Bank Fees in Australia

It is common to view banks as financial intermediaries which take deposits and lend funds, thereby earning profit primarily from the difference between the interest rates they charge for loans and those they pay on deposits. Banks, however, provide a range of other financial services. Each of the major banks, for example, offers insurance, funds management, advisory services, financial markets products, and a wide range of transaction services, as well as earning money from its in-house trading activities and provision of products such as foreign exchange to customers. The income earnt from all these activities is known as ‘non-interest income’ and there is a reasonable amount of data on this going back quite a few years. Within the category ‘non-interest income’, there is a smaller component which covers fees for account-servicing, loans and transactions. It is this component which has attracted a good deal of public interest recently and which is investigated in the present paper. Fees have long been a feature of banking relationships. In 1900, for example, banks in New South Wales and Victoria imposed a charge of ten␣ shillings (about $50 at 1999 prices) a year for keeping a current (cheque) account. For much of Australia’s post-Second World War history, however, many banking services were provided free or at very low cost as they were cross-subsidised by the wide interest margins banks earned on their intermediation. This was most evident during the period in which bank interest rates were heavily regulated as such regulation ruled out competition via interest rates. The main avenue of competition left for banks was to provide payments and other services at low, or no, charge to customers in order to attract deposits. Financial deregulation, a process which gathered momentum in Australia in the early␣ 1980s, allowed banks greater scope to compete for deposits and loans on the basis of interest rates. As a result, banks’ net interest spreads␣ – the difference between the average interest rate received and the average interest rate paid ␣ – should have begun to contract.2 This process was slow at first and took a setback in the early␣ 1990s as banks restored their profitability to offset the high levels of bad debts they had incurred at that time (Graph␣ 1). The Reserve Bank first began researching the subject of interest margins at