Josh Fear, Richard Denniss and David Richardson

The authors are grateful to Leigh Thomas and Serena Rogers from the Australia

Institute for their contribution to this report. We would also like to acknowledge the

financial support of the Finance Sector Union in preparing this paper.

This work is copyright. It may be reproduced and

communicated to the public for the purposes of fair dealing as

moral rights in this work. Requests and inquiries should be

directed to The Australia Institute.

Policy options vi

The retail banking market 4

Bank profits 5

Implications 8

The power of incumbency 10

Failed attempts to make the banking industry competitive 11

The ‘four pillars’ policy 13

Implications 14

Banking habits 16

Marketing of debt 17

Community attitudes towards big banks 18

Implications 20

The psychology of finance 22

A behavioural account of financial decision-making 25

Marketing opportunities 27

Implications 30

Policy options 33

The power of Australia’s big four banks is unmistakeable. Their underlying profits equate to almost three per cent of GDP, up from less than one per cent a quarter of a century ago. Of every $100 spent in Australia, nearly $3 ends up as underlying profit for the banks.

Profits are so high because the banking market is highly concentrated. The big four banks now control more than 75 per cent of all bank assets and banks account for over 90 per cent of all lending by financial institutions in Australia. This level of concentration has distorted competition, allowing the big banks to reap underlying profits of around $35 billion per year, including $20 billion in ‘superprofits’ attributable to their market power. Most Australians believe that the banking market is overly concentrated: three in four survey respondents (72 per cent) said that the big four banks in Australia have too much market power.

But is the extreme profitability of Australia’s banks in the public interest? Many workers hold shares in banks indirectly through superannuation, and therefore arguably receive a share of their profits. Yet the distribution of share ownership and superannuation balances means that the wealthiest Australians capture most of the dividends flowing from bank profits. And in other important respects the behaviour of the banks runs counter to the interests of the broader community.

Traditionally, banks have served a social as well as an economic function, providing a service to the community and controlling the supply of credit. But modern banking practice involves striving for maximum market share, even if this means acting against the interests of individual customers or the community as a whole. The logic of maximising shareholder value has put the marketing of debt, through credit cards and housing loans, at the centre of the banking endeavour.

This paper presents survey results that reveal the extraordinary extent to which ordinary Australians are offered new credit products, often without asking for it.

Two in three respondents (66 per cent) reported receiving an unsolicited offer for a new credit card in the past 12 months, while one in two (49 per cent) had received an unsolicited offer to increase their credit-card limit. One in three (36 per cent) had received an offer for a personal loan and one in five (18 per cent) had an offer to increase the available credit on their home loan. While people on higher incomes are more likely to receive such offers, the marketing of debt among people on low incomes is clearly widespread. For example, one in three people living in a low-income household has received an offer of a personal loan in the past year without seeking one out.

When faced with calls for greater regulation, banks argue that individuals are responsible for their own financial decisions and that the predominant form of government action needed in the sector, if any, is to provide consumers with the information necessary for them to make educated individual decisions. Informed consumers, they insist, will behave rationally to ensure competitive discipline in the market, which will in turn bring about socially optimal outcomes.  BULLSHIT

This paper argues that the role for government should be much greater than the mere provision of additional information to consumers. In short, government should ensure that banks behave in ways that are consistent with the public interest, rather than ‘leaving it to the market’.

When people are asked to make financial decisions that they do not fully understand, they often rely on other people for help, particularly people that they regard as better qualified or informed. In the case of bank products, people often rely on the advice they receive from bank workers. What is not well understood is that bank workers in Australia are often paid commissions to sell their bank’s products. The more products they sell—in other words, the more debt they convince customers to take on—the more money they make. In fact, encouraging bank tellers and call-centre workers to sell debt products is an integral part of a bank’s marketing strategy. Consumers can no longer be confident that the advice they receive from bank workers is objective rather than conflicted.

Debt-pushing by bank workers is just one part of the sophisticated and multifaceted marketing operations of Australia’s big banks. They also spend enormous sums of money on advertising in the mass media, on junk-mail campaigns, and even on face-to-face marketing in public places. In fact, the big four banks spend over $1 billion every year on advertising—more than it costs to run the ABC.

Together, all this marketing allows banks to take maximum advantage of the confusion and disinterest that consumers feel when faced with financial choices.

And while constant marketing can maximise shareholder returns, the effect on broader society is a negative one.

The banks claim that because they compete with each other, interest rates and fees are kept at reasonable levels, a claim that rests on the assumption that consumers will readily switch banks when they see the opportunity for a better deal. By contrast, our survey results show that 43 per cent of big-bank customers have never even considered switching. In fact, only three per cent of bank customers switch banks each year, an astonishingly low figure for a sector that is allegedly subject to free and open competition. Once a bank signs up a new customer, it can be quite confident of keeping that customer for decades to come.

The global financial crisis has fostered a view in the community that the bigger a bank is, and the bigger its profits, the safer it is. Indeed, around one in five Australians appear to hold this belief, with 19 per cent of survey respondents agreeing that it is safer to deposit money in a bank with bigger profits. If one in five Australians believe that a bank with bigger profits is safer, there is a pool of more than three million adult Australians who hold this view. This constitutes a massive marketing advantage for the incumbent players in the sector against smaller banks and credit unions.

In recent years policymakers around the world have come to recognise that many people struggle with financial decisions. In Australia, this has been officially acknowledged by the recent Cooper Review into Australia’s superannuation system. The standard policy response has been to promote financial literacy through education and awareness-raising. The assumption behind these initiatives is that consumers possess the motivation and capacity to improve their financial knowledge.

But there is something missing in this approach. Consumers also need to be aware of the various ways in which financial providers may attempt to persuade them to take on more debt than they need, or to use a financial product that is not in their best interests. They also need to understand the extent to which certain providers in the retail financial sector dominate all the others and the techniques they use to reinforce their dominance.

More broadly, government needs to ensure that the environment in which consumers make financial choices is structured fairly and in a way that empowers ordinary people rather than just the big banks. To date, the principal weapon used by Australian policymakers in their battle against the might of the banks has been competition. The Commonwealth Bank was established to provide genuine competition against the private banks almost a century ago; since then there have been waves of competition from credit unions, building societies, finance companies, mortgage originators and foreign banks. Despite a century of competition, the big four banks are stronger now than they have ever been.

The lesson of history is that competition policy is not very effective against a large, powerful industry enjoying the competitive advantages that result from incumbency and economies of scale. One solution might be to require functional or structural separation between the different functions performed by banks:

    deposit-taking and lending, payments facilitation, retail investment, investment banking and so forth.

The aim should be to reduce bank profits to one per cent or less as a share of GDP, the level they were at two decades ago. Other policy changes that would contribute to this aim include:

Such initiatives would help bring profits back to a reasonable level, but it is also important that banks do not use their privileged position to exploit the vulnerabilities of individual customers. Something more is needed to ensure that banks behave in socially responsible ways that contribute to the wellbeing of the broader community.

