Australia’s leading banking journalist, the Financial Review’s Andrew Cornell, undertook a valiant, albeit flawed defence of banking exception fees yesterday. Cornell claimed that exception fees (which last year totalled almost $1.2 billion) were “necessary and the consumer advice groups and politicians such as (Family First’s) Steve Fielding would actually serve consumers better by giving them the material to manage their banking better.”
The Reserve Bank last week broke down the types of penalty fees charged by banks to Australian consumers. The fees included $415 million relating to credit cards (usually, for late repayments) and $490 million for breaching terms and conditions of deposit accounts.
Despite every Australian paying on average, more than $50 last year to banks for penalty fees, Cornell felt that such fees were actually a good thing for consumers, noting:
To charge for exceeded credit limits, non-payments or use of a rival’s infrastructure is actually in the interest of the general consumer because without such disincentives, those who do not contravene their banking arrangements cross-subsidise those who do, for whatever reason. Without them, all prices would be higher.
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Cornell’s arguments may hold a small degree of accuracy if the banks operated in a vaguely free market in which consumers had real choice in banking services. That is however, not the case. The vast majority of exception fees charged by banks would most likely be deemed illegal under common law on the basis that they do not represent an accurate reflection of the cost to the bank and the bargaining power between the parties is grossly unbalanced.
This is evidenced by the banks merely debiting penalty fees from a client’s account at its own discretion (some banking contracts even allow for financial institutions to charge whatever fees they see fit). This writer successfully sought and obtained a declaration from the Victorian Civil and Administrative Tribunal that so-called exception fees were unenforceable penalties and not permissible under common law principles.
In some cases, banks will charge customers of “over-limit” charge on a credit card (of upwards of $40) for exceeding their credit limit, by even $1. The customer is often unaware of the balance remaining and the transaction may often be an innocent mistake (further, most customers would rather not exceed their limit anyway, but rather, be told that they are over-limit and pay by some other method). When such an event occurs, Australian banks will charge a penalty fee which is in no way commensurate with the cost incurred by them as a result of the breach.
Similarly, banks will charge exception fees of more than $40 for a “late repayment”. The cost of those breaches to the bank has been estimated to be at far less than $1. Not only does the bank earn a windfall profit from the exception fee, but they are also able to collect interest charges of approximately 20 percent.
Despite Cornell’s contentions, bank penalty fees do not cross subsidise “good customers”, but rather, simply add to the Big Four’s bottom line. The bank fees were not in existence a decade ago, but rather materialized when banks realized they could charge such fees with virtual impunity. Banks use their oligopolistic power and legal expertise to enforce these likely illegal (and certainly immoral) fees on their largely unsophisticated customer base.
The increased profitability (helped largely by the billions being reaped from exception fees) has led to banking executives being among the highest paid workers in Australia. In 2008, CBA chief, Ralph Norris took home $8.6 million, Westpac CEO Gail Kelly earned $8.5 million while ANZ head, Mike Smith, earned $12.9 million last year (including a $9 million sign-on bonus). It appears that Cornell got it wrong — exception fees do not benefit “good customers”, but rather, line the pockets of bank executives.
Cornell also claimed that “Fielding’s stupidity, unfortunately, is repeated even by some in the financial media, who should at least have some idea and ability to comprehend the industry the report on. For a start, the price ‘charged’ for a service is not automatically a ‘gouge’ — sometimes it is the price.”
Sorry Andrew, but charging what is most likely illegal fees to unsophisticated consumers is not only a gouge, but a blatant misuse of market power in an industry already substantially subsidised by taxpayers through a deposit and wholesale funding guarantee.
There are few easier jobs then being a banking executive, especially when you have friends like the Financial Review.