Banking Review

Fee crackdown should drive innovation

They’ve done it in the UK, it’s headed to Australia, and they’re debating it in the US. Cracking down on bank penalty fees is all the rage in the developed world, as legislators ponder the fallout from GFC-induced industry consolidation.

Reduced penalty fees from Australia’s major banks came into force this month, although customers will have to read the fine print, as not all fees have been abolished by all banks.

When NAB became the first Australian bank to pre-empt new unfair contract terms and drop penalty fees entirely in July, it chose to give up $100 million a year in revenue. It was an acknowledgement from the bank that the days of dumb profits are over.

In the US, a market where banks will collect an estimated US$27 billion in 2009 on overdraft fees alone, Bank of America is facing a reshuffle of its business in the face of reduced fees. Last month it eliminated fees on overdrafts below US$10, a move which has many analysts asking: Where will the fees move to?

Locally, NABs competitors have been busy tweaking fees, but there’s not a marked difference between any of the major banks. Collectively Australia’s four major banks hold around 75% of all retail deposits, so any moves to reduce fees can have a significant impact on the overall market.

In the US the three largest banks hold a little less than a third of retail deposits, yet some analysts are still calling for the largest banks to be broken up into smaller entities. There’s also the likelihood that proposed legislation requiring banking giants to hold proportionately larger capital reserves could force them to break up. The plan has been called a “tax on size”.

With Australian banks running significantly more profitable operations than their US counterparts, there have been few calls from those in power for the banks to be broken up. Why try and fix something that isn’t broken?

But global pressure on banks to justify fees, combined with scrutiny on competition from policymakers, ultimately mean the business model for financial services must change. The margin on deposits is currently razor thin for many banks, so bankers will need to innovate if they are to find new ways to deliver the kind of value the customer of the future will be willing to pay for.

Customers, not regulation, will determine the fate of our banking industry. What do you think?