The use of emotional techniques in advertising and marketing financial products is common and clearly effective. However, marketing that relies solely on such techniques without providing any helpful information or guidance to consumers is misleading and manipulative and contributes to widespread public mistrust of banks. Banks should promote their products in ways that contribute to, rather than undermine, broader public understanding of financial concepts and imperatives. If they choose not to do this, it is the responsibility of government to monitor and regulate their communication with customers, particularly in the marketing of credit. This can be achieved in various ways:

These reforms should constitute part of a formal social contract between individual banks and government; ratifying the social contract would then become a condition of maintaining a banking licence. Without this kind of policy intervention, the profits of the big banks will only get bigger.

Banking is an enormously lucrative business, and becoming more so each day.

Despite the global financial crisis, the profits of Australia’s big four banks have

continued to rise steadily. Twenty years ago their profits were around one per cent

of GDP; by 2008–09, the major banks were earning underlying profits before tax

of $35 billion, or just under three per cent of GDP. This means that of every $100

spent in Australia, almost $3 ends up as underlying profit for the major banks.

When the financial sector was deregulated in the 1980s, banks accounted for 50

per cent of all lending in Australia. Today this figure is over 90 per cent. The big

four banks—Westpac Banking Group (Westpac), Australia and New Zealand

Banking Group Limited (ANZ), Commonwealth Bank of Australia

(Commonwealth) and the National Australia Bank Limited (National)—now control

76 per cent of the banking market. It is this degree of concentration that explains a

good deal of their profitability.

But is the extreme profitability of Australia’s banks in the public interest? Many

workers hold shares in banks indirectly through superannuation and therefore

arguably receive a share of their profits. But in many important respects the

behaviour of the banks runs counter to the interests of the community.

Traditionally, banks have served a social as well as an economic function,

providing a service to the community and controlling the supply of credit. But

modern banking practice involves striving for maximum market share, even if this

means acting against the interests of individual customers or the community as a

whole. The logic of maximising shareholder value has put the marketing of debt,

through credit cards and housing loans, at the centre of the banking endeavour.

Taken to its extreme, this method of doing business was responsible for the subprime

mortgage debacle in the United States and the financial crisis that ensued.

And while Australia has not experienced the same degree of financial turmoil,

Australian banks have nonetheless been very willing to exploit consumer debt in

their quest for bigger profits. In fact, some of their most profitable customers, such

as those who never pay off their credit cards in full, are also the very people who

are least able to handle more debt. In this way, the impulses of individual

consumers, carefully channelled by the banks, regularly come into conflict with the

public interest.

While the banking industry is less regulated than it once was, it is also less

competitive. The high degree of market concentration allows the big banks to

charge fees for an extraordinary variety of ‘services’, often at well above cost.

These include, but are by no means limited to, ATM fees, credit-card fees,

interchange fees, merchant fees, transaction fees, account-keeping fees, and socalled

‘exemption’ fees (otherwise known as penalty fees). As well as charging

their customers directly, banks charge retailers, intermediaries and even each

other in every conceivable way, thus increasing the cost of virtually all goods and

services in the regulated economy. Although it is impossible to determine how

much of the price of any individual product corresponds to the extra costs imposed

by banks, as a whole bank fees and charges represent a major impost on the

wider economy, analogous to a private-sector ‘tax’ on economic activity.

In response to criticism, the major banks typically argue that competitive forces are

strong because there are four big organisations that compete on more or less

equal terms and keep each other ‘honest’. By this logic, the structure of the

banking sector is inevitable, a natural result of market forces and the strength of

the organisations that dominate the industry. Little or no mention is made of the

massive advantages of historical incumbency or a regulatory environment that

favours big players over small.

When faced with calls for greater regulation, the banks argue that individuals are

responsible for their own financial decisions and that the predominant form of

government action needed in the sector, if any, is to provide consumers with the

information necessary for them to make educated individual decisions. Informed

consumers, they insist, will behave rationally to ensure competitive discipline in the

market, which will in turn bring about socially optimal outcomes. This paper argues

that the role for government should be much greater than the mere provision of

additional information to consumers. In short, government should ensure that

banks behave in ways that are consistent with the public interest, rather than

‘leaving it to the market’.

The paper is set out as follows:

The paper concludes that the high degree of concentration in the banking market and the huge profits it generates are inevitable in a deregulated banking system such as Australia’s. With consumers powerless to change corporate behaviour and new entrants unable to compete on a level playing field, the big four banks are relatively free to gouge as much money from the Australian economy as they are able. Better regulation in banking is urgently needed.

In assessing how well the banking market works in Australia, it is important

to gain a sense of the scale of bank profits. This section presents key facts

on the nature of bank activities and their profitability. It describes the key

characteristics of the retail banking market and documents the trend

towards ever-higher profits for the big four banks.

Financial systems are built around two core activities: lending and deposittaking.

In Australia, lending is dominated by banks. Of the total loans and

advances outstanding in Australia in April 2010, 91 per cent was issued

from banks; the remaining nine per cent came predominantly from building

societies, credit unions and other minor institutions. In April 2010, banks

Banks dominate the financial system, but banking itself is dominated by just

four big banks: ANZ, Commonwealth, National and Westpac, which

together accounted for 82 per cent of all lending by the 54 banks in

For most consumers, bank deposits are a way of parking money for use in

ordinary transactions. A survey by the Reserve Bank of Australia (RBA)

shows that consumers undertake about 38 per cent of the value of their

transactions with cash, which the majority withdraw from a bank. Other

transactions are made through bank accounts and include cheques, which

used to be popular but now account for only 11 per cent of the value of

non-cash transactions, and electronic payments, which are mainly

facilitated through banks. Of all non-cash transactions, direct debits and

credits account for 86 per cent, with debit cards, credit cards and BPAY

some kind, which earns the banks a good deal of their income.

Bank fees raised $11.6 billion in 2008 (the latest figure available). Around

$6.7 billion was collected from fees on business, most of which would be

passed on to customers in the form of higher prices. The rest, $4.8 billion,

http://www.rba.gov.au/statistics/tables/index.html

of Australia, 2009, pp. 6–17.

came from fees on retail customers. Fees on transaction accounts

amounted to $1.8 billion, on credit cards to $1.3 billion and on housing

loans to $1.0 billion. A further $1.0 billion was charged to households in the

In 2009, the after-tax profit of the four majors was $13.4 billion, down

pre-tax profits for the four major banks over the past quarter-century and

shows that such profits now consistently represent around two per cent of

adjusted for bad debts) are now close to three per cent of GDP (see Table

2).

Table 1: Historical performance—profit before tax

1986 1989 1999 2006 2009

ANZ ($m) 357 773 2,162 5,214 4,380

Commonwealth ($m) 396 813 2,498 5,704 5,975

National ($m) 484 1,110 4,141 7,275 6,962

Westpac ($m) 540 926 2,026 4,547 6,096

Total ($m) 1,777 3,622 10,827 22,740 23,413

Per cent GDP 0.7 1.0 1.8 2.3 1.9

annual reports.

