly will not happen if left to market forces, and is unlikely to happen if left to banks, judging by the following reported comments: A. Cullen of the Australian Bankers' Association - "pricing polices should not be dictated by social issues" (Age 11 Jan 1995 p.2); D. Argus, Managing Director of National Australia Bank - "banks' functions are to provide efficient intermediation between savers and investors, not to redistribute wealth - that is an issue for government..." (Financial Review 27 Feb 1995 p.32); D. Mercer, Managing Director of the ANZ, who at least acknowledges the social role of banks - "we have a social role but are not part of the welfare system" (Australian 21-22 Jan 1995 p.8).
Banking is an essential service. Social justice and equity are important community values and stated Commonwealth objectives. Consumers should be assured of equity of access to a basic retail banking account without fees and charges, and an array of financial services at reasonable cost. Banks have a responsibility as part of the community service obligations of business organisations to offer these.
Effective choice is limited by the many fees and charges and by imperfections in the provision of accurate consumer-friendly information.
Information that is timely, accurate, comprehensive, in easy to use formats and in plain English and community languages is necessary for consumers to exercise effective choice in comparing products. Upfront disclosure of the terms and conditions on which services are offered is necessary to redress the imbalance of information between financial institutions and customers.
Seeing banking from the users' perspective is an essential part of effective policy formulation. Policy makers and bankers have a different conception of money as an "undifferentiated, impersonal commodity to be bought and sold in the market for the best monetary return" (Singh 1994 p.i). To consumers within the domestic sphere it is personal and private, hence the major measure of satisfaction with their financial institutions is measured by the quality of personal relationship. Consumers need to be aware that they are buying products from a bank or any other financial institution, and to consider the bank as a commercial vendor as well as service provider.
It is important that consumers and representative organisations work with financial institutions to find ways to meet consumer concerns. Council on the Ageing (Australia) welcomes any opportunity to assist in this process.
Prepared by Helen Scott
March 1995
Copyright © 1997 Council on the Ageing.
All rights reserved.
Revised: 30 May 2002
COTA National Seniors Policy Secretariat [formerly Council
on the Ageing (Australia)
Level 2, 3 Bowen Crescent, Melbourne Vic 3004
Tel (03) 9820 2655 Fax (03) 9820 9886
email cota@cota.org.au