By Effie Zahos,
, December 2010
Interest rate gaps, exit fees - they got everyone excited in 2010 and will continue to do so in 2011.
The big four made a big effort to remind homeowners that the cash rate had little to do with the cost of their funding.
So when the Commonwealth Bank lifted interest rates by almost twice as much as the Reserve Bank did on Melbourne Cup Day 2010, homeowners, now being educated on the matter, would understand. Not so!
Westpac may have got away with increasing its home loan rates by more than the official rate hike back in December 2009, but you can put that down to good timing.
For the Commonwealth Bank the timing couldn’t have been worse. The big four were hitting record profits and federal Shadow Treasurer Joe Hockey had only just put the need for greater banking competition back on the political agenda. He wasted no time repeating his message many times on TV.
Homeowners may be baffled about why the Commonwealth needed to raise rates more than the Reserve Bank in the same year that it announced a record $6.1 billion profit, but some good has actually come out of what federal Treasurer Wayne Swan has described as a "cynical cash grab".
Major reforms are now facing the banking industry. The fact there were delays and differences between the major banks announcing their rate movements suggests there is competition between them.
ANZ waited eight days before it announced a 0.39 percent rate hike. NAB announced a 0.43 percent hike two days after ANZ. Westpac’s announcement of a 0.35 percent jump came just hours after NAB’s - putting it in number one spot as the bank with the highest standard variable rate of the big four.
ANZ softened its news by packaging the rate hike with a special discounted fixed rate mortgage package but, more surprisingly, both ANZ and NAB abolished its exit fees.
This was a great PR move given the Australian Securities and Investments Commission (ASIC) has only recently laid out new guidelines on what banks can charge home loan customers when they switch to rival lenders.
In addition to exit fees, other reforms consumers can expect to see revolve around portability, such as allowing home loan account numbers to be made portable, thereby making it easier for borrowers to change banks. Then there are calls for parliament to regulate how banks increase interest rates.
The big four would say there are a number of misconceptions consumers have regarding the cost of funding. Put simply, the official cash rate plays some part in lenders determining rates, but it’s no longer the sole factor by which lenders price their deposit or loan rates (see breakout Rising Cost Claims).
Of course political leaders and consumer groups say there’s no justification for rate rises out of step with any Reserve Bank moves.
The fact is bank profits are now pretty close to being back to pre-GFC levels. Tight credit funding pushed out a lot of their competitors during the GFC, yet they’re still crying poor.
John Khall, chief executive of Pacific Mortgage Group, Money’s non-bank gold winner for Cheapest Home Loan for the second year running (see page 100), believes the big four have become a financial system within themselves.
Khall believes non-banks will return to pre-GFC levels, where they were an alternative to major banks.
"The federal government must aim for this to happen," he says. "2010 saw a slight increase in the number of borrowers going back to non-banks. It’s a good sign that consumers are starting to realise there are alternatives."
Canstar CEO Andrew Spicer agrees that competition is definitely returning, but he believes strong entrepreneurs rather than regulation is what the industry needs.
"It’s easy to jump on the regulation bandwagon but do we really want to go back to the days when the banks were heavily regulated?" he says. "Back then credit rationing was the norm, home loan margins were over 4 percent and there was no way you could even get a home loan if you didn’t have a 30 percent deposit."
If ASIC were to put a blanket ban on all exit fees, the very thing consumers believe would add to competition could destroy it.
Exit fees typically apply if you repay or refinance your loan within the first five years.
A report on exit fees by the ASIC found Aussies pay nearly five times more to switch their lender than homeowners in the US and Britain. That same report identified that while the average early termination fees sat around the $1000 mark for banks, non-banks did charge the most. Banks introduced exit fees after non-banks began charging what they called deferred establishment fees.
Non-banks figured that because they didn’t charge an upfront fee and in general a considerably cheaper interest rate - you’d have to pay a package fee of around $400 with a major bank to get a rate equal to what most non-banks charged - they were entitled to charge a 'deferred establishment' fee if you left within three to five years.
Put a straight out ban on all early mortgage exit fees and you could remove the very thing that helps makes non-banks competitive.
This is something that the regulators will have to get a grip on - lose exit fees and we may just lose competition.
While most of the headlines in late 2010 were on mortgage interest rates, let’s not forget that in this rising interest environment, cashed-up savers were rubbing their hands with glee.