Committee in 1994. As the name suggests, cash figures use cash accounting results which

basically measure cash in versus cash out. The rest of the figures used in this report are based

on accrual figures which take account of transactions that give rise to receipts and liabilities in the

future. These are the figures usually used to express companies’ financial results. See RBA,

Representatives Standing Committee on Banking, Finance and Public Administration, August

1994.

The effect of bad and doubtful debts on recent bank profitability is shown in

Table 2, which presents annual profit figures for the big four over the last

four years. This allows us to assess their financial performance as the

Table 2: Profits in recent years—big four banks.

Year to

Sep-06 Sep-07 Sep-08 Sep-09

Pre-tax profit ($m) 23,043 25,398 18,856 22,096

Bad and doubtful debt

provisions ($m) 1,801 2,278 6,675 12,993

Underlying profit ($m) 24,844 27,676 25,531 35,089

% GDP

Pre-tax profit 2.38 2.43 1.67 1.84

Bad and doubtful debts 0.19 0.22 0.59 1.08

Underlying profit 2.57 2.65 2.26 2.91

Bad-and-doubtful-debt provisions are now around $13 billion, $11 billion

more than they were prior to the crisis. Yet even as their bad debts nearly

doubled, the big banks were able to claw back income and increase their

underlying profit. Although profits fell from 2.65 per cent of GDP in the year

to September 2007 to 2.26 per cent in the year to September 2008, in 2009

it has bounced back to 2.91 per cent making 2009 a record year for the

the Commonwealth Bank, which reports on a financial year ending in June. The other three

banks have a financial year ending in September. Earlier years are taken from the quarterly bank

performance statistics of the Australian Prudential Regulation Authority (APRA). See APRA,

Australian Prudential Regulation Authority, Australian Securities and Investments Commission,

underlying profitability of the big four banks and indicating their ability to

absorb losses from bad debts by increasing profitability in other areas. In

December 2009 for example, three of the four major banks took the

opportunity to raise home-loan rates by more than the increase in the

official interest rate. This situation suggests that the banks’ actual

profitability will be higher than ever before when they reduce bad-anddoubtful-

debt provisions back to pre-crisis levels.

That the major banks have been able to win back their profits despite

reductions in the profits of other industries in the Australian economy is

deal more successful at this than the smaller Australian banks. Table 3

examines the performance of the smaller banks, comprising all domestic

banks apart from the big four. It shows that the smaller banks were hit by

the global financial crisis but have not been able to compensate for their

losses by clawing back profit from fees, charges or interest increases.

Table 3 reveals that among the smaller banks profit before tax almost

halved, falling from $4,589 million to $1,846 million; even after adding back

losses (charges for bad and doubtful debts), total underlying profit declined

from $5,038 million in 2008 to $3,654 million in 2009. As a percentage of

GDP, pre-tax profits plunged from 0.37 per cent to 0.15 per cent, while

underlying profit fell from 0.40 per cent to 0.29 per cent. This is a major

contrast to the figures in Table 2, which show that the big four banks

increased their underlying profit from 2.26 of GDP in 2008 to 2.91 per cent

in 2009.

expenses and depreciation) for non-financial corporations fell four per cent in nominal terms from

Table 3: Performance data of the smaller banks

Year ended

June-08 June-09

Charge for bad or doubtful debts ($m) 449 1,808

Profit before tax ($m) 4,589 1,846

Total underlying profit before tax and losses ($m) 5,038 3,654

Performance indicators—%GDP

Charge for bad or doubtful debts share of GDP 0.04 0.14

Profit before tax share of GDP 0.37 0.15

Total underlying profit before tax and losses share of

GDP 0.40 0.29

The figures presented above highlight the difference in the reaction of the

big banks to the increase in bad debts associated with the global financial

crisis compared with that of the smaller institutions. The major banks simply

increased the amount they charged their ‘good’ customers in order to help

offset the losses they were incurring by lending too much money to ‘bad’

customers. Although they would have liked to, smaller banks could do not

do the same because they do not possess the same level of market power.

The very large profits earned by Australian banks have long puzzled those

who look at the industry from the orthodox point of view. For example, the

former Governor of the RBA, Ian Macfarlane, has said:

I, like you, have often wondered why banks are so profitable—and they

certainly have been extremely profitable in Australia … They always

were very profitable, let's face it. They were very profitable in the

regulated phase, and some of us thought that those profit rates would go

down in the deregulated phase, as competition heated up. So you can

understand why people are very interested in profits and very surprised

As the next chapter will show, the real reason behind the power of

Australia’s large banks to extract disproportionate amounts of profit

compared with both smaller banks and other categories of business is the

degree of centralisation in the sector. Put simply, the behaviour of the

banks increasingly resembles the sort of behaviour that occurs in a

monopolistic market. Monopolies typically use their market power to limit

services, creating an artificial scarcity and so increasing prices and profit.

Indeed, the excessive profits of the big banks can be likened to a massive

tax that they impose on the Australian economy.

Hansard, Thursday 17 June 1999, pp. 77–80. (Mr Ian Macfarlane, Governor of the Reserve Bank

of Australia).

When Australian financial markets were deregulated in the 1980s, it was

predicted that greater competition would deliver efficiency gains and a

better deal for banking customers. This section describes how the

theoretical forecasts of the impact of deregulation bear little resemblance to

the way events have unfolded. The architects of financial-market reform

assumed that deregulation would lead to an increase in the level of

competition because it would remove barriers to the entry of new financial

institutions. Yet precisely the opposite has occurred: since 1983, the major

banks have steadily consolidated their market power at the expense of

credit unions, building societies, foreign banks and home-loan originators.

Concerns about the exploitation of market power by Australian banks go

back to before Federation, as do the efforts by policymakers to counter

them. Early governments tried to generate competition in colonial times by

establishing some of the early state-owned banks and, soon after

Federation, the Commonwealth Bank in an attempt to offer fairer

alternatives to the private banks. Building societies, credit unions and later

the mortgage originators (for example, RAMS and Aussie Home Loans)

were each promoted as potential competition against the banks. Similarly,

foreign banks have at times been championed as the means of providing

In industries such as banking, ‘competition’ between suppliers appears to

reflect the common-sense meaning of the word applicable to the sporting

ground. At the end of the season there will be one winner, competition

having gradually eliminated the weaker teams. In sport, the team that

finishes on top tends to be the one that was also consistently well above

average throughout the season—the top performer in other words. Unlike

competition between sporting teams however, the survivors of competitive

immediate prospect of providing an effective competitive stimulus [to domestic banks]’. In

December 1983, the Hawke Government announced a review of foreign investment policy and

flagged the possible entry of foreign banks. On 10 September 1984, Treasurer Paul Keating

announced that the government had decided ‘to call for applications from both domestic and

foreign interests wishing to operate as banks in Australia’. The aim was to have foreign banks

compete with domestic banks and so bring ‘the development of a more innovative, efficient and

Campbell, Chairman), AGPS, Canberra, 1981; P Keating, ‘Participation in banking in Australia

battles between large corporations are likely to have experienced a great

deal of luck. For example, these organisations might have been bigger to

begin with, or they may have been established before their competitors.

