Banking competition and low income earners

The banking competition reforms announced by the Federal Government late last year should result in benefits for many consumers. However, will competition reforms really make a difference to those living on lower incomes, many of who have trouble accessing basic, affordable banking?

The focus of debate on banking competition has been on mortgages. There are obvious public benefits that flow from effective competition among mortgage lenders - cheaper interest rates, and the ability to switch providers without penalty, should ultimately result in better outcomes. A competitive and fair market for mortgages will have ongoing benefits for homeowners and ensure the banks aren’t gouging customers.

However, as many aspiring purchasers know, home ownership is increasingly unaffordable. A recent report from the Australian Housing and Urban Research Institute shows it is becoming progressively harder for low-to-moderate income households to purchase a home. It finds that six in 10 recent low-to-moderate income home purchasers have repayments in excess of 30 per cent of their income, a widely accepted affordability benchmark. Twenty years ago, this was less than 4 in 10. The research also suggest that if the purchase patterns of the last decade are sustained into the future, overall rates of home ownership will fall.

There are a number of other areas in which oligopolistic banks are failing to provide safe and affordable financial products and services on a wide scale. A particular example is small amount unsecured consumer credit, which is required by many income constrained households to smooth expenditure and to progressively build a base of assets.

Over past years, the banks have shied away from providing small amount loans, instead pushing many onto credit cards or simply refusing to offer service. For many on low incomes, credit cards are merely a debilitating debt trap, designed to induce immediate spending without an affordable planned repayment schedule. Some banks, such as the ANZ, are offering small amount, affordable loan schemes in partnership with community agencies including the Brotherhood of St Laurence. Programs like Progress Loans have demonstrated that when provided with opportunity and support, low income earners can pay back debt. However, these opportunities are yet to become widely available, and more needs to be done to ensure that such initiatives move beyond a corporate social responsibility response to be truly a mainstream service.

Without easy access to safe and affordable financial products and services, households turn to lower quality, non-bank financial service providers, such as fringe lenders, store credit providers and payday lenders. Such fringe banking services provide few hurdles to transact, but their effect is wealth-stripping rather than asset-building. A recent report on the payday lending industry from the Consumer Action Law Centre demonstrates that thousands of Australians are forced to repeatedly borrow small loans at rates equivalent to 400% per year or more. The report also shows that the industry has exploded, with many new players offering exploitative loans to financially-stressed households. If the development of this industry is the result of competition, then we should question whether competition in financial services is always a good thing.

In products beyond loans, low income Australians also need access to fair and accessible transaction accounts, so they can receive income and make essential payments, including bills. While there have been significant improvements in penalty fees charged by some banks, ATM fees are still in excess of the cost to provide the service. While some banks offer free ATM transactions, if you’re constrained or disabled, the cheapest ATM may not be convenient. In some remote areas, ATM fees are up to $10 per transaction - that’s $10 that can’t go towards basic needs.

What, then, are some of the solutions, so that lower income earners aren’t forced to rely on exploitative products, or go without?

The Federal Government is working to promote smaller providers such as credit unions as competitive alternatives. While this may be a good solution for many, it’s not clear if they’re able to service low income Australians effectively. While many are community focused, the business model of the few successful credit unions relies on raising savings from more affluent members to build a sustainable base, rather than from low income groups: most members are employed and have a mortgage. In addition, in an environment where banks are abolishing penalty fees, many credit unions still charge large amounts for overdrawing a bank account.

In the United Kingdom, significant government funding and support has been provided to community development finance institutions. Their mission is not to make a private profit, but to support communities by providing affordable finance that would otherwise not be available. They recycle this finance again and again into communities. The Federal Government has this year announced a pilot project to implement a community development finance sector in Australia, a move that is applauded by the Brotherhood.

There is also the potential to introduce legislation regarding community service obligations for banks. In the United States, the Community Reinvestment Act (CRA) has encouraged banks to provide better service for poorer communities largely through a system of standard-setting and reporting. The CRA has been credited with a major contribution to addressing locality and systemic financial exclusion in the United States.

More recently, a law passed in California seeks to increase the availability of credit opportunities for marginalised individuals looking for low-dollar-value loans. The law in particular recognises the role of community agencies in linking low income earners with relevant fair and affordable credit options.

Also in the United States, the recently established Consumer Financial Protection Body will set standards for financial products and services, both in the mainstream financial sector and among alternative financial service providers. It advocates a consumer financial system that encourages savings and thrift, and provides access to safe, affordable financial products and services, particularly credit.

To be meaningful to the lived reality of many Australians, the debate about banking competition needs to move beyond the mortgage market. It needs to consider whether banks are adequately serving the needs of the whole community, including low income earners, who in many cases miss out because they are regarded as ‘less profitable’ than other consumers.