Bank Fees Boom

Sydney Morning Herald

Wednesday September 5, 2007

By John Collett

Fees, fees and more fees. The banks love them and consumers hate them. But are bank fees too high?

An international study has found that while Australians pay high fees and receive low interest rates on standard bank accounts, they get a much better deal with their credit cards.

A typical median-income Australian family pays $222 a year for a transaction account. In Britain, the equivalent family pays $48.

Standard Australian transaction accounts are pricey but Australian consumers have some of the cheapest credit cards among the 11 developed countries covered in the study.

The study - The Price of Banking: An International Comparison, by research group Oxera - compares bank products in Britain, Australia, Canada, France, Finland, Germany, Ireland, Italy, the Netherlands, Sweden and the US.

It divides consumers into five groups - student, young professional, low-income family, median-income family and retirees - and compares the costs of each group's pattern of use across the 11 countries.

The study was commissioned by the British Bankers' Association and the data was collected last year.

Bank fees have come under the spotlight in Australia with the Senate to establish an inquiry into a proposed bill that aims to stop banks from charging too much in penalty fees.

These are the fees for breaking the banks' rules, such as being late with credit card payments and exceeding credit limits. (See box below).

SAVINGS ACCOUNTS

Penalty fees are the fastest-growing source of fees for Australian banks but the fees on deposit accounts cost consumers the most.

The Reserve Bank of Australia's bank fee survey, published in May this year, shows fees on deposit accounts were the largest component of banks' fee income from households. They make up more than 40 per cent, or $1.6 billion, of the total $4 billion in fees that flows into the banks' coffers annually.

The Australian Bankers' Association chief executive, David Bell, rejects the study's findings on transactions accounts. He says between 40 and 60 per cent of bank customers pay no fees on their bank accounts, such as those people who have a mortgage with the same bank and those low transactors with "basic" accounts.

Bell is sceptical about how accurately countries with different banking systems can be compared. The user-pay business model predominates in Australia, whereas in some other countries, such as Britain, banks tend to do more cross-subsidisation between their products.

TICK FOR CREDIT CARDS

The study found that Australian consumers, across all profiles, get a good deal on their credit cards. They were found not only to be cheap by international standards but Australia's average interest-free period of at least 35 days is in the middle group of the 11 countries. American consumers receive about 20 days' grace on interest, while in Finland consumers receive about 60 interest-fee days.

Interest rates on credit cards in Australia can be as high as 16 or 17 per cent a year, but once adjusted for the differences in the cash rate between countries to make comparisons fair, the study found that was not particularly high. That makes Australian credit cards relatively cheaper for those who pay only the minimum on their credit cards.

When it comes to personal loans, however, Australians pay more than most of the other 11 countries. Administration and establishment fees were also found to be among the highest of the countries surveyed. The study uses an APR, or annualised percentage rate, to make international comparisons. This takes into account interest payments and charges such as loan establishment fees and administration fees. The example used in the study was for an unsecured personal loan taken over two years.

Bell says the strength of the Australian system is that consumers have the choice of whether to take basic bank products or pay more to access products with more options. He says Australians pay total fees that are at the lower end of the scale in terms of international comparisons.

SHOP AROUND

Australian banks' fee revenue is increasing but the Reserve Bank's bank fee survey found most of the increase is coming from an increase in transactions and higher account numbers rather than increases in the level of fees.

Australians are accustomed to paying monthly account-keeping fees of a couple of dollars on their transaction accounts but it adds up to a lot of money, says Jeremy Ooi, a financial analyst with researcher Cannex.

He says it pays to shop around because there are now online accounts that cost less than standard accounts with much of the same functions as standard accounts.

Ooi says a good example of where competition has worked to consumers' advantage is the mortgage market. He says competition from non-bank lenders has forced the banks to lower their fees while the squeeze on their margins has resulted in lower mortgage interest rates for consumers.

For competition to be effective in lowering fees, however, consumers have to be aware of what they are paying.

The Oxera study said there is a lack of transparency in Australian bank fees.

The study said that while most fees are disclosed by Australian banks, "the complexity of their products and charging structures is not matched by clear explanations of when certain charges apply".

"Significant gaps" were found in the availability of information on charges and interest rates for bank accounts and personal loans, says the study.

Bell says: "Banks are required by law to disclose fees and charges and to make them transparent, which we do."

PENALISING THE FEE MAKERS

Penalty fees raise the hackles of consumers. They are charged up to $40 for being overdrawn on their account, exceeding credit card limits, being late with card payments and dishonouring cheques.

The Reserve Bank of Australia's fee survey showed that late payment fees on credit card accounts have risen from an average of $20 in 2001 to $31 last year. That is an increase of more than 50 per cent.

The bank said in its report that penalty fees are the fastest-growing source of fees for Australian banks. They are usually charged as a flat fee regardless of whether the account was overdrawn by $20 or $200. Penalty fees, or exception fees as the banks calls them, are a growing source of irritation for Australian consumers - but in Britain they have caused consumer outrage.

Penalty fees in Britain are charged at up to $150. British banks take more than $4 billion a year in penalty fees and the legality of the fees is being questioned.

In Canberra, senators are to hold an inquiry into a proposed law to stop lenders charging excessive penalty fees and only charge their cost recovery. The sponsor of the bill, Victorian Family First senator Steve Fielding, said last month that low-income families were hardest hit by penalty fees.

© 2007 Sydney Morning Herald

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