In Australia, the big four banks are the lucky recipients of just such an

advantage—that of incumbency. They have therefore appeared to be

largely immune from external competition and have emerged from the

global financial crisis stronger than ever. Virtually the only procedures that

seem to work against their market power are the actions of the RBA, which

effectively imposes price controls on some of their fees and charges.

A highly concentrated industry in which the top firms make very high profits

implies an industry that needs a dose of competition to challenge the

incumbents. That, at least, seems to be the thinking of most commentators.

There has been a strong and persistent view that if monopoly (or oligopoly)

is a problem, the solution is to pit more competitors against the monopolist.

Pricing power, leading to high profits and resulting in dangerous social and

economic consequences, has been a common theme in Australia, and

there is a long history of attempts to find competitors to pit against the

banks. One of the early examples followed the crisis of 1841–43, which

saw banking collapses and banks forcing borrowers into insolvency. The

Legislative Council of New South Wales established a Select Committee

on Monetary Confusion, which proposed a central bank that would

compete against the private banks with its own notes issue. (In those days,

even private banks issued their own currencies.) As it happened, the

legislation that followed the Committee’s report was refused assent by the

At the Commonwealth level, the government established the governmentowned

Commonwealth Bank of Australia in 1911. At the time, ‘the

argument for the national bank was based on the proposition that the

the earlier speculation and subsequent slump of the 1890s. It was thought

that the private banks needed competition from a socially responsible

institution.

Press, Sydney, 1968.

Canberra, 1968, p. 18.

In the 1960s and 1970s, competition from building societies and credit

unions was seen as the answer to the power of the banks. In the 1980s, it

was argued that foreign banks would provide the necessary competition.

More recently, regional banks and mortgage originators (for example

RAMS) were expected to challenge big-bank market power, but these

organisations have suffered as a result of the global financial crisis and

Despite the faith of successive governments in the capacity of new entrants

to prevail over the big banks, their impact never reached expectations.

Figure 1 illustrates the results of such policies by tracking the market share

in loans and advances across all financial institutions in Australia since the

mid-1950s. The top line traces the shares for banks and the bottom for

non-bank financial intermediaries (NBFIs), which include building societies

and credit unions as well as finance companies, mortgage originators and

World War II, banks occupied a dominant position in the credit market,

holding 83 per cent of all loans and advances. By 1980, however, their

share had shrunk to 50 per cent. Significantly, this period of decline was

dominated not by faith in competition but by regulation. When the

deregulation phase that began in the 1980s was complete, the share of

overall lending attributable to the banks had increased again and now

exceeds 90 per cent.

discussion would reveal a similar history—a brief challenge that is soon met and neutralised by

the major Australian banks.

superannuation funds, cash management trusts and general insurance offices.

Figure 1: Market share: banks and non-bank financial intermediaries

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

Banks share NBFIs

Bank deregulation begins

Campbell Report

Attractive economies of scale in banking lead to the conclusion that further

concentration among the remaining banks is likely. While such

consolidation leads to increased profit, the reduction in competition is likely

to be bad for consumers; without pressure from rivals there is no

compelling reason for the banks to pass on the savings achieved through

economies of scale.

In recent decades, an important theme has been the prevention of further

mergers between the remaining big four banks, a policy sometimes termed

as the ‘four pillars’ banking policy. It is generally believed that, bad as the

present situation might be, it would be worse if any of the remaining banks

merged. The four pillars policy evolved from the ‘six pillars’ policy

four banks and the big two life-insurance companies, AMP and National

Mutual Life Association (now AXA Asia Pacific). Notably, the National is

8, various dates.

currently part of a bid for AXA Asia Pacific and, if successful, this would turn

the six pillars into five.

The global financial crisis has meant that the biggest of the banks are

growing even bigger. The total share capital of the Australian banks was

These institutions are now not only ‘too big to fail’, but are rapidly becoming

system ‘should seek to avoid the emergence of banks that are too big to

fail’. He adds that the ‘encouragement of new deposit-taking institutions

In the UK, the Bank of England has expressed concern that larger banks

are becoming too complex. It complains that ‘some large, complex banks

have over 2,000 distinct legal entities across different countries’ and, as a

Some commentators have suggested that the banks need to be trimmed

down to their core functions. Recently Strauss-Kahn, the Managing

Director of the International Monetary Fund, has said

… [I]n the wake of the crisis, it is now widely accepted that in some

countries, the financial sector has grown too large. It has gone well

beyond its core function of financial intermediation, and devoted much

energy to financial engineering—generating products that have been

profitable for the industry, but of more doubtful value to the economy as

Similar concerns could be expressed about the Australian banking system.

Competition has an important function in modern economies. Its end result

should be that markets are served by suppliers that earn just enough to

cover the cost of the resources they use and provide a modest return on

investment. However, in an industry such as banking, the end result of

competition is the dominance of the market by a small number of large

Dominique Strauss-Kahn, Managing Director, International Monetary Fund, Paris, 24 November

2009.

players earning excessive profits at the expense of the rest of society. If the

market acts perversely, as it has in the Australian banking sector, nonmarket

solutions are necessary to prevent a small number of large

institutions from extracting monopoly profits from the broader economy.

In the wake of the global financial crisis, which has seen an increase both in

the underlying profitability of the big banks and the levels of concentration in

the industry, strong competition policy and firm action against anticompetitive

behaviour are going to be even more critical. A common

response from government to the power of the banks has been to suggest

that consumers ‘shop around’. As the then Treasurer Peter Costello

remarked in 2000, ‘I always encourage people having trouble with their

Government has introduced switching policies designed to make it easier

for customers to shift their accounts to other banks, an idea based on

research by the Organisation for Economic Co-Operation and

Development (OECD) that found increased scope to enhance competition

Unfortunately, Australian customers appear particularly unwilling to change

The explanation for ever-increasing market concentration (and the profits

this brings) lies in the interaction between banks and their customers. In the

next section, we describe consumers’ banking experiences and the

attitudes of ordinary Australians towards banks.

House of Representatives Standing Committee on Economics, July 2008.

The nature and structure of the banking sector depends to a large degree

on the individual decisions of millions of Australians about which institutions

to trust with their financial affairs. This section examines how different

sections of the population tend to favour different categories of financial

institution and discusses the extent to which customers consider switching

between banks, a key measure of competition from the consumer

perspective. The section goes on to describe how millions of Australians

are regularly encouraged by overtures from financial institutions to take on

more debt in one form or another and finally reports on community attitudes

towards the market power of the big banks.

