10 April 2007

Dikkii's financial tips #1: A brief history of bank fees


Welcome to Dikkii's financial tips.

This is a new series where I attempt to provide some sort of guidance to financial matters without breaching the Corporations Act by actually providing advice.

Today, we'll be looking at bank fees.

Now this blogger worked for 6 years at a major Australian bank. This is not meant to be an argument from authority, however, one of the things that I used to have to deal with from time to time was people whingeing about bank fees.

I still cop it from time to time, although not working for a bank anymore appears to work in my favour, as people no longer feel that they have to unload on me over the fees that banks charge. However, as soon as I open my mouth and mention that I've worked for a bank in the past, the gripes will, sooner or later, make themselves known.

And before I start, I'll let it be known that I am absolutely the last person that you should be complaining to about bank fees. I do not have any sympathy for you at all. More often than not, if you are complaining to me about bank fees, it's because you have not even bothered to put in the hard yards shopping around for a better deal.

So how do we get that elusive "better deal"?

Well, for that, let's take a brief look at bank fees. It's important to know your enemy, and bank fees fall into this broad category. How do they come about? How are they charged? How can they be avoided?

It is important at this point that I mention that it is impossible for me to cover off on all the different types of bank fees out there, but in the meantime, this is a brief history of bank fees.

A brief history of bank fees

The first thing that is obvious is that, unlike a lot of other things, when people talk about "the good old days" when Telstra's customer service was good, crime was non-existent, sex happened only on one's wedding night and drugs were what you got at the pharmacist after a visit to the doctor, this one is actually true:

There actually was a time where bank accounts didn't get charged account keeping fees and transaction fees.

Oh yes. Such a time existed.

In Australia, this was prior to the banking reforms that came about in the 1980s.

The theory, as it was at the time was this: you lent your money to the bank in the form of a savings account, and the bank lent it out afterwards to borrowers in the form of loans.

The bank charged a rate of interest on the loans, and from that it paid a smaller rate of interest on the savings account money. After administration costs, anything left over was profit in the hands of the bank.

This was what I'm calling the "cross-subsidisation model", and it was a very simplistic way of looking at the banking system. Essentially, the admin costs of depositors was subsidised by borrowers.

Now it should be patently obvious to even the biggest bank-hater out there that this was a grossly over-simplistic way of looking at banking. Not all depositors are savers.

Quite a few of them were "Transactors". A Transactor is one who puts money in, just to withdraw it soon after.

A great example, which this blogger saw lots of, were pension recipients. Often a lot of them would come in the day after their pension was credited to their accounts and withdraw all but a few cents.

And it's not just pension recipients, either. Some people just keep bank accounts open to receive their pay, or other moneys and will withdraw the lot soon after.

So this model fell down in that some depositors were essentially getting something for nothing, and borrowers were paying for this.

This blogger had a great conversation with a regular customer whom we'll call Mrs Jones which went like this:



Mrs Jones: "I've been waiting in that queue for twenty minutes."
Me: "Sorry, ma'am."
Narrator: Mrs Jones came in promptly every second Thursday to withdraw her pension payments. The pension payments would always be credited the day before.
Mrs Jones: "Not good enough. You're always busy when I come in. Why can't you get some more staff?"
Me: "The day after pension day is the busiest day of our fortnight. You don't think that it would be silly for the bank to get on a couple of part-timers once a fortnight?"
Mrs Jones: "No I don't. After all, we pay your wages."
Narrator: Words cannot describe the anger I felt at that point in time. She did not pay our wages, nor did any other Transactors receiving their pension payments in this way. I noted that she had an exemption for fees, too.
Me: "Here's your money, Mrs Jones. Have a nice day."
Mrs Jones: "You have no idea, do you?"


This all may seem a little trivial, but when you're working on the cash as I was for the first couple of years at the bank, this kind of ridiculousness grates after several thousand similar comments. And although this was many years after the fee-free banking utopia that many bank customers used to enjoy, the sentiment is still the same.

So de-regulation came into effect in the mid 1980s, and soon after that, the Commonwealth Bank, formerly owned by the federal government, was privatised. About this time, banks that were owned by state governments were also privatised.

Competition was allowed to take its course and bank fees started popping up on bank accounts, now that the banks didn't have to compete with state owned enterprises. Transaction accounts appeared that pay no interest whatsoever.

