Business as usual won’t cut it
In the wake of the perfect storm exposed by the royal commission, we must fight for a better deal, says Louise Grimmer
AWEEK is a long time in politics. Unless you pointedly do not follow the news, you would be aware that on February 1, Commissioner Kenneth Hayne handed down the much-anticipated findings from the Banking Royal Commission.
The footage of Commissioner Hayne’s frosty demeanour as he handed over the report to Josh Frydenberg and his refusal to shake the Treasurer’s hand, or indeed to even smile for the cameras, was a rather symbolic end to the commission’s work. To say you could cut the air with a knife is putting it mildly.
The Government, originally opposed to the notion of any sort of inquiry into Australia’s banking sector, had just the weekend to digest the report and to craft an appropriate response to the recommendations.
The public release of the report on Monday last week was purposely held back to coincide with the end of the day’s stockmarket trading, such was the expectation that Commissioner Hayne’s recommendations would negatively impact the sharemarket.
However, banking stocks remained relatively steady and the Treasurer was left to prosecute the Government’s case that it had always supported a light being shone on the banking and finances sector. We’ve since learned of allegations the report was leaked, which may have resulted in the rather ordinary trading day.
For months the commission heard from those at the top level of the banking and financial services industry, and stories from individuals and small business owners affected by lending practices.
Under sustained questioning from the imperturbable Rowena Orr QC, witnesses from financial institutions squirmed, blustered and agonised their way through the evidence.
Having exposed bad banking practices, the report made 76 recommendations and 24 referrals to regulators ASIC and APRA over specific instances of misconduct.
With an election looming, it comes as little surprise the Government announced it agreed with all the reommendations.
There has been reporting, dissection and revelation, as well as calls for an inquiry into the supposed leaking. Most recently NAB’s chief executive and chairman resigned, with the latter acknowledged for behaviour during questioning which was inappropriate for such a forum. Indeed, the NAB was given particular attention in the commission’s report, no doubt contributing to the high-profile resignations.
What interests me as a marketing and consumer behaviour academic is the way limited competition and high consumer switching costs in the financial services industry have had such an insidious and far-reaching impact on individuals, families and small businesses across the country.
The fact that the banking and mortgage lending practices exposed have been tolerated for so long is astounding, but perhaps not unexpected when we consider what happens where there is little to no competition and when firms make it almost impossible to even consider finding an alternative provider. We ended up with the perfect storm that has been uncovered by the Royal Commission.
In markets with no or very limited competition, consumers are immediately at a disadvantage (think of the electricity market in Tasmania).
In the case of the banks, there is some competition to the big four offered by smaller banks and building societies, but many of the products such as loans and credit cards offered by small banks are often underwritten by their larger competitors.
The concept of switching costs is incredibly pertinent to banks misbehaving. When consumers are unhappy with products or services (let’s take the banks as our example), they usually have the option of switching to another provider.
But there are a number of costs, not just the obvious financial costs. There are psychological costs and the associated effort and time for consumers. In addition to cancellation fees, a switching cost can manifest in the form of time and effort as well as in concerns the replacement provider may not live up to expectations or offer a comparable alternative.
Those of us with a mortgage through one of the big four banks likely have a network of linked accounts, including credit cards, offset accounts and numerous direct debits. It can be confronting to try to disentangle our finances and move them to another bank.
We also have to spend time trying to find a better deal. In the case of the big four, there is very little difference between them. For many of us, just the
thought of sitting down and trying to work out how much we could save by switching our mortgage to another bank is an unattractive prospect.
High switching costs are the reason so many of us don’t switch banks (we just grumble about them instead) and why we probably won’t change banks in the wake of the royal commission – just too much bother.
This is what companies rely on – they make it incredibly difficult to switch to a competitor. Think about how challenging it is to change the brand of your phone, your private health insurer or NBN provider. Companies strive to make the costs of switching so high their customers wouldn’t dream of leaving and this allows the business to charge premium prices on products and services.
While these practices appear to render us helpless, especially when we add high switching costs to lack of competition in a relatively homogenous industry such as the banking industry, we need to remember purchase power still sits with the consumer.
Indeed, the outgoing chairman and the chief executive of NAB have implored customers not to take their business elsewhere.
Despite some commentary that the recommendations were a little lacklustre, it is now incumbent upon the banking sector, particularly the big four, to make significant changes to the way they treat their customers. Business as usual just won’t cut it any longer.