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.