A shift had taken place. No longer were depositors considered to have lent money to banks - depositors were now considered to be using banks for secure money storage facilities. Banks now provided networks of ATMs for people to get money whenever they liked rather than toting wallets bulging with cash. Banks provided phone and internet facilities for customers to move cash around easily. And banks still (although the importance of this was decreasing) provided staffed cash handling facilities all around the country for customers to drop off and pick up cash and other requests.

This was reflected in the types of deposit products banks now offered. Banks' core offerings now included transaction accounts for easy access to cash. Higher interest accounts for serious savers. Cash management accounts for people who needed to move larger amounts of money around. And more.

Lending products were rewarded with lower rates of interest as banks competed with one another for the lending dollar. Offsetting this was a new raft of admin and, sometimes, transaction fees on lending products.

Complicating this was the fact that banks were now not just competing with other banks for borrowers. There was renewed competition from building societies, credit unions, mortgage funds and other non-bank lenders.

Banks responded by slashing interest rates some more, adding more features to their loans such as redraw facilities and offset accounts and bumping up admin costs generally.

Of course, they had to respond by then going in and raising fees higher still to compensate.

The general public were not pleased with this direction. To this day, the top rating current affairs shows are guaranteed to use a "bad bank fees" story for ratings mileage at least once every six months.

And while banks are still suffering from over 15 years of bad press over fees, and trying to repair the damage, most of the bad press comes from misconceptions about why fees are charged.

To their detriment, banks aren't a good case study in how to manage expectations. Banks have never made a good case with the general public as to why fees have gone up, or been introduced to begin with.

The following are 7 points that banks have failed to make clear to consumers:



  • Money doesn't manage itself. Unless you are sinking a large amount of money into an account for the small to medium term, you are not lending the bank a cent, except for accounting purposes. You are storing your money somewhere so you can access it later on. Which pre-empts points two and three.

  • ATMs and other access mechanisms don't magically materialise on their own. Banks have to pay for implementation and maintenance of these. If you are purely using a bank as a cash storage medium for immediate use, or in the short term, it is totally not unreasonable to expect to pay a fee for this.

  • Don't expect a decent rate of interest to be paid on accounts that, more often than not, have no money in there. Bank accounts with balances close to zero are a major administration drag on resources - they still require all the usual services such as statements, monitoring, the occasional bit of tax compliance etc.

  • Fees can be avoided. Yes, this is true. Banks do a pretty poor job of conveying this message, but the vast majority of fees that bank customers pay are completely avoidable. Most of them are charged on a user pays basis, with little extra bits if you request something unusual.

  • Expecting borrowers to cross-subsidise depositors' (and others') admin fees is completely unreasonable. I don't think that this point really warrants further discussion.

  • Bank shareholders aren't twee altruistic schmucks. They expect banks to be profitable, the evil bastards. Except the "evil bastards" are not just a small cartel of Monty Burns types closeted up in castles in the wilds of Transylvania. Thanks to compulsory superannuation, bank shareholders are effectively you and me and pretty much most of the Australian population. And, because we all expect our super funds to perform, we all, by logical extension, expect our bank shareholdings to do likewise.

  • Borrowers have it easy. Oh yes. I remember when I was young, the best interest rate that you could get on your savings was about 8 percentage points lower than the best interest rate borrowers could get a loan for. Now that gap is as small as 1 percentage point. In an environment like this, how could you not expect banks to seek alternative methods of remuneration?
And that is my brief history of bank fees.

In the next exciting installment, I'll tackle some of the fees that exist out there and look at ways that these can be reduced, if not avoided outright.

--
Dikkii's financial tips index

Standard but necessary disclaimer: This is not advice. Only a complete idiot would think that any of this constituted advice. It's not even vaguely reasonable to consider this to be advice. If you are in any doubt as to the content of this, see a good, independent financial adviser immediately. They do exist.

15 comments:

MichaelBains said...

Thanks for this angle, Dikkii.

I've learned and forgotten so much about the evo/devo of Banking, but I'll keep it personal here, and just say how much I appreciate MY local Bank. Ohio Savings Bank.

