Bank fees, the silent killer
Bank fees, the silent killer. Australia’s banks have become incredibly profitable and powerful in recent years, generating billion-dollar profits year after year. This has seen them become some of the most profitable and powerful financial institutions in the world.
Banks, by and large, make money by securing deposits, on which they pay interest. They then lend the same money to you and me at a higher interest rate.
This sounds straight forward. Well not quite. The silent killer is the built-in fees they charge, such as;
• Application fee
• Establishment fee
• Monthly fee
• Annual fee
• Account keeping fee
• Late payment fee
• Dishonour fee
• Withdrawal fee
• Discharge fee
• Early Payout fee
• Variation fee
• Valuation fee
• Solicitors fee, and on and on it goes.
At the time of writing this report one of the big 4 banks is advertising a home loan with a variable interest rate of 3.59%, which sounds like a good deal, doesn’t it? I’ll let you be the judge, the comparison rate is 4.42%.
What are Comparison Rates, and how important are they?
The comparison rate is the true interest rate, it is the advertised rate plus all the fees built into the product over the term of the loan, excluding any variation or delinquent fees.
When banks advertise home loan interest rates, they promote the advertised rate in big bold letters that are easy to see and eye catching, with the comparison rate in small print that is barely noticeable.
It’s these fees that chew into your profits. If you have money in a term deposit, over your life time this could mean the difference between a frugal retirement or a comfortable retirement. If you are a home loan customer, you could be paying tens of thousands of dollars in bank fees over the life of your home loan.
Going back to the bank offering 3.59% on a variable rate home loan and comparing it to one of its competitors offering 3.64% with a comparison rate of 3.65% – the difference between the two over the 30 year term is $107,561.00.
When comparing home loan against home loan, credit card against credit card, term deposit against term deposit, it is the comparison rate you want to be comparing not the glossy advertised rate.
For more information on Comparison Rates, you can visit www.moneysmart.gov.au.
Australians don’t like to change banks
Australians typically do not like to change banks; most Australians have banked with the same bank since their parents opened their first savings account as a child. The banks know this, and they rely on the fact that their customers are unlikely to leave them, no matter how badly they are treated.
Given that such appalling treatment has been highlighted in the recent Royal Commission, I would have thought that Australians would be up in arms, marching into their banks, closing their accounts and taking their business elsewhere.
But no, Australians have hardly blinked an eye and certainly haven’t marched into their banks and demanded better service, better returns and less fees.
It appears that the Royal Commission has just added fodder to people‘s dinner table conversations. I can only assume that most Australians must think that all banks are alike, it does not matter where you go, they will all rip you off in the end.
My experience has shown that this belief is not true. There are better alternatives out there, and if that means you need to move from one bank to the next every few years to maintain a good deal for yourself, then that is what you need to do. The difference could be $107,561.00 of your hard-earned money.
Is there a need for fees or are they just smoke and mirrors?
Collectively, in 2015, Australian households paid nearly $4.38 billion in bank fees. This is an average of about $468.00 per household. In 2017 the figure crept up to $4.5 billion, most of which were attributed to credit card fees, the subject of litigation not so long ago.
The fight against bank fees
In September 2010, law firm Maurice Blackburn filed a Class Action against the ANZ bank, claiming its fees amounted to penalties the bank wasn’t authorised to charge.
In December 2011, Maurice Blackburn filed the same Class Actions against the Commonwealth Bank, Westpac, NAB and Citibank and in early 2012 extended its reach to Bankwest and Westpac subsidiaries St. George and Bank SA.
According to Maurice Blackburn, more than 185,000 bank customers joined the Class Action in pursuit of a claim of about $240 million.
At the time, fees charged by the banks ranged from $7.00 to $60.00 with many charging $30.00 or $35.00 for everyday banking mishaps such as insufficient funds.
It appears the lawyers have a fair point: Banks may be justified in charging whatever it costs to deal with insufficient funds or other customer infractions. However, should they be allowed to charge penalties above and beyond their costs, acting as if they’re law enforcement agencies?
In 2014, Federal Court Justice Michelle Gordon ruled that if credit card late-payment fees exceeded the true cost of handling such late payments, then said fees were unlawful. However, dishonour and over-the-limit fees were deemed to be within the law.
Justice Gordon estimated the cost of handling late payments at about 0.50 cents, a far cry from the many multiples of that figure banks were charging at the time.
Unfortunately, the consumer win, such as it was, was short-lived: in 2015, the Full Court reversed her decision.
Declan Hanratty – Managing Director
M: 0409 089 456 F: 03 9416 1916 ABN: 19 880 907 430 POSTAL: PO Box 1551 COLLINGWOOD Victoria 3066 MFAA Membership No. 50217 Australian Credit Licence No. 383120 Australian Financial Complaints Authority No. 42572