The information presented below is drawn from a survey of 1,360 adults

As Table 4 shows, survey respondents reflected the profile of the retail

banking market, with most respondents (70 per cent) saying they did most

of their banking with one of the big four banks. Fourteen per cent reported

using another bank, while another 15 per cent banked with a credit union.

Younger people (76 per cent of 18 to 24 year olds) were more likely to bank

with one of the big four than older people (61 per cent of those over 55

years).

Table 4: With which kind of institution do you do most of your banking?

18–34 years 35–54 years 55+ years Total

One of the big four banks 76.4% 71.7% 60.8% 69.6%

Another bank 14.8% 13.8% 13.8% 14.1%

A credit union 6.8% 13.3% 24.1% 14.8%

Other 1.9% 1.2% 1.4% 1.5%

Base = 1,360

Respondents who banked with one of the big four were asked whether

they had ever considered switching to another bank (not one of the big

four) or a credit union. Roughly half (49 per cent) had considered switching

to another bank, while 41 per cent had considered switching to a credit

union; together, 57 per cent had considered switching to one or the other.

Viewed another way, fully 43 per cent of people banking with one of the big

four have never considered switching to a smaller bank or credit union.

Survey results reveal the extent to which ordinary Australians encounter

offers from banks to take on debt in various forms, even without going near

a bank branch. Two in three respondents (66 per cent) reported receiving

an unsolicited offer for a new credit card in the past 12 months, while one in

two (49 per cent) had received an unsolicited offer to increase their creditcard

limit. One in three (36 per cent) had received an offer for a personal

loan, and one in five (18 per cent) had an offer to increase the available

credit on their home loan.

Such unsolicited offers, which can come by post, by email, in a bank

branch and even in a public place such as a shopping centre, were by no

means restricted to those on substantial incomes. As tables 5 and 6 show,

a majority of respondents who were not in paid employment together with a

majority of those living in households with a combined income of less than

$40,000, had received an offer for a new credit card in the previous 12

months. While people on higher incomes were more likely to receive such

offers, the marketing of debt among people on low incomes is clearly

widespread. For example, one in three people in low-income households

had received an offer of a personal loan in the past year without seeking

one out.

Table 5: Unsolicited offers for credit in the previous 12 months, by

employment status

In paid

work

Not in paid

work

All

Offer for a new credit card 69.2% 60.6% 65.8%

Offer to increase credit card limit 54.9% 40.8% 49.4%

Offer for a personal loan 39.7% 30.8% 36.3%

Offer to increase the available

credit/redraw on home loan

21.1% 13.5% 18.2%

Table 6: Unsolicited offers for credit in the previous 12 months, by

household income

Less than

$40,000

$40,000–

$80,000

More than

$80,000

All

Offer for a new credit card 58.8% 67.1% 73.3% 65.8%

Offer to increase credit card limit 41.2% 52.1% 58.0% 49.4%

Offer for a personal loan 31.4% 39.6% 39.3% 36.3%

Offer to increase the available

credit/redraw on home loan

16.5% 16.3% 23.2% 18.2%

Survey findings indicate that most Australians do not believe that the highly

concentrated structure of the banking market is desirable. Three in four

survey respondents (72 per cent) agreed that the big four banks in Australia

have too much market power, while only 13 per cent disagreed. People

who did their banking with a smaller bank or credit union were more likely to

believe that the big four have too much market power.

Table 7: In your view, do the big four banks in Australia have too much

market power?

Banks with

one of the

big four

Banks with

another bank

Banks with a

credit union

Total

Yes 69.1% 77.6% 81.6% 72.3%

No 14.5% 9.9% 7.5% 12.7%

Not sure 16.5% 12.5% 10.9% 15.0%

Base = 1,360

The survey also asked respondents for their views on whether its profits

affect how ‘safe’ a bank is. Around one in five (19 per cent) said that it is

Younger people were much more likely to believe that a bank with big

profits is safer. People who banked with one of the big four were also more

likely to hold this view, suggesting that perceived ‘safety’ is a factor in their

choice of financial institution.

Among those who banked with one of the big four, respondents who had

never considered switching to a smaller bank or credit union were more

likely to believe that bigger profits equal more safety than those who had

considered switching. Around a quarter of big-four customers apparently do

not interpret recent bank profits as evidence of overcharging; on the

contrary, they see such profits as evidence they have chosen a ‘safe’ bank

for their funds.

Figure 2: Proportion of respondents who said that it is safer to deposit

money with a bank with bigger profits*

28.0%

16.8%

11.7%

23.5%

10.4%

4.0%

19.1%

29.2%

18.5%

18-34 years

35-54 years

55+ years

Big 4 customers

Customers of other

banks

Credit union

customers

Considered

switching**

Not considered

switching

All

* Base = 1,360

** Considered switching from one of the big four banks to a smaller bank or a credit union.

These survey findings present an interesting snapshot of the relationship

between banks and their customers. They show that older people are more

willing to use alternatives to the major banks: more than one in three people

over 55 years use a smaller bank or credit union compared with one in five

people under 35. However, three in four Australians still do most of their

banking with one of the big four.

Of those that bank with one of the big four, 43 per cent have never even

considered switching to a smaller bank or credit union. This result is

surprising given the industry’s claim that competitive pressures in the sector

are strong. Even with constant negative media coverage about the major

banks and widely reported community concerns about their conduct, many

Australians are simply not prepared to shift their banking to a smaller

institution. This is despite the fact that customers are regularly subjected to

attempts by banks to lend them money, even where they have expressed

no interest whatsoever in taking on debt.

Perceptions about ‘safety’ appear to be related to the tendency for

Australians to stick with what they know when choosing a bank. Of course,

nobody wants to lose their money and anyone would be well advised to

avoid financial institutions without a strong track record and balanced

books. However, the level of prudential regulation in this country, along with

the government’s guarantee on deposits of up to $1 million, mean that

there is very little risk in choosing a credit union or smaller bank over one of

the big four. Young people are more likely to equate big profits with safety

and also more likely to bank with one of the big four.

the realm of consumer psychology where perceptions are so critical, the

incumbents have the advantage. Even as they make record profits, the big

four are simply reinforcing a common community misconception that the

bigger a bank’s profits, the safer it is. The survey results show that one in

five Australians believe this to be the case, although people who bank with

smaller banks or credit unions are much less likely to hold this view.

Despite the suggestions of economic theory, choosing a bank is not a

simple matter of comparing fees and interest rates or weighing up the

relative risks of different institutions. Instead, it is a decision influenced by a

host of non-rational ‘human’ factors. The next section explores the way

people make financial decisions in an increasingly complicated and

confusing environment.

As discussed above, the big four banks command three-quarters of the

retail banking market in Australia. A great many factors influence the

choices people make about their financial affairs, including which

institutions to bank with.

