By Chow Wei-Cheng
We are witnessing most brazen bank robbery of them all. The top four banks this year alone will reap a massive $5.2 billion in profits from customers and workers. Yet they are crying poor and introducing schemes to increase the scale of the robbery.
"It seems almost everyone loves to hate banks — government and small depositors, anyway. They are outraged over the level of banking fees while shareholders are smiling in the proverbial way as share prices keep rising and dividends keep increasing and the bank sector looks set for another huge year following record profits in 1994." This was how Australian Business Monthly introduced a cover story which went on to praise bank chief executive officers for the sterling job they had done.
Public outrage over bank fees has forced the Prices Surveillance Authority (which has no power except to make recommendations) to undertake an inquiry into banking practices.
The PSA has indicated that it will recommend that a "basic bank account" be available for the community at the bank's expense when it releases its report on June 19. This would have no account keeping fee, a fixed number of free transactions per month, a minimum cash withdrawal of $40 and interest paid at the bank's discretion.
Greed
Don Mercer, the chief executive officer of ANZ, was almost apoplectic at the thought. "The federal government should keep out of transactions between banks and customers ... compulsory basic banking is almost an insult ... I cannot believe it — a free service is an extraordinary idea!"
The Commonwealth Bank, once called the "People's Bank", in its submission to the PSA inquiry, stated: "the bank does not have, nor has it ever had, Community Service Obligations".
The big four banks (NAB, ANZ, CBA and Westpac) have been unanimous in their rejection of the basic banking service. They argue that if those who use the service don't pay, then other customers will be paying for them. This cross-subsidisation is fundamentally unfair. But even if it were true that banks lose money on their smaller accounts, it wouldn't follow that other customers would have to subsidise them: the subsidy could come out of the banks' huge profits.
The banks also argue that they should aim for cost cutting and efficiency, and that this will provide customers with a cheaper product.
Banks have certainly cut costs and increased efficiency. They will continue to reduce operating costs: the big four plan to sack 2500 workers over the next couple of years. The productivity increases and decreased staff numbers have reduced operating costs on average around 4% over last year.
In this same year, bank fee income has risen. Customers still have not seen that "cheaper product".
Cost cutting, larger fee revenue, plus wider interest margins (the difference between the interest earned by banks from lending and the interest paid by banks, for example to deposit accounts), and a decrease in bad debts have led to the massive 75% increase in pre-tax profits from 1993 to 1994.
Banks have been one of the most profitable sectors in the stock market. The graph shows how bank share prices have outperformed the All Ordinaries Index. The NAB, Australia's most profitable bank, is ranked as the ninth best investment in the world by the Morgan Stanley Banking Index.
In fact, the banks are so profitable that analysts have identified a potential problem — "over-capitalisation".
The surplus capital of the big four alone is estimated to be around $8 billion. These vast sums are sitting on their balance sheets not being utilised because there is nowhere to profitably invest them, unless they can take over another bank like BankSA.
The Reserve Bank of Australia has already given tacit approval for banks to increase their fees. The RBA believes this should offset any narrowing in interest margins as interest rates fall. The interest paid to depositors is not likely to decrease as much — my Westpac account pays me 1.25% interest (less than inflation), so there's not much further it can fall.
Interest margins are also set to decrease due to more competition from non-bank financial institutions such as building societies and credit unions, as well as from foreign banks, especially on the corporate lending side. Insurance companies are also moving into mortgaging, further undercutting the banks' core business.
Analysts at CS First Boston estimate that the banking industry will generate an extra $500 million in fees by 1997.
Two classes
Management consultants to the banks have been making a great living lately out of dividing the customers into "value creators" and "value diluters" — that is, customers who are profitable and those who are not. They are trying to find ways to get rid of those of us who are "value diluters" — or make us pay more.
Value diluters have small account balances and a large number of transactions. The bank's strategy is to get rid of the bottom 20% of value diluters (and target the top 20%). The bottom 20% typically comprise welfare recipients.
Westpac was the first with its notorious "Newcastle experiment" in November 1994. Westpac increased transaction fees three-fold on accounts in the Hunter and Newcastle regions without notifying its customers. The aim was to test the limits of consumer resistance to bank charges. Nineteen per cent of customers closed their accounts.
Bank fees have forced many out of banks, and credit unions have received a 55% increase in customers since November 1994, when the publicity around fees began.
The problem is that everyone needs an account today. Will we reach a situation where low income earners and pensioners are denied access to the payments systems? Australia could be heading down the same road as the US, where whole communities are sidelined, left without a single branch in their neighbourhood, and residents are forced to use one of the mushrooming cheque cashing outlets, which charge 5% of the value of the cheque to convert it into cash.
The CBA has suggested a government transaction card related to the Department of Social Security. The DSS would identify recipients and take back any interest earned on balances. This would also give the government and DSS enormous powers to monitor the cash flows of recipients.
It has also been suggested the government (as in the US) pay the banks the fees in place of the customers. That way the banks' profits would not be hurt and the basic bank account could be introduced.
But why should our taxes guarantee fee income and profits for the banks? The costs should be taken out of the banks' profits. However, the banks have also rejected this approach. They know they can squeeze more out of individual customers than from the government.
Economic role
Banks reject any social responsibility. They are ultimately accountable only to their shareholders. Obviously, this attitude is not uncommon in capitalist society.
Banks and other financial institutions have a crucial role in the capitalist economy. They mediate the flow of funds and investments for firms. When banks collapse the whole system is thrown into crisis because banks have their tentacles in every aspect of the economy and industry.
To avoid this the government has set out a whole range of "prudential guidelines" for banks and in the last instance acts as a "lender of last resort": when banks cannot meet the repayments demanded of them, the Reserve Bank will bail them out.
Restoring profitability to the banks was one of the main motives for financial deregulation. It meant banks were not subject to a fixed interest rate and so could freely compete against building societies and other non-bank financial institutions.
This freeing up of the banks led to all sorts of bodgie loans in the '80s. These came back as bad debts and hurt their profits. Who paid for these losses? The Martin Inquiry found that these were passed on to retail (non-business) customers in wider interest margins, while interest rates to business actually fell.
Today there is another, more sophisticated, risk the banks are exposed to, over which we have no social control — derivative exposures (hedging or speculation). NAB has derivative contracts worth $892 billion, Westpac $607 billion, ANZ $446 billion and CBA $189 billion. Compare these figures to the pain we all have to feel for the government to achieve its budget surplus of $0.7 billion! One wonders when the next Barings collapse will be.
The banks exploit us by charging a fee for a service which in modern society is essential, and by forcing workers to pay crippling rates of interest on their mortgages while firms can borrow at a substantially lower rate.
The services that banks provide should not be constrained by the profit motive. Clearly there needs to be more accountability and control over the banks — social control over investment and allocation of funds. This can be achieved only through the nationalisation of the banking sector under a truly democratic government.