Fees for Banking Services
2007 Report
Prepared for
the Australian Bankers Association
by
A/
Contents
Fees
adjusted for growing transaction volumes
Fees
and customer circumstances
May 2007
Key findings
This
report outlines recent trends in fees for banking services in
The
main findings are:
- the growth of banking fee
revenue is broadly in line with national economic growth
- the average unit cost of
banking services declined further in the latest year as transaction
volumes continued to outpace fee revenue
- a range of recent international comparisons show Australian retail
banking fees around those of overseas peers
- consumers are driving down the average price of
banking services by choosing low-cost options for their everyday
transactions
- home loan customers continue to enjoy net gains from reduced
loan interest margins and intense rate discounting
- despite the booming
economy and the strength of business lending, the growth of commercial
banking fee revenue has remained subdued
- low income groups in
For further information please contact:
Professor Kim Hawtrey
Department of Economics
Email: khawtrey@efs.mq.edu.au Tel: 0404 476 012
Latest trends
In
2006, growth in aggregate fee revenue from domestic banking services remained
modest for the third successive year.
Banking fees grew by 5.8%, up slightly on the year before but still well down on growth rates recorded in the past (Figure 1).
Fees in the banking sector are now growing in line with the national economy. In nominal terms the economy expanded by around 6 percent in 2006, comprising real GDP growth of 2.8 percent plus CPI inflation of 3.3 percent. This economic growth rate was broadly matched by the change in banking fee revenue during the year.
Figure 1
Latest growth rates by broad customer segment are provided in Figure 2. To allow comparisons over time, figures since 1998 are shown.
Figure 2: Banking service fee revenue
|
$m |
1998 |
1999 |
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
2006 |
|
Households |
$1,435 |
$1,630 |
$2,083 |
$2,233 |
$2,620 |
$3,049 |
$3,419 |
$3,660 |
$4,031 |
|
% change |
42.2% |
13.6% |
27.8% |
7.2% |
17.4% |
16.4% |
12.1% |
7.0% |
10.1% |
|
Enterprises |
$3,133 |
$3,545 |
$4,164 |
$4,797 |
$5,099 |
$5,558 |
$5,496 |
$5,587 |
$5,752 |
|
% change |
17.9% |
13.1% |
17.5% |
15.2% |
6.3% |
9.0% |
-1.1% |
1.6% |
3.0% |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
$4,568 |
$5,175 |
$6,247 |
$7,029 |
$7,720 |
$8,607 |
$8,916 |
$9,247 |
$9,783 |
|
% change |
24.6% |
13.3% |
20.7% |
12.5% |
9.8% |
11.5% |
3.6% |
3.7% |
5.8% |
Source: Australian Bankers
Association. See Attachment for further detail.
Fees adjusted
for growing transaction volumes
Fee growth can be placed in the context of business volume by scaling banking service fee revenue against banks’ assets and profits, respectively.
Figure 3 shows the trend in banks’ fees-to-asset ratio in recent years, expressed as a percentage. The downward trend in the ratio continued in 2006 to 0.67 percent, from 0.73 the year before and 0.90 percent a number of years ago.
Figure 4 shows that the ratio of fee revenue to bank profits also fell further in 2006, to 58 percent.
Figure 3
Source: Reserve Bank of
excludes non-resident assets and overseas operations.
Figure 4
Source:
Banks’ annual reports. Fee and earnings data are based on the domestic business
of the six largest banks, representing approximately 92% of the industry. Profit
is on a pre-tax basis.
Aggregate fee revenue in banking is influenced by two main ingredients: higher transaction numbers stemming from growth in the customer base, and changes to listed fee prices.
Economists use the term ‘volume effect’ to denote increases in turnover or usage. Even without any change to individual product fees, annual revenue will increase in any given year simply because there are more customers using the system. The ‘value effect’ is used to describe the second aspect: the growth in revenue (if any) resulting from higher unit prices per transaction.