This section provides a real-world account of the way people make

decisions about banking. It draws on research into consumer choice in

financial services to explain how the orthodox economic theory of the

rational consumer is inadequate, both in describing behaviour and guiding

regulation. Instead, behavioural economics presents a much more

compelling account of why people make the financial decisions they do in

the real world.

In the ordinary course of our lives we make all manner of decisions ranging

from the trivial and inconsequential, such as which breakfast cereal to buy,

to important judgements that will affect our future, such as which career to

pursue. Modern society presents us with an increasing number of choices

in almost every facet of our lives. Indeed, one of the defining characteristics

of the globalised economy is the range of choices available to ordinary

consumers.

Choice is usually regarded as inherently good. Common wisdom has it that

people like choice and that governments and businesses contribute to

social wellbeing by facilitating greater choice. At the individual level there is

much evidence to support this view. Choice has been shown to enhance

people’s sense of self-determination and motivation to perform tasks, while

the increased sense of control associated with choosing leads to improved

psychological and even physical health. Choice can also help people to be

Consumer choice is at the heart of mainstream economic thought. Rational

choice theory, for example, assumes that individuals have well-defined and

consistent preferences and will act in ways that maximise their own ‘utility’.

It also assumes that people can access enough information to enable them

to properly assess the costs and benefits of each option, so that the right

it is possible to assess the costs associated with acquiring that information,

at which point an ‘informed’ judgement can be made about whether to seek

out further information. When the costs and benefits of all these options

(including finding more information) have been weighed up, the outcome

will, according to rational choice theory, maximise individual wellbeing.

Increasing the amount of options allows every individual to express his or

her preferences more exactly and this enhances collective welfare. By this

Of course, it is difficult and perhaps impossible to determine what

competing factors coalesce in the minds of individuals as they form their

preferences. Rather than examining how people assess different options,

economists rely on the theory of revealed preference, the idea that an

individual’s actions, usually in the form of their purchasing decisions, are the

true test of their needs and wants. The axiom of revealed preference

provides a sort of guarantee that the choices people make are always in

their best interests, and that collective choices are in the best interests of

society generally. But in so doing it relies on a circular logic, assuming that

people always understand completely what choices reflect their best

interests. Challenging the notion of revealed preference, there is persuasive

evidence that people often make choices based on emotional factors rather

than a strictly rational appraisal of costs and benefits.

Most decisions about personal finances, including decisions about savings,

investments, retirement planning, insurance and other financial products

and services, involve determining which product is most suited to one’s

needs. It is reasonable to say that one savings product is ‘better’ than

another because it earns more interest, or that one insurance policy is

superior to another (on comparable terms) because it is cheaper. It is the

‘right’ decision to choose an investment product which will maximise

returns, and the ‘wrong’ decision to opt for a product with lower returns.

Although financial providers often rely on subjective or emotional triggers to

advertise and promote their products, orthodox economic theory assumes

2007.

2000, pp.79–88;

Botti and Iyengar, ‘The Dark Side of Choice‘.

that people make decisions about financial products according to objective

rather than subjective criteria. However, emotional factors such as trust in

particular institutions or brand recognition have a disproportionate influence

on financial behaviour.

In order to make the right choice, consumers of financial products need the

right information. This is not necessarily a problem for very knowledgeable

consumers, who are able to understand the implications of each option. For

other consumers, however, the cost of acquiring and interpreting this

information, the ‘cost of thinking’, is very high. This could be the result of

insufficient education or problems with numeracy, or it could simply be

through lack of experience. Faced with a decision they are not qualified to

make, people often end up making no choice at all, even when that is the

worst option available. According to psychologists, ‘the more choosers

perceive their choice-making task to necessitate expert information, the

more they may be inclined not to choose, and further, they may even

This account of how people make choices is very different from that

advocated by orthodox economics. While ‘irrational’ decision-making may

not be a problem for many of the insignificant choices we make in everyday

life, it can have serious implications for our personal finances. The

consequences of some financial decisions are only felt many years later, by

which time a poor choice will be too late to rectify. Further, some people

may never realise that they have made the ‘wrong’ decision because they

are unaware of what alternatives there might have been. Despite this, the

range of financial options available to consumers, and the knowledge

required to assess them, continues to grow. The assumption behind these

trends is that people generally like more choice, and in particular prefer

more choice in the context of their finances. Yet, as recent empirical

research has shown, ‘posing choices in this way … is to pretend that

Exacerbating this situation is the fact that much of the information currently

available to consumers, both on individual financial products and general

financial issues, can be extremely bewildering. This was acknowledged by

is borne out by the growth in the financial advice sector, which has taken place at the same time

as the range of options available to retail investors has grown.

the Australian Government’s Consumer and Financial Literacy Taskforce in

that consumers ‘have a number of common problems with information and

advice’, including:

advice received

(particularly the case with young consumers)

According to the Taskforce, when information becomes too confusing,

‘consumers tend to resort to easier and more trusted sources of information

misconceptions are perpetuated.

Together, these factors create a major discrepancy between the

information and knowledge available on the one hand to financial providers

and institutional investors and on the other to ‘ordinary’ or retail consumers

of financial products and services. Consumers can find it much more

difficult to assess various types of risk, including market, institutional and

inflation risk, due to the inherent complexities of financial decision-making.

Under orthodox economic theory, such ‘information asymmetry’ is actually

a form of market failure. In other words, markets in which some participants

possess important information while others do not tend to generate

Behavioural economics is a relatively recent field of study that seeks to

integrate the lessons of psychology with an economic account of human

behaviour. In orthodox economic theory, human beings are assumed to be

strictly rational creatures who make choices by carefully assessing the

paper, Commonwealth of Australia , 2004.

costs and benefits of each option. As a result, ‘virtually all the behaviour

studied by cognitive and social psychologists is either ignored or ruled

conveys the many ways in which choices deviate from the rational model.

One of the key lessons of behavioural economics is that people look for

shortcuts when they are forced to make decisions for which they have no

clear preference or where the cost of acquiring information is high. They

apply what psychologists call an heuristic, a rule or short-cut that allows

them to solve complex problems even with incomplete information. Table 8

presents a list of common patterns of behaviour, identified through

behavioural research, which are particularly relevant in the realm of

support the contention that consumers often do not possess the

wherewithal to make decisions about their personal finances in ways that

correspond to their own self-interest.

Economic Research, Cambridge MA, 2000, p. 2.

tendencies can be found in the following sources:

Economics Foundation, London, 2005;

O Mitchell and S Utkus, ‘Lessons from Behavioural Finance for Retirement Plan Design’, in O

Pension Research Council, Oxford University Press, 2004, pp. 3–41;

214;

(2), 1997, pp. 443–77.

Table 8: Common behavioural biases in financial decision-making

Name Definition

behaviour of other people.

The tendency to believe that a given instance is representative

of a larger class of phenomena.

The tendency to prefer easily available information over

information that is more difficult to acquire.

options, in response to a large number of choices or

overwhelming complexity.

whether other options are preferable in an objective sense.