When I hit a rough financial stretch a couple years back, I talked with their HQ about the fact that I was likely to Overdraft with some frequency, but there was nothing I could figure to do to avoid that, and that I would always be able to cover those ODs within a day or two of their occurrence:

They understood and they stopped charging me the $35 fee ea time I overdrew my overdraft protection.

Yes. I pay them interest (2.5% the last I checked) on what amounts to a $500 credit limit for my Checking Account (transactor, since I live paycheck to paycheck. [It could always be worse...])

For about 7 or 8 months there, I was over that limit about once each month. The $35 didn't charge me was no bigger a deal to them then the 2.5% I paid in interest, but they didn't have to decline making me pay.

Now that's Personal Banking.

Guess they're figurin' that I may eventually get my act together (LMAO! Damn I hope so!) and wanna borrow money to buy a house. Seriously, but I'm still glad I found 'em. It's almost impossible for Bankers working for the MegaBanks like NatCity & BoA to make those kind of decisions for a single user.

Dikkii said...

For about 7 or 8 months there, I was over that limit about once each month. The $35 didn't charge me was no bigger a deal to them then the 2.5% I paid in interest, but they didn't have to decline making me pay.

Now that's Personal Banking.


That is one mighty cool bank you've got there, MB. There is absolutely no way that an Australian bank would do that unless you'd filed the necessary paperwork first.

Never let them go.

Einzige said...

Nice one! I hadn't thought of it this way before, but now that you've pointed it out it's painfully obvious.

Dikkii said...

Sadly, "painfully" appears to be the correct word.

ted said...

Very nice Dikkii...:)

Ok, so now I understand why fees are charged and it seems perfectly reasonable, but I'm going to take you to task this time and raise a couple of issues as I see it from my position of complete ignorance of all things banky and/or financial.

1. I have no choice but to pay bank fees if I'm not a saver.

My pay is now directly debited and it's been that way since just before everything got privatised. I can no longer draw a cheque (clearing... a whole other question I just don't understand.) or be paid in cash. Were it my choice and I was the type (as I used to be) that makes no attempt to save, I would take the money and to hell with the bank, which is simply not possible any more. That however, is probably not so much the banks fault as it is a product of a "cashless" society and deregulation. It still pisses me off though and I think the banks milk it just a little bit.

2. Record profits, year after year.

I don't have a problem with profit and records are made to be broken, there's no doubt, but to be broken as often as banks break them smacks of profiteering. I also don't think there's any doubt that fees contribute quite a bit to those profits.

Dikkii said...

G'day Ted,

You actually raised a number of points, not just the two that you think.

Allow me to address some of them:

1. I have no choice but to pay bank fees if I'm not a saver.

Au contraire, mon frere. In my next instalment, I hope to show that quite a lot of fees can be reduced if not avoided entirely.

This blogger isn't a saver, either, although he's currently trying to put together a bit so he can buy a guitar. But this is quite hard when the car requires some serious (and expensive) work done.

My pay is now directly debited and it's been that way since just before everything got privatised.

I hope that you meant "directly credited".

Otherwise you're in a far worse situation than you realise. :-)

I can no longer draw a cheque (clearing... a whole other question I just don't understand.) or be paid in cash.

Cheques require a whole future post. They're surprisingly complex arrangements. Bet you didn't know that.

Were it my choice and I was the type (as I used to be) that makes no attempt to save, I would take the money and to hell with the bank, which is simply not possible any more.

I miss the passing of cash a bit - but now I find cash inconvenient. Personal preference, though.

That however, is probably not so much the banks fault as it is a product of a "cashless" society and deregulation.

Actually, we've theoretically had a cashless society for years.

I may tackle the concept of "fiat" currency in a future blog post. Or I might not. It's really not that interesting.

It still pisses me off though and I think the banks milk it just a little bit.

Oh sure it does. And the banks certainly do. But, why shouldn't they? More on this below.

And my central point still stands - are you pissed off enough to shop around? Are you aware that, if banks upset you enough, that building societies and credit unions exist? And, if you (not saying you do) consider profit a dirty word, how about the fact that these institutions are not-for-profit organisations?

2. Record profits, year after year.

I don't have a problem with profit and records are made to be broken, there's no doubt, but to be broken as often as banks break them smacks of profiteering. I also don't think there's any doubt that fees contribute quite a bit to those profits.