The two effects can be separated. Figure 5 shows a measure of aggregate fee revenue with the volume effect removed: only the estimated value (or price) effect remains. It divides nominal banking fee revenue by an index of the number of customer transactions.
In 2006, the average unit cost of banking services to the consumer declined. Over the past five years or so, the index reveals a decline of over 5 percent.
This tells us that growth in banking service revenue has come from rising banking service volumes in recent years, on account of simple growth in the number of customer transactions. At the same time, the average price of banking services has declined.
Figure 5
Sources: Reserve Bank of
The chart above incorporates eight different banking activities: credit card, ATM, EFTPOS, cheque and direct entry transactions, plus the number of housing loans, personal loans and commercial loans written.
Separating these products allows us to see which ones are driving the growth in transactions volumes (Figures 6 and 7).
In 2006, six out of eight banking transactions recorded volume growth faster than the 6 percent growth in dollar fee revenue: credit card (7 percent), EFTPOS (10 percent), direct entry (7 percent), housing loans (10 percent), personal loans (10 percent) and commercial lending commitments (23 percent).
Figure 6: Growth in transaction volume by product (% per year)
|
credit card |
ATM |
EFTPOS |
cheque |
direct entry |
home loans |
pers. loans |
bus. loans |
|
|
2003 |
8.0 |
7.2 |
8.5 |
-4.4 |
11.3 |
11.9 |
16.6 |
14.2 |
|
2004 |
9.2 |
6.3 |
9.9 |
-8.1 |
13.4 |
-12.1 |
1.4 |
4.5 |
|
2005 |
5.4 |
4.1 |
11.2 |
-8.3 |
8.7 |
6.1 |
-6.7 |
9.9 |
|
2006 |
6.8 |
3.3 |
9.8 |
-7.3 |
6.9 |
9.6 |
10.0 |
22.7 |
Sources: Reserve Bank of
5609.0. Figures based on value of
personal and commercial loan commitments from all lenders.
Figure 7
Clearly, a key part of
the story on banking fees in
Bank customers have increasingly been shifting away from traditional ways of transacting (cheques, over-the-counter) toward electronic forms (EFTPOS, credit card transactions, direct debit). The latter are generally cheaper, and often involve zero fees.
The shifting pattern of transaction banking is illustrated in Figure 8.
In the recent five year period, transactions through EFTPOS have grown by over 20 percent per year on average. By contrast, cheque usage has steadily declined by about 8 percent per annum.
In this context, it is noteworthy that ATM transactions have not been growing as fast as EFTPOS or card transactions (see chart). Besides the convenience factor, this reflects consumers’ response to pricing differentials, with EFTPOS often attracting fewer or no fees.
The upshot is that banks are collecting less fee revenue per transaction. As customers substitute low-fee or zero-fee services in place of those for which fees are higher, the overall cost of banking to the consumer is falling.
This is evidence that customers are exercising choice and influencing the overall impact of banking service fees.
Figure 8
Source: Australian Payments System Council
Many bank customers do not pay
any fees at all because they transact within fee-free limit conditions on their
accounts.
On the supply side, the banking industry has been facilitating the trend to greater choice by expanding their product range with more competitive pricing.
In particular, recent years have witnessed significant growth in ‘all-you-can-eat’ accounts: low-cost transaction facilities that typically have a simple flat monthly account-keeping fee of $5 and entitle the customer to multiple free transactions each month.
The number of such low-cost accounts on offer has grown by 18 percent over the past five years or so, and the proportion offering unlimited free transactions is up from 7 to 24 percent over the period (Figure 9).
Figure 9: Growth of low-cost no-limit accounts
Source:
Cannex
International
comparisons
This section compares Australian
banking fees with those overseas, using several independent sources.
The first comparison is provided in
Figure 10. It compares annual account-keeping fees across eleven countries
using the Oxera Report, prepared for the British Bankers Association in 2006.