Closely related to procrastination and frailty of will.

specific, available number.

a situation is described or explained, rather than its objective

reality.

competence.

one’s pre-existing beliefs.

different financial commitments, despite the complete fungibility of money.

real terms.

Bank customers are real human beings, not the super-rational consumers

of orthodox economic theory. This means that they are susceptible to

predictable behavioural biases, which will sometimes cause them to make

decisions that are not in their own financial best interests. As the amount of

choice in the financial marketplace increases and decisions become more

complex, levels of confusion and misunderstanding about financial

products grow accordingly. From society’s perspective, this is a negative

development, but for financial institutions it presents an enormous

marketing opportunity.

The fundamental aim of much of the marketing undertaken in the retail

banking sector is to turn what should be objective decisions (‘which product

is best according to the following criteria?’) into subjective or emotional

decisions (‘which brand do I feel best about?’). This is not easy, because

financial decisions are not usually exciting or emotionally captivating. Banks

therefore go to great lengths to imbue their brands with the kinds of

emotional connotations that will attract customers. One of the best ways to

do this is through fear: fear of not having enough money in retirement, fear

of the disapproval of others, fear of losing one’s life savings and so forth.

The bank or its product then becomes the solution to, or a way of placating,

such fears.

If, as a result of such overtures, customers decide to use financial products

that match their needs, this marketing is unobjectionable. If, however, they

use financial products which are inappropriate for them, it is actively

working against their interests. This may be the case where people are

encouraged to take on more debt than they can comfortably service, even

if they can technically ‘afford’ the repayments. As noted in the previous

chapter, 66 per cent of Australian adults, and 61 per cent of people who are

not in paid work, have been offered a new credit card in the last 12 months.

Similarly, 55 per cent of adults, and 41 per cent of people not working, have

received an offer to increase their credit-card limit. In other words, large

sections of the Australian population, including many people in difficult

financial circumstances, are continually encouraged to take on more debt.

As we have seen, when people are asked to make financial decisions that

they do not fully understand they often rely on other people for help,

particularly people whom they regard as better qualified or informed. In the

case of bank products, people often rely on the advice they receive from

bank workers. What is not well understood is that bank workers in Australia

are often themselves incentivised to sell their bank’s products. The more

products they sell—in other words, the more debt they convince customers

to take on—the more money they make. In fact, encouraging tellers and

call-centre representatives to sell debt products is an integral part of a

bank’s marketing strategy. According to a recent survey commissioned by

the Finance Sector Union (FSU), 59 per cent of bank workers believe that

‘selling debt to customers’ has ‘become a much higher priority [in recent

years] and sales targets always go up’. Seventy three per cent of workers

agreed that ‘every year, my sales targets go up’, and 43 per cent agreed

that ‘I am under pressure to sell debt products, even if customers don’t ask

for them and may not be able to afford them’. This survey found strong

support among bank workers for removing the link between their

remuneration and the sale of debt products, particularly for a return to an

environment in which customers can be confident that the advice given by

Debt-pushing by bank workers is just one part of the sophisticated and

multi-faceted marketing operations of Australia’s big banks. They also

spend enormous sums of money on advertising in the mass media, on

junk-mail campaigns and even on face-to-face marketing in public places.

In fact, as Table 9 shows, the big four banks spent over $1 billion on

advertising alone in 2008–09, more than the Australian Government

Bank $ million

ANZ 195

Commonwealth 475

National 219

Westpac 155

Together, all this marketing allows banks to take maximum advantage of

the frailties of willpower and knowledge that real consumers demonstrate

when faced with financial choices. And while constant marketing can

maximise shareholder returns, the effect on broader society is a negative

one. Given the enormous profitability of banking, it may be time to rein in

the marketing of debt through greater regulation.

Sector Union, April, 2010.

ABC Television, $316 for ABC Radio and $95 for the ABC’s analog transmission. See Australian

for the Commonwealth include ‘marketing’ and ‘loyalty’, while figures for ANZ include ‘public

relations’.

The global financial crisis was caused in part by ‘irrational exuberance,’

where banks lent too much and individuals borrowed too much. A

behavioural understanding of financial decision-making suggests that,

when faced with numerous, complex and important choices, many people

will procrastinate, go with the easiest or simplest option, or rely on others to

make decisions for them. This means that policy responses need to be

more interventionist than simply providing consumers with more

information. Indeed, it could be argued that a substantial proportion of bank

profits and, in particular, the enormous profit margins made on credit cards,

are associated with the lack of attention that customers pay to their financial

affairs.

The consequences of this unwillingness or inability to ‘shop around’ are far

greater than the direct costs to consumers in excessive fees and interestrate

differentials The entire regulatory structure of the Australian banking

system is based on the assumption that ‘rational’ banking customers will,

by analysing all the relevant costs and benefits of particular courses of

action and acting accordingly, keep continuous downward pressure on

bank fees and interest rates.

The evidence shows that this picture of consumer banking behaviour falls

woefully short of reality. In the absence of super-rational consumers who

exert competitive pressures on banks, bank profits can be expected to

keep rising indefinitely unless additional regulation is imposed. Policy

responses should be based on the reality of the banking market in

Australia, not on economic theories that do not correspond with the facts.

Recently, the big four banks have tried to claim much of the credit for the

admirable performance of the Australian economy through the global

financial crisis. They have used their prudential strength, which is not

unrelated to their huge profits, to argue against tighter controls on their

activities. Even senior government ministers praise the banks, presumably

to remind voters that they presided over a system in which no Australian

banks failed even as other banks around the world ran into trouble.

The power of Australia’s big four banks is unmistakable; they exert an

enormous degree of influence over the economy and over their customers.

Their underlying profits equate to almost three per cent of GDP, up from

less than one per cent a quarter of a century ago. Of every $100 spent in

Australia, nearly $3 ends up as underlying profit for the banks.

Profits are high because the banking market is highly concentrated. The

top four banks now control more than 75 per cent of all bank assets and

banks account for over 90 per cent of all lending by financial institutions in

Australia. This circumstance has distorted competition, allowing the big

banks to become extremely profitable with underlying profits of around $35

billion; some $20 billion of this amount represents the rewards reaped as a

banking market is overly concentrated: three in four survey respondents

(72 per cent) agreed that the big four banks in Australia have too much

market power, while only 13 per cent disagreed.

The banks claim that because they compete with each other, interest rates

and fees are kept at reasonable levels, a claim that rests on the assumption

that consumers will readily switch banks when they see the opportunity for

a better deal. By contrast, our survey results show that 43 per cent of bigbank

customers have never even considered switching. In fact, only three

figure for a sector that is allegedly subject to free and open competition.

Once a bank signs up a new customer, it can be quite confident of keeping

that customer for decades to come.

Australia Institute, March 2010.