"Competition in the savings market is healthy," says Canstar’s deposit product specialist, Adam Beu. "Although most of the competition emanates from the promotional rates, as base rates remain close to the official cash rate. Switched-on consumers can take advantage of these promo rates; however this requires significant effort to keep chasing the higher rates."
It remains to be seen whether the banks pass on the rates in both areas of their savings products - base and promotional rates.
Steven Munchenberg, chief executive of the Australian Bankers' Association, believes while there is no doubt that the global financial crisis has meant there is less choice, this doesn’t equate with a lack of competition.
"There is clear evidence of competition in Australia’s banking system," he says. "In the past two years, banks have slashed, or removed altogether, a range of unpopular fees, such as late payment and overdrawn account fees, as they fight for customers’ business.
For borrowers, banks are also offering a range of rates on mortgages and for savers, attractive rates on term deposit and online accounts."
Research outfit Core Date principal Andrew Inwood believes there is potential for a serous challenge in the industry to come from the credit unions and building societies.
"They have started to understand that their business is not limited to the branch offering that they already have."
These awards support what Munchenberg and Inwood say. While there is no substitute for doing your own homework - as individual situations vary widely and what suits one does not suit another - these awards do help with well with researched information so consumers can improve their financial dealings.
"Best of the Best Awards traverse the maze of financial products out there and this helps the consumer make a shopping list of products to follow up on," says Canstar’s Spicer.
Home loan winners
On the home loan front NAB and Newcastle Permanent Building Society were stars, picking up gold in both the Cheapest Package Home Loan and Cheapest Flexible Home Loan category (see page 98 and 102 of the magazine).
"Newcastle Permanent has really emerged as a market leader of premium home loan products both against their mutual peers and other major institutions," says Canstar’s mortgage specialist Mitchell Watson.
"And NAB’s decision to follow the RBA movements was a win for borrowers and themselves as it has made their products competitive."
Watson believes new players in the market such as Yellow Brick Road, Hemisphere Financial and LJ Hooker in 2010 will be a springboard for competition in 2011. "This new competition is already having a positive effect on the home loan market."
As for savings accounts, Bankwest and UBank were the star performers. This comes as no surprise to Core Date’s Inwood. "What this year will be most remembered for is the fracturing of the brands," he says.
'Fracturing' is where banks start to launch new brands to enter into markets they didn’t have or into market types that traditionally didn’t use them.
Inwood says UBank was the first example of an Australian bank launching a new brand to attack a market segment - adding good service, a simple product and a great rate to what was perceived to be a secure brand.
It’s a move that has proved to be a success and it would be reasonable to expect other banks to follow suit. "In part this brand fracturing would be driving the developments of the next few years in banking," he says.
Apart from ANZ, Inwood says all of the Australian banks essentially are running two brands - one which represents security and one which acts as a challenger brand. The Commonwealth has Bankwest, Westpac has St George and NAB has UBank.
Spicer of Canstar says Bankwest continues to be a price leader despite its merger with the Commonwealth Bank.
"Mergers always raise concerns about reduced competition but these results show that Bankwest has certainly not strayed from its path of offering top-value products to consumers, and this commitment can only be a good thing."
As for credit cards the contactless payment movements continued to gain momentum. There are more and more merchants with compatible card readers and more compatible cards in consumers’ wallets.
"Commonwealth Bank is ahead of their release schedule, hitting the 15,000 active reader mark mid-year and aiming for 20,000 by the end of the year," says Canstar’s credit card specialist, Peter Arnold. "There are also some key players, such as 7-Eleven, on board which will help increase consumer awareness, which is paramount to the success of contactless payments."
2010 also saw some interesting new movements in the frequent flyer space. With Virgin Money’s re-entry to the market came the Virgin Flyer card, and Woolworths released the Everyday Rewards Qantas card. Add this to the Jetstar cards released last year, and you have plenty of new options to earn flights.
As for what consumers can expect in 2011: "The balance transfer market may also look much different this time next year," says Arnold. There are already significantly fewer 0 percent balance transfer deals on offer compared to a few years ago, with institutions cautious about chasing unsecured debt post-GFC.
If we see widespread improvements in how repayments are allocated, following NAB’s lead (see page 108 of the magazine), 0 percent balance transfer deals will become much more expensive for institutions to provide.
For consumers who have been battling credit card debt for a while, now is the time to take advantage of a low-interest balance transfer deal - as long as you do not make any more purchases until the balance transfer is paid off in full.
For more on your banking, see Money Best of the Best 2011. Out now.
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