The chart employs a common
definition of retail ‘transactions account’ that supports payments using a
variety of means including branch, debit card, telephone, internet, ATM, direct
debit and cheques. The data refer to 2006.
Source: Oxera Report (2006), The price of banking: an international
comparison, Report to the
British Bankers Association, Oxera Consulting,
As shown, the
However Figure 10 captures only
the annual account-keeping fee, and does not include usage fees involved in a
typical household’s monthly banking transactions.
A more comprehensive measure of
global rankings is shown in Figure 11. It is taken from the Capgemini report
and employs a standardised basket of retail banking services applied equally in
all the countries surveyed. Data are for 2005 and nineteen different countries
are included.
The chart places
Figure 11
Source:
Capgemini EFMA ING Report (2005), World
retail banking report,
estimated
annual cost of a standardised basket of core day-to-day retail banking services.
Figures
are
expressed in $A (after conversion from €).
A
third source for global comparison is provided by the Organisation for Economic
Cooperation and Development (OECD). Whereas the Oxera and Capgemini reports are
both survey-based, the OECD figures come from published annual report data. This represents a
useful alternative viewpoint.
Figure 12 shows the international
rankings using this approach. Data are for 2003 and sixteen countries are
covered.
Fee
revenue is measured using net
non-interest income earned by the banking sector in each country. To allow for
comparison across banking systems of differing sizes, the figures are scaled
relative to bank assets in the country concerned. This gives the ratio known as
non-interest income margin (NOM).
On this measure, Australian banks
(1.5 percent NOM) sit just above the OECD average (1.4 percent). The highest earners of fee income according to
this measure are
Figure 12
Source:
Organisation for Economic Cooperation and Development (2005), Bank
Profitability: Financial Statements of
Banks, Paris. Data are for the 2003
reporting year. Australian figure based on
To gain a micro perspective, we
can look at fees on selected banking services. For example, Figure 13 compares fees
on credit card cash withdrawals made from an ATM across eleven countries.
Figure 13
Source: Oxera Report (2006), The
price of banking: an international comparison, Report to the
British Bankers Association, Oxera Consulting,
Figure 14 takes the analysis of
credit card costs one step further, by adding the effect of the typical
interest-free period in each country. The interest-free period on a credit card
can be thought of as a ‘negative fee’, a subsidy the bank pays the consumer. It
represents a benefit that counteracts any annual account charges.
The chart derives the net annual
cost of using a credit card for transaction purposes only, for the average
middle income family with a typical monthly usage pattern, assuming the
consumer pays off their credit balance each month.
Once again
Figure 14
Source: Oxera Report (2006), The price of banking: an international
comparison, Report to the
British
Bankers Association, Oxera Consulting,
index).
Figures are based on fees plus interest-free benefit for a typical ‘transactor’
credit card
family
user.
To summarise the international
picture: although cross-country comparison of bank fees is not an exact science
and individual country rankings can vary depending on the precise measure
employed, a safe conclusion from this survey is that Australian banking fee
revenue is not in excess of overseas peers.
Indeed,
This conclusion is based on
data from a number of different sources and methodologies, across a variety of peer
countries.
Fees and
customer circumstances
Turning to the economic impact of fees on particular customer groups with different banking needs, a breakdown of banking fee revenue by broad customer segment is shown in Figure 15. The chart separates household customers from business customers.
More detailed figures for these two broad customer segments are provided in the Attachment.
Figure 15
Source: Australian Bankers Association
Both customer segments are sharing in the slowdown in bank fee growth in recent years, albeit with enterprises (4 percent rise in 2006) generally experiencing lower rates of increase than households (10 percent).
Despite the booming economy and the strength of business lending (see Figure 7), the growth of commercial banking fee revenue has remained subdued. This reflects strong competition in the business banking sector and other evidence that enterprise fees are experiencing waivers and discounting. The lower rates of increase for enterprises since 2004 also partly the historic reforms to business merchant fees introduced at that time, which saw merchant fees drop by 17 percent in a single year, with the RBA subsequently noting that competition had seen the reductions in interchange fees flow through ‘fairly quickly’.
