Australia’s highly-concentrated banking sector is failing customers and squeezing out competition, while delivering astronomical, internationally anomalous profit margins.
That is the message from the Australian Competition and Consumer Commission (ACCC), the government agency tasked with ensuring markets are competitive and function in the interest of consumers.
The ACCC’s comments, made in a submission to the Productivity Commission, took aim at the “four pillar” system, depicting a top-heavy banking sector with too much power to influence products and prices.
It described the status quo as an “oligopoly” – a market dominated by a handful of big players – and proposed a number of reforms that would create a more robust group of “second tier” banks.
“When we look at retail banking markets in Australia we observe a number of indicators that, taken together, suggest that the current oligopoly structure is not vigorously competitive and has not been for some time,” the ACCC said.
It said the big banks had maintained “significant market shares over a considerable time, largely unchallenged by smaller players, many of whom offer a less extensive range of products and services”.
“The largest players have been able to sustain very high margins and overall profits by international standards without attracting significant new entry or expansion by smaller players,” it said.
The ACCC said this lack of competition had allowed the banks to take advantage of consumers, for example by raising interest rates quickly when the official cash rate goes up, but not lowering them so promptly when the cash rate is lowered.
This, the regulator said, demonstrated “longstanding asymmetry in cost pass through”.
The lack of competition also meant there was little difference between the products offered by banks.
“We do not observe strong rivalry between [the big banks] to be the first to roll out new products and services to better meet the needs and wants of consumers,” it stated.
The ACCC proposed a number of reforms to encourage what it called “pro-competitive disruption”.
These included allowing smaller institutions to call themselves “banks” (currently you need to have a certain amount of reserve capital set aside to call yourself a bank); and relaxing the 15 per cent ownership cap. Both reforms were proposed by the Government in the May budget.
“Although the large banks may resist such a measure, in the same way there was resistance to telephone number portability from Telstra 15 -20 years ago, any resistance should not be allowed to stifle an opportunity to empower new entrants and smaller players to more effectively challenge the large banks,” the regulator said.
Benefits to shareholders, not customers
One of the regulator’s central points was that the current oligopoly was benefitting bank shareholders, rather than customers. Given Australia is a nation of shareholders, both directly and through superannuation, these two groups are often (if not always) the same.
Big bank stocks have consistently outperformed in Australia, delivering franked dividends that boost superannuation balances and provide income to retirees.
The ACCC recognised this fact, saying it was “self-evident” that banks would “strive to maximise profits, which in most circumstances promotes economic welfare”. However, it added that Australian banks’ astronomic profit margins did not appear to be a result of exceptional service to consumers.
In other words, banks are able to make so much money not because they have fantastic products, but because their customers have no other choice.
This year Commonwealth Bank of Australia, the nation’s biggest bank, delivered profits of $9.93 billion. Westpac’s last full-year profits stood at $7.4 billion, NAB’s stood at $6.48 billion, and ANZ’s stood at $5.7 billion.