Let's go back and look at fees just for a moment. Fees are charged for a service.

The company I work for charges its clients who are mainly major Australian superannuation funds fees for the services that they provide.

If we just broke even, our owners (who, and not co-incidentally, are mainly the same major Australian superannuation funds) would not be pleased one iota. We are expected to make some sort of profit on the fees that we charge.

I'm going to come back to your "record profit" line.

This is a typical example of the lazy hyperbole that the media likes to indulge in, in order to sell papers and generate ratings.

Let's look more closely at these so-called "record profits". If you put money in a bank account, and it generates compound interest, then assuming that you don't touch the funds, and interest rates remain unchanged for a number of years, haven't you just generated year after year of record profits? More importantly, would you consider yourself to be "profiteering" in any way?

In dollar terms, "record profits" is correct. And you would expect this consistently from banks. Compared to, say, for example, resources companies. Banks do generate largely consistent profits. Resources companies do not. If a bank was not generating bigger profits each year, there would, most likely, be a question mark over the prudential competence of that bank, particularly if its rivals were succeeding.

However, if we put banks in a broader context, such as in a stock market, we can see that banks' performance - which are proxies for these so-called "record profits" - largely mirrors the index. Compared to other companies over the last ten years, banks' performances have been, to put it honestly, mediocre.

Listed property trusts have done much better over this period. So have resources stocks. Overall. Even if their under-performing years are more common.

Compared to the index generally, banks have roughly trodden water.

Which means that in this context, you would have to say that banks have not only not been stellar performers, they have, in comparative terms, certainly not generated "record profits".

By the way, this is not advice.

ted said...

Dikkii: In my next instalment, I hope to show that quite a lot of fees can be reduced if not avoided entirely.

Electric or acoustic?

It's my guess (and experience) that you wont be able to do better than "quite a lot", if I'm a non-saver, which I try not to be these days.

I hope that you meant "directly credited".

Well I did say "complete ignorance", I'm sure. But yes, you know what I meant...:)

Cheques require a whole future post.

Possibly even a series. I have many questions...:)

why shouldn't they?

Milk it? As I said, profit is one thing, but milking it's another entirely. Candy from a babe... Legal perhaps, but seriously crass.

And my central point still stands - are you pissed off enough to shop around?

Yes, and it has yielded lower fees. But through no choice of my own, my money must go there and fees are paid. Yes, I have one account I don't tend to keep a minimum in.

that building societies and credit unions exist?

Yes indeedy, but now you're talking convenience, although that has improved quite a bit over the years. The last one we used however, introduced fees...

I can see your point about the record profits. But I guess that if they're going to hype up their profits for the benefit of a share price and share holders, then they need to expect ignoramuses like me to complain mightily.

They should pay you Dikkii, for explaining what they won't...:)

And no, it's not advice, it's education. Thanks...:)

Dikkii said...

G'day Ted:

Electric or acoustic?

I'm actually looking at an Epiphone Dot, which is an electro-acoustic. So my answer is "yes".

It's my guess (and experience) that you wont be able to do better than "quite a lot", if I'm a non-saver, which I try not to be these days.

You're quite right about not being able to save much when you're a non-saver. It really does take time to get to certain milestones, and then to lose all you have when you have to spend it is truly depressing. And on car repairs, too.

Milk it? As I said, profit is one thing, but milking it's another entirely. Candy from a babe... Legal perhaps, but seriously crass.

Not really sure about this. There actually is a lot of competition in the banking sector, which leads me to believe that things are as competitive as they're going to get. On the other hand, Australians are stupendously financially illiterate, so maybe there is scope for improvement and better deals.

And Australians are only going to get them if they shop around - if more people do this, then we will start to see action. I really hate apathy and inactivity here.

Yes, and it has yielded lower fees. But through no choice of my own, my money must go there and fees are paid. Yes, I have one account I don't tend to keep a minimum in.

No employer can make you use one bank over another. When I started working for a bank, they tried this one on me, but another guy in my training group pointed this out and they allowed him to get paid into an account with another institution.

Having said that, banks usually relax all fees for their employees, so it ceases to make any financial sense to keep one's accounts elsewhere.

Also, minimum account balances are a con. You can do better than this.