Turning to the fee experience of households, Figure 16 separates fee growth for the three most important household product areas: deposit accounts, loan accounts and credit cards.
Fee revenue growth for credit cards has been declining for three successive years, easing back toward the other household products. By 2006 the rate of growth in credit card fee revenue was only around a third of its growth rate a few years ago.
Figure 16
Source: Australian Bankers
Association. The ‘loans’ category includes housing loans, personal loans
and other household banking fees.
Growth in loan fees paid by households needs to be placed in the context of reduced interest rates, particularly for housing.
Households continue to reap the benefit of lower borrowing rates in a highly competitive market. One driver is widespread discounting by banks below their advertised standard loan rate.
In its May 2007 Statement (page 45), the Reserve Bank confirms:
‘interest rate discounts … are now received by almost all borrowers ..’
The other driver is continuing compression of lending margins of banks over recent years, reflecting competition among lenders, such that although the cash rate has not declined, housing loan rates paid by borrowers have fallen.
Figure 17 calculates a measure of the net gain to household customers from lower interest margins on home loans. The margin today between the official cash rate and the average mortgage rate is almost two and a half (2.45) percent narrower than a decade ago.
This tightening in interest margins translates into very significant savings for home buyers, amounting to thousands of dollars on the average mortgage each year.
Figure 17: Fall in housing loan margins (%)
|
Cost of funds (cash rate) |
Housing loan rate |
Difference |
Reduction |
|
|
Early 1990s |
5.25 |
9.50 |
4.25 |
na |
|
2007 |
6.25 |
8.05 |
1.80 |
-2.45 |
(Source: RBA
Bulletin F1, F5; figures refer to 1993 and 2007)
To appreciate the impact of this, consider the typical home buyer. The median amount outstanding for owner-occupied housing loans across all borrowers is around $101,000 (source: ABS 4130.0). On this basis, the squeeze on bank lending margins as a result of competition over the past decade or so is saving the median home buyer $47.59 per week in mortgage interest repayments.
This saving on interest can be compared with fees paid by
the average household. According to ABS data, the typical household pays a
total of $4.23 per week in duties, taxes and charges on financial institution
accounts (source: 2003-04
Figure 18
In net terms the average Australian household with a home loan and standard deposit banking accounts is better off by at least $43 per week (Figure 18).
In the case of new borrowers, the savings are greater still. The average new owner-occupied housing loan taken out in February 2007 was $225,150. The 2.45 percent margin reduction noted in Figure 17 translates into a larger saving of $106.08 per week in mortgage repayments and a net gain after banking fees of $102.
It is clear that home loan customers have gained more from reduced loan interest margins than they have foregone in the form of account fee increases.
Notwithstanding the above, there remains a sub-group of consumers who do not hold a home loan account with a bank and therefore have not been the beneficiaries of lower interest margins. How have they fared on regard to fees on their transaction banking?
In assessing the impact on this group of consumers, perspective is gained by placing their outlays on banking fees in the context of the household budget generally.
The average weekly expenditure by Australian households on financial account duties, taxes and charges of $4.23 represents less than 1 percent (0.48) of the average household weekly budget. This modest proportion can be compared with weekly spending on other staples such as 1.1 percent for local government rates, 2.7 for domestic fuel and power, 12.8 for recreation and 15.7 for transport (Figure 19).
Figure 19
Source: ABS 2003-04
Moreover, the proportion
of the household budget spent on financial accounts is diminishing with time, as shown in the next
chart.
shows the average proportion spent by
all households fell from 0.55 percent to 0.48 percent during the five year
sampling period to 20003-04 (source: 1998-99 and 2003-04
Source: ABS 2003-04
These trends show that banking charges are
among the very smallest items in household budgets, and falling.
Fees and
low-income earners
A group of consumers
deserving particular analysis are those on low incomes. Household customers
vary in their capacity to pay, and this raises the issue of fairness across the
range of households.