The backdrop of the global financial crisis and financial collapses abroad

have fostered a view in the community that the bigger a bank is, and the

appear to hold this belief, with 19 per cent of survey respondents agreeing

that it is safer to deposit money in a bank with bigger profits. Customers of

one of the big four were also more likely to equate profits with safety,

suggesting that this is a factor in consumer decisions about which institution

to bank with. If one in five Australians believe that a bank with bigger profits

is safer, this means that there is a pool of more than three million adult

Australians who hold this view, constituting a massive marketing advantage

for the incumbent players in the sector against smaller banks and credit

unions.

In the wake of the global financial crisis, the corporate sector, drawing on

the doctrine of ‘personal responsibility’ to absolve itself of any culpability in

the debt crisis, has tended to blame individuals for taking on more debt than

they can handle. From the banks’ perspective, the solution to excessive

borrowing is to encourage greater financial literacy. At the same time, they

bombard consumers, including those on low incomes and those not in paid

employment, with offers of credit. Banks also encourage their workers to

sell debt, a situation that often means customers can no longer be certain

of receiving objective advice from their local bank branch. Instead, the

remuneration for bank staff is commonly linked to the amount of debt that

they are able to sell. Given the extent to which credit is marketed by banks,

it is almost inevitable that some customers will take on more debt than they

can manage regardless of how much ‘information’ is available.

In recent years, policymakers around the world have come to recognise

that many people struggle with financial decisions. Their standard response

has been to promote financial literacy through education and awarenessraising,

the assumption behind these initiatives being that consumers

possess the motivation and capacity to improve their financial knowledge.

But there is something missing in this approach. Consumers also need to

be aware of the various ways in which financial providers may attempt to

persuade them to take on more debt than they need, or to use a financial

product that is not in their best interests. They also need to understand the

extent to which certain providers in the retail financial sector dominate all

the others and the techniques they use to reinforce their dominance.

More broadly, government needs to ensure that the environment in which

consumers make financial choices is structured fairly and in a way that

empowers ordinary people rather than just the big banks. To date, the

principal weapon used by Australian policymakers in their battle against the

might of the banks has been competition. Almost a century ago, the

Commonwealth Bank was established to provide genuine competition

against the private banks and since then there have been waves of

competition from credit unions, building societies, finance companies,

mortgage originators and foreign banks. But despite a century of

competitive conflict, the big four banks are stronger now than they have

ever been.

The lesson of history is that competition policy is not very effective against a

large, powerful industry enjoying the competitive advantages that result

from incumbency and economies of scale. One solution might be to require

functional or structural separation between the different functions performed

by banks: deposit-taking and lending, payments facilitation, retail

investment, investment banking and so forth. The aim should be to reduce

bank profits to one per cent or less as a share of GDP, the level they were

at two decades ago. Other policy changes that would contribute to this aim

include:

line with changes to the RBA cash rate and are set and advertised

as a mark-up over the cash rate

that provide payment services and infrastructure to retailers, thus

encouraging new entrants into this market

costs, including a reasonable return on assets

everyday savings/transaction account to every customer

credit to levels that reflect the underlying risk to the lender.

Such initiatives would help bring profits back to a reasonable level, but it is

also important that banks do not use their privileged position to exploit the

vulnerabilities of individual customers. Something more is needed to

ensure that banks behave in socially responsible ways that contribute to the

wellbeing of the broader community.

The use of emotional techniques in advertising and marketing financial

products is common and clearly effective. However, marketing that relies

solely on such techniques without providing any helpful information or

guidance to consumers is misleading and manipulative, prompting

widespread public mistrust of banks. Banks should promote their products

in ways that contribute to, rather than undermine, broader public

understanding of financial concepts and imperatives. If they choose not to

do this, it is the responsibility of government to monitor and regulate their

communication with customers, particularly in the marketing of credit. This

can be achieved in various ways:

people who do not have the capacity to repay

loans made to people who did not have the capacity to repay

when the money was originally loaned

workers

of sales-based commissions

credit extensions

credit products as tax deductible business expenses.

These reforms could constitute part of a formal social contract between

individual banks and government; ratifying the social contract would then

become a condition of maintaining a banking licence. Without this kind of

policy intervention, the profits of the big banks will only get bigger.

The Australia Institute conducted an online survey of 1,360 people in March

2010. Respondents were sourced from an independent, online-panel

provider, Research Now. Each respondent who completed a survey was

given a small incentive of $1.50 through the panel provider.

Quotas were applied to ensure that respondents were representative of the

Australian population with respect to age, gender and state/territory. Data

were also post-weighted by age and gender to ensure results indicative of

the wider adult Australia population.

The survey asked the following questions, as well as collecting standard

demographic information.

One of the big 4 banks (National Australia Bank/NAB, Westpac/St George,

Commonwealth, ANZ)

(Reissue), Cat. No. 4228.0, Canberra, 9 January. Available at:

http://www.ausstats.abs.gov.au/Ausstats/subscriber.nsf/0/B22A471C221C

7BADCA2573CA00207F10/$File/42280_2006%20(reissue).pdf

5206.0, Canberra, 2 September. Available at:

http://www.abs.gov.au/AUSSTATS/abs@.nsf/allprimarymainfeatures/1296

E6064552577FCA25768D007A0D96?opendocument

Australian Bureau of Statistics, Cat. No. 4228.0.

2010.pdf

Available at:

http://www.rba.gov.au/payments-system/clearing-settlement/survey-otcderiv-

mkts/sotcdma-052009.pdf

Australia, House of Representatives, Standing Committee on Economics,

pp. 77–80. (Mr Ian Macfarlane, Governor of the Reserve Bank of Australia).

Australia, House of Representatives Standing’ Committee on Economics,

Commonwealth of Australia, Canberra, November.

Botti, S and Iyengar, S (2006). ‘The Dark Side of Choice: When Choice

24–38.

York.

August.

Costello, P (2000). ‘Interview with Alexandra Kirk’, Transcript No 2000/61,

commissioned by the Finance Sector Union, April.

at:

https://www.tai.org.au/index.php?q=node%2F19&pubid=497&act=display

Iyengar, S and Lepper, M (2000). ‘When Choice is Demotivating: Can One

http://www.columbia.edu/~ss957/articles/Choice_is_Demotivating.pdf

Minister and Treasurer, 23 May, Canberra.

Mitchell, O and Utkus, S (2004). ‘Lessons from Behavioural Finance for

Council, Oxford University Press, pp. 3–41

Paper 7948, National Bureau of Economic Research, Cambridge MA.

November.

Pixley, J (2007). ‘How Do Australians Feel about Financial Investment?’, in

Denemark, D, Meagher, G, Wilson, S, Western, M and Phillips, T,

Press, Sydney.

submission to the House of Representatives Standing Committee on

Banking, Finance and Public Administration, August. Available at:

http://www.rba.gov.au/publications/submissions/intl-comp-bank-marginsapp3.

Bank of Australia, pp. 6–17. Available at:

http://www.rba.gov.au/publications/annual-reports/psb/2009/pdf/2009-psbann-

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2008.

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