Yes indeedy, but now you're talking convenience, although that has improved quite a bit over the years. The last one we used however, introduced fees...

Convenience, eh? This is something I point out to people all the time - no matter how often I do, there is always someone who just doesn't get that a national network of ATMs and branches costs money.

Expect to pay for convenience. Convenience doesn't magically materialise.

Incidentally, quite a few credit unions are introducing fees, now. This is significant for a number of reasons:

- because credit unions are not-for-profits, it provides conclusive evidence that fees are necessary,

- therefore anyone who claims that banks and other institutions don't need to charge fees is now making an extraordinary claim, and

- the hypothesis that banks (and other financial institutions must charge fees has become the null hypothesis.

- It's also important that CU's are recognising the existence of the transactor. Previously, CU's treated savers and borrowers as if they were the only users of a CU. Financially this reflects a greater degree of sophistication that only stands to benefit members, generally (if not specifically, sorry transactors).

I can see your point about the record profits. But I guess that if they're going to hype up their profits for the benefit of a share price and share holders, then they need to expect ignoramuses like me to complain mightily.

Ted, I hate it when companies do this. And banks are as guilty as anyone else for doing this, too.

I wanted to go to a couple of AGMs last year and complain loudly about this practise with a couple of banks, given that they simply cannot trumpet the kinds of performance that they are, given that the ASX is still galloping along like a racehorse on crystal meth.

But it's only when us ignoramuses complain that anyone will take notice. The media on the other hand will selectively criticise bank's profitability.

And when it comes to financial journalism, the media will blindly accept any spin-doctoring that is given to them. The business sections of most media outlets (except maybe The Fin) are usually chronically under-resourced. But I'm not defending them.

They should pay you Dikkii, for explaining what they won't...:)

And no, it's not advice, it's education. Thanks...:)


Thanks Ted. *goes red*

It's nice to know that my opinions on this are appreciated.

ted said...

Well there you go. I was gonna tell you all about the Dot Studio (Rosewood finish, great action, sounds fantastic) that a mate of mine left at my place and wants me to sell. I wanna keep it and he's in New Zealand, so I'm curretly putting him off and playing it...:)

He paid about $900 for it about 6 months ago. I haven't heard from him for a bit, but email me if you want to talk turkey, as it were...

Now that you've set me straight on fees, here's a question to start you on cheques...:)

I pay you by cheque and you deposit it that same day. Next morning I check my account and the money is gone. You however, unless you've forked over some hard earned for a quick clearance, won't see my money for another 5 working days. Now, if I don't have it and you don't have it, where the bloody hell is it?

beepbeepitsme said...

I remember the days when banks didn't charge fees as I am an old fart.

I still think it is a travesty that banks charge people to take their own money out, but that is by the by.

If you look at the fine print, in some cases it is VERY fine print, it will say something like this - "All fees and charges are negotiable."

I have had a lovely time over the years telling various banks and financial institutions that if they don't negotiate away particular fees and charges, then I won't participate.

Nothing brouls my brain faster than being charged a fee for daring to remove some of my own money from the financial organization's clutches.

Even though fees and transactions are categorized as "negotiable" obviously there are varying degrees of negotiating power. What has happened in this system is that those who have less negotiating power (less money), have less chance at being able to negotiate the terms of their transactions.

Inevitably, the poor pay fees and the richer people avoid them.

Dikkii said...

G'day Ted.

I'll have to respond to your query about the guitar via email. Stay tuned.

As for cheques - your query about clearance days is the most common one I've heard yet, and I'll look at this when I get to my cheques feature. As I said, cheques are frustratingly arcane pieces of paper, and I'll need a full blog post in order to give them full justice.

G'day Beep, good to see you here.

You wrote:

If you look at the fine print, in some cases it is VERY fine print, it will say something like this - "All fees and charges are negotiable."

I have had a lovely time over the years telling various banks and financial institutions that if they don't negotiate away particular fees and charges, then I won't participate.


Heh heh, I bet they wanted to tell you exactly what you could do with your negotiations.

Seriously, this is just an angle that allows them to waive fees for certain clients. And by certain clients, I mean those who can afford to pay them. Which you alluded to when you wrote this:

Even though fees and transactions are categorized as "negotiable" obviously there are varying degrees of negotiating power. What has happened in this system is that those who have less negotiating power (less money), have less chance at being able to negotiate the terms of their transactions.

