Yesterday NAB announced it would no longer charge consumers penalty fees of $30 each time they overdraw their transaction account or have a direct debit payment dishonoured. Whether the remaining majors and other financial institutions follow suit will be a real test of how the banking system responds to consumer concerns. Penalty fees have been a running sore for Australian consumers since the amounts charged began to skyrocket from about 2000. Last year Australian households paid banks alone almost $1 billion -- $490 million on transaction accounts, $415 million on credit cards and the balance on other products. The reason banks can price gouge is that penalty fees are largely immune from the discipline of market forces. To date few consumers have chosen a bank account based on the level of penalty fees, simply because consumers -- whether through over confidence or otherwise -- do not anticipate paying them. And once a consumer has chosen their banking product there are considerable barriers to changing to a better deal if they do get stung by an unfair fee.

How can competition work if it's too hard to change providers? Following the increased concentration in the banking industry in the last year, there is widespread concern about competition on interest rates, upfront fees and the terms and conditions of loans. There is even less competition in relation to fees consumers don't see staring them in the face at the time they take up a product. These include mortgage exit fees as well as penalty fees. The only discipline on bank fees has been public anger. The Fair Fees consumer campaign lead by CHOICE and the Consumer Action Law Centre saw more than 50,000 consumers write to their bank to complain. Many others will have voiced their concern on their own initiative. Banks acknowledged this pressure in 2007/08 with some reductions in many fees, but as yesterday's announcement shows, this was not enough to reduce consumer anger. So what should be done? First of all, other financial institutions need to match NAB's move. But credit card fees are just as costly to consumers and equally unjustified - so NAB as well as other banks need to take a look at them. Beyond this we need to make it easier for competition to work across the banking sector. We need to reduce concentration and make it easier to switch between providers. We've seen significant concentration in household banking through the financial crisis - non-bank competitors have become unviable, and two mid tier-banks have been allowed to disappear through mergers. The takeover by the Commonwealth of the BankWest, an aggressive challenger to the big four, has been a particular setback to the search for adequate competition.

We need a competition regime that really works. It should include -

1.        stronger creeping acquisition laws,

2.        a power to order divestiture of assets where concentration exceeds acceptable levels; and

3.        a more robust approach to the competition tests by the regulator, the ACCC.

If this doesn't produce a competitive market then the government will need to take a serious look at the 'Aussie Bank' proposal floated recently by a group of prominent economists. Finally, given the difficulty of ever achieving competition in contingent fees, specific regulatory action is warranted. The unfair contract terms laws to be introduced by the Commonwealth Government later this year will offer consumers help in some circumstances - indeed they may have been a factor in NAB deciding to act. But as the UK experience shows, even if other banks follow the NAB lead on transaction accounts, unfair contract terms law are more likely to somewhat reduce rather than eliminate remaining unfair fees such as those on credit cards.

The Commonwealth is also introducing nationally consistent Consumer Credit laws extending the existing state scheme. The current draft does not provide the regulator or a court with the power to review an unfair fee that is not part of the upfront price. It needs to include this power to make sure that we finally rid the market of the scourge of this type of unfair rip off. 

Gordon Renouf is Director of Policy and Campaigns for CHOICE