Reserve Bank board member Ian Harper said the banks’ $3 billion “loyalty tax” was neither illegal nor unusual, as economists and competition experts said customers only have themselves to blame for being ripped off.
Professor Harper disagreed with consumer groups who have urged the federal government to take regulatory action after The Australian Financial Review reported that the big four banks are reaping an estimated $3 billion a year by charging loyal customers higher rates than new customers.
“Price discrimination is not illegal,” said Professor Harper, who is also the dean of the Melbourne Business School. “Different people are prepared to pay different prices at particular times.”
He pointed to decades of price discrimination in every sector from airlines to hotel accommodation, and says the solution is for companies to be transparent and for consumers to shop around.
The root cause, particularly for home loans, is the inertia of loyal customers, which explains why Treasurer Josh Frydenberg and Australian Competition and Consumer Commission chairman Rod Sims keep urging customers to shop around – including proposing a marketing blitz to promote action.
Mr Sims has cited the so-called loyalty tax in pressing for an ACCC review into bank competition, suggesting that the the bank were disrespecting their loyal customers and that the longer a customer stayed with a bank “the more out of kilter it seems to become”.
Professor Harper led the Coalition government’s 2015 competition inquiry that recommended the ACCC be prevented from advocating “particular policy positions” because it could “undermine perceptions of its impartiality in enforcing competition law”.
In contrast to Mr Sims’ comments, Professor Harper said consumers were familiar with the practice for airline fares “where someone in the next seat can dig you in the ribs and say ‘I bet you paid more than I did for my seat’.”
Similarly, the current ad for hotel booking site Trivago plays off the widespread practice when the actress checking in is outraged after hearing the Trivago girl is paying less for the same room.
In addition to pushing back on the loyalty tax argument, the Reserve Bank board member cautioned the federal government against attacking bank profits at such a precarious point in the economic cycle. Labor has already opened the door to increasing the $6 billion bank levy.
While the big four banks reported a cash profit after tax of $14.5 billion for the first half of 2019, those profits were down 4 per cent after what some termed a horror year.
Professor Harper also pointed to the recent action by the European Central Bank to step in and protect bank profits because he says “we don’t want people putting their money into a safe or into a hole in the ground”.
“Other central banks are concerned,” he said, “and for good reason.”
‘You can’t pay people to switch’
Consumer activists such as Barefoot Investor Scott Pape have made a career out of successfully arming customers with scripts to call their bank and demand a better rate.
But Consumer Action Law Centre chief executive Gerard Brody wants the government and regulators to do more than just issue warnings.
“The Treasurer is telling people to shop around but if that is the only policy prescription the government have got, we will still be complaining about this in 20 years time,” he said.
Former Productivity Commission chairman Peter Harris has urged the Treasurer to act on the 34 recommendations in his report last year, including a best interest duty, rather than calling another inquiry.
Professor Harper favours improved transparency, so that consumers are armed with the right information to make their own decision. But even he admits that if it’s left in the hands of consumers, most people can’t be bothered acting.
“For a lot of people it is just too much of a hassle,” he said. “We constantly have people turn up at my door with a new energy offer and I say, ‘I’m sorry mate, I’m not interested, I’ve got better things to do’.”
In fact, the Victorian government has found you can’t even pay people to shop around.
It offered energy customers $50 to go onto their government-backed website to compare providers, but have had to extend the offer after estimates it had given away less than $14 million of its $48 million package.
Comparator website finder.com.au warns the problem is even more pronounced for credit cards and home loans than in energy.
While 18 per cent of people have switched mobile phone plans, 13 per cent have switched electricity providers and 10 per cent have switched broadband, only 8 per cent have switched credit cards and just 3 per cent home loans over the past six months. That is despite the mortgage topping the list of expenses which cause the most stress.
Further, 40 per cent of adults are still with their childhood bank, which suggests more than 7 million have never switched banks.
Little can be done
In contrast, the Australian Bankers Association proudly sung the findings of a Deloitte Access Economic report on Thursday, claiming 2.8 million customers switched banks for their home loan, credit card or transaction account last year and “competition is robust”.
Professor Harper said another important element of the equation was that banking is relational, not simply a transactional purchase based on price alone. “People often stay partly because of that relationship and history,” he said.
Competition law expert Geoff Carter agreed there was little that can be done under the current legal framework.
The Trade Practices Act did specifically prohibit price discrimination in relation to goods (but not services) before 1995, but several competition reviews concluded the prohibition did not benefit consumers or small business.
“Price discrimination is in fact an extremely common commercial practice and it would only be very unusual factual circumstances which would give rise to a valid misuse of market power or unconscionable conduct case,” he said.
A fresh inquiry?
But Mr Brody argued banking, like energy, was a special case and also supports as a minimum the duty proposed by Mr Harris. “The banks know it is very easy to tell people to shop around but much more difficult to do,” he said.
“It takes a lot of time, it’s confusing, the standard rates are not the rates people pay and so people tend to give up.”
He said former Treasurer Wayne Swan’s bank switching package of 2010 failed largely because it was too limited in scope, focusing only on transactional accounts.
He pointed instead to a widespread UK inquiry which has examined so-called loyalty penalties across insurance, banks, energy and telecommunications.
“For insurers they are considering whether to ban or restrict price increases for consumers who renew year on year, or automatically require them to move consumers to their cheapest deal, that could apply to mortgages here too.”
Mr Brody said the government should also consider a fresh inquiry or support a government-backed comparator website like the abandoned Grocery Choice or Fuel Watch, after the Productivity Commission also recommended public disclosure of actual mortgage rates.
In energy, the federal government went further and introduced a default offer, but Mr Sims said loyal customers were “paying ridiculous prices” and the case for a similar intervention against the banks was not yet made out.
“For airline fares, people know and can see that if you travel at an inconvenient time it will be cheaper, but for an essential service like a mortgage what is the justification?” Mr Brody asked.