Inevitably, the poor pay fees and the richer people avoid them.


Could not agree more, and I put it to you that if enough people who pay fees shop around regularly and aren't afraid to do so, the banks would be forced to act to retain their market share.

I'll actually discuss fee negotiation in my next post on this - but be warned, negotiation is not something I believe very strongly in. I'll explain more later.

Thanks for dropping by, Beep.

Greg said...

On the "shopping around" front, I recall an industry seminar on CRM that I attended some years ago which featured some bloke from ING UK.

He claimed that their research shows that people change their spouse more often than their bank! I can't recall specific numbers, but it was something along the lines of "If you've ever been married, you'll have 1.4 spouses in your life. If you have a bank account, you'll have had a relationship with 1.1 banks".

Australian retail banking is simply not a competitive market. Poll the average punter and I'm sure you'd find that overwhelmingly people regard them all as equivalent in terms of fees and services, hence comparison shopping is pointless. This view is widespread, entrenched and lacks any empirical basis.

The industry encourages this through what is dubbed "the entanglement strategy". (The idea is to increase the switching costs through a bewildering array of unintegrated products and services - chequing, credit, transaction, mortgage, stocks, margin loans, super etc.)

Compare and contrast with, say, mobile phone selection or the ISP market or domestic flights. Actually, I'd wager that 90% of Australians spend more time and brain-power on shopping for a single pair of shoes than their life-long banking services supplier.

When you consider that those shoes might cost $50-$200, whereas lifetime banking costs are more like $5K-$15K, you realise there's a lot of irrationality going on here.

What to do? Nothing. I hope to consult to one or all of our banks one day and I would like to charge them a lot of money for the privilege. This will be easier if they have a lot of cash.

Dikkii said...

"If you've ever been married, you'll have 1.4 spouses in your life. If you have a bank account, you'll have had a relationship with 1.1 banks".

And that stat is truly a disgrace. Australians really need to shop around.

Australian retail banking is simply not a competitive market.

I'm going to accuse you of equivocating on the term "competitive market."

The reason being that banking is far more competitive than people realise.

Oh sure, people shop around for other stuff, but banks, just like your mobile phone example, do not offer a homogeneous product.

In fact, I'd say that picking your bank (or banks) is a lot like shopping for a mobile phone - you have to do some serious number crunching based on some fairly out-there assumptions.

And it's about as expensive as some of your cheaper mobile phone plans.

Poll the average punter and I'm sure you'd find that overwhelmingly people regard them all as equivalent in terms of fees and services, hence comparison shopping is pointless. This view is widespread, entrenched and lacks any empirical basis.

Which is why Australians get ripped off for bank fees year after year.

Bank products and fee structures are simply not homogeneous, and I'll be examining this in a future post.

The industry encourages this through what is dubbed "the entanglement strategy". (The idea is to increase the switching costs through a bewildering array of unintegrated products and services - chequing, credit, transaction, mortgage, stocks, margin loans, super etc.)

Yet this can be avoided. I'll cover this in a future post.

What to do? Nothing. I hope to consult to one or all of our banks one day and I would like to charge them a lot of money for the privilege. This will be easier if they have a lot of cash.

And why not?

May I suggest that you engage a remuneration consultant with experience in the banking sector? There are metaphorically rivers of money flowing to consultants.

Anonymous said...

Actually bank fees are much older than that. What you observed is that for a brief period of time, bank fees were out of style - then bank fees came back.

If you really want to cringe -- wait until banks start charging interest again. I do not mean interest on loans. I mean interest based on the amount of money you keep on account. If the world economy does not improve and governments start to get shaky that might even start matching the 10% rates of the European Dark Ages.

But honestly given the current economy I do expect the return of say 1/2% annual fee for keeping your money safe.

Dikkii said...

Very interesting, Anon. I didn't know that. I should point out, though that I'm not that old - I'm only in my thirties, and I didn't begin to work in banking until the mid-to-late nineties.

The 10% rates of the middle ages? It's almost reverse loan sharking. I'm pretty glad it's not around these days.

And I agree that in this low interest rate climate we may see bank fees rise. This is bound to make our treasurer and PM mad.