A breakdown of the figures by household income
reveals that lower-income households bear a significantly lower share of fees
than consumers with higher incomes. Figure 21 shows expenditure on financial
accounts across all income quintiles, as a percentage of total weekly spending
by the quintile in question.
Figure 21: Average weekly
household expenditure on bank accounts
|
|
Gross Household
Income Quintile |
|||||
|
|
Lowest |
Second |
Third |
Fourth |
Highest |
All |
|
Duties, taxes &
charges paid on financial accounts |
$1.40 |
$2.75 |
$3.92 |
$5.12 |
$7.99 |
$4.23 |
|
% of all weekly
expenditure by the quintile |
0.34% |
0.46% |
0.46% |
0.48% |
0.54% |
0.48% |
|
6.6% |
13.0% |
18.5% |
24.2% |
37.8% |
100.0% |
|
Source: ABS 2003-04
In relative terms, households in the lowest
income bracket spend the least on financial account charges (0.34% of their
weekly budget), while those in the highest bracket spend the most (0.54%). This
‘sliding scale’ means the incidence of account fees is progressive and thereby
satisfies one of the most basic criteria for equity in the application of
surcharges.
Figure 22
displays the share of each income quintile in total financial fees paid by
households. The lowest income group pays the lowest share (6.6%), while the
highest share (37.8%) is borne by the high-earning quintile of households.
Low-income earners
pay a lower share than high income customers.
Figure 22
Source: ABS 2003-04
Further perspective on the equity issue can be
gained from data involving international comparisons.
Figure 23 displays country rankings for three
different types of low income customer: pensioners, students and low-income families.
The chart is based on the average annual cost
of a credit card where the card is used for transactions only. It takes into
account both fees and any offsetting interest-free period benefit.
Countries are listed in descending order of
cost, with the most expensive country at the top of the list.
In particular,
Figure 23: Rankings of
annual cost of credit card for low income groups (transactions use only)
|
Low-income family |
Student |
Pensioner |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US |
|
|
|
|
US |
US |
|
|
|
|
|
|
|
|
|
|
|
|
Source: Oxera Report (2006), The price
of banking: an international comparison, Report to the
British Bankers Association, Oxera Consulting,
Figure 24 drills down a little further into
detail by looking at one specific product: annual account-keeping fees on
designated ‘student’ accounts. Australian fees for student accounts are in line
with the middle group of countries.
Figure 24
Source: Oxera Report (2006), The price of banking: an international
comparison, Report to the British Bankers Association, Oxera Consulting,
In
Industry
comparisons
We can gain further perspective on banking charges by making inter-industry and international comparisons.
Fees for everyday banking versus other daily utilities are shown Figure 25. The monthly cost of fees for everyday banking services is significantly less than basics such as water, power or transport. As shown in Figure 26, banking services on average cost less than other everyday services such as buying a newspaper, renting a telephone line, registering a car and drinking coffee at a café (see endnotes for data sources).
Figure 25
Figure 26
Conclusion
This paper
has outlined
recent trends in banking service fees in
Evidence is strong of healthy fee competition amongst banks including falling average unit fees, the fierce discounting war over home loans, and the growth in all-you-can-eat low fee products.
Despite the booming economy and the strength of business lending, the
growth of commercial banking fee revenue has remained subdued.
Financial deregulation foresaw
that benefits would flow from today’s user-pays approach to banking fees, and
the evidence suggests this is so:
- Australian consumers today face a fairer and more transparent
system of charging for banking services than in the past when services
like cheques were paid for implicitly through higher interest charges
- the user-pays system has allowed banks to reduce interest
charges, with customers on average gaining more from cost reductions on
loan interest margins than they have paid through account fee increases
- user pays is allowing customers to make choices about
their banking and data show that consumers are gravitating toward low-cost
options, responding
to transparent fee information by switching products.
As a consequence, Australian
banking service fees are around those of banks overseas, on a range of
measures.
Also, the proportion of the
weekly household budget spent on banking service fees is declining with time.
The distribution of fees across
the population is fair because low-income earners pay a relatively lower share
than high income customers.
Exception fees in
Overall, banking service fees
in
Notes
Sources for Figure 25
1. Banking – 2003-04 ABS Household Expenditure Survey 2. Water – Sydney Water Corporation, Hunter Water Corporation,
Sources for Figure 26
1. Banking – 2003-04 ABS Household Expenditure Survey 2. NSW RTA: medium car weighing up to 1504
kg (excludes CTP) 3. The Australian: purchased 5 days a week
at newsagent 4. Telstra: standard line
rental only under a basic ‘Homeline Plus’ plan (excludes handset rental) 5.
Average café price of $2.50 for five days a week
Attachment
Banking fees paid by
households
|
Banking fees $m |
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
2006 |
|
Deposit accounts |
960 |
1024 |
1115 |
1309 |
1413 |
1483 |
1615 |
|
25.0% |
6.7% |
8.9% |
17.4% |
7.9% |
4.9% |
8.9% |
|
|
Housing loans |
510 |
495 |
625 |
723 |
785 |
772 |
839 |
|
% change |
24.3% |
-3.1% |
26.3% |
15.8% |
8.5% |
-1.6% |
8.6% |
|
Personal loans |
208 |
269 |
366 |
357 |
393 |
425 |
489 |
|
% change |
44.3% |
29.1% |
36.2% |
-2.4% |
10.2% |
8.1% |
15.0% |
|
Credit cards |
290 |
337 |
425 |
589 |
761 |
899 |
1018 |
|
% change |
34.0% |
16.4% |
26.0% |
38.8% |
29.1% |
18.2% |
13.2% |
|
Other |
115 |
108 |
90 |
71 |
68 |
81 |
72 |
|
% change |
-33.5% |
-6.1% |
-16.8% |
-20.9% |
-5.2% |
19.3% |
-10.7% |
|
|
|
|
|
|
|
|
|
|
Total |
2083 |
2233 |
2620 |
3049 |
3419 |
3660 |
4031 |
|
% change |
21.7% |
7.2% |
17.4% |
16.4% |
12.1% |
7.0% |
10.1% |
Source: Australian Bankers
Association. Note: due to data revisions there is a break in the series for
both ‘housing loans’ and ‘other’ affecting 2005 and 2006; growth rates in these
two years are affected.
Banking fees paid by
enterprises
|
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
2006 |
|
|
Deposit
accounts |
609 |
643 |
681 |
710 |
737 |
754 |
757 |
|
% change |
25.1% |
5.6% |
5.9% |
4.3% |
3.8% |
2.3% |
0.3% |
|
Loans |
1115 |
1257 |
1197 |
1351 |
1485 |
1563 |
1623 |
|
% change |
14.4% |
12.7% |
-4.8% |
12.9% |
9.9% |
5.3% |
3.8% |
|
Merchant
fees |
1164 |
1383 |
1622 |
1826 |
1516 |
1468 |
1481 |
|
% change |
20.2% |
18.8% |
17.3% |
13.0% |
-17.0% |
-3.2% |
0.9% |
|
Bank
bills |
935 |
1040 |
1074 |
1077 |
1120 |
1151 |
1224 |
|
% change |
5.4% |
11.2% |
3.3% |
0.3% |
4.0% |
2.8% |
6.4% |
|
Other |
340 |
473 |
525 |
594 |
639 |
651 |
668 |
|
% change |
10.7% |
39.1% |
11.0% |
13.1% |
7.6% |
1.9% |
2.7% |
|
|
|
|
|
|
|
|
|
|
4164 |
4797 |
5100 |
5558 |
5496 |
5587 |
5752 |
|
|
% change |
14.9% |
15.2% |
6.3% |
9.0% |
-1.1% |
1.7% |
3.0% |
Source: Australian Bankers Association