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Time to break the banking 'lazy tax'

For all the criticism heaped on big banks, most customers are notoriously reluctant to vote with their feet, and the industry knows this all too well.

The reputations of the major banks have been dragged through the mud this year, thanks to various financial scandals and a political backlash over mortgage rate decisions.

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The CEOs of the four big banks sing from the same song sheet at a parliamentary inquiry - to a hard-to-please audience.

More than two-thirds of voters supported Labor's call for a royal commission into the industry, an April poll found, and Roy Morgan on Monday said customer satisfaction with banks has dropped 2 percentage points since last May's peak, to 79.5 per cent.

Banks have also faced a flood of parliamentary inquiries in recent years, the latest of which last week concluded our "major banks have let Australians down too frequently in too many other ways".

Yet for all this scrutiny, how many customers do you think have dumped their bank for a rival?

Treasury figures show the number of people using an official account-switching program has been minuscule since it was introduced in 2012. 

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Only about 60 people a week used the service to have their payments transferred to a rival at its peak in 2013, but this has now dipped to about 40 a week at the past full year. 

While some undoubtedly change banks without using the government's switching service, it's common knowledge in banking that customers are "sticky".

So, what's behind this peculiar loyalty to the big four? And what does it mean for competition?

It's sometimes said customers are more likely to get a divorce than they are to break up with their bank. There's the hassle of switching all the payments to and from accounts, and besides, most of us would rather do something better with our time.

This is great for the banks' bottom lines, as it emboldens the type of unpopular interest rate decisions of a few months ago.

But policymakers have long seen the consumer inertia in banking as a problem, because it leaves us with a less-competitive market. 

If people are reluctant to shop around because it's just too hard, banks can set their prices higher than otherwise, also known as levying a 'lazy tax' on their customers.

If people are reluctant to shop around because it's just too hard, banks can set their prices higher than otherwise, also known as levying a "lazy tax" on their customers.

This theme was picked up in last week's House of Representatives inquiry into the big four banks, like other inquiries before it.

The good news is that this time around, technological advancements could finally help to break the banking lazy tax, though it will also require politicians to act.

The report identified a couple of bright spots on the horizon.

One is that many of the practical difficulties of changing accounts should be removed by a new $1 billion system known as the new payments platform (NPP), which goes live next year.

For years, consumer advocates have been talking about making switching bank accounts more like changing mobile phone providers, where number portability in the early 2000s gave a big boost to competition. It's never happened in banking because of the cost involved.

Currently, you can have your direct debits and credit changed to the new bank by signing one form, but this does not apply to BPAY transactions or payments from debit and credit cards.

According to last week's report, from next year it should be easier to switch, because the NPP will do away with the complicated system of having to provide BSB and account numbers, instead linking payments to an email, or a mobile phone number.

"In this world, as noted by the RBA governor, shifting a customer's regular outgoing and incoming payments will be as simple as changing the relevant link," the report says.

The NPP may be less useful for people wanting to switch multiple products such as credit cards, so the committee recommended revisiting the switching question again in the future.

Yet even if switching accounts does get easier, that won't change the reality that many consumers still find it hard to compare if they are getting a raw deal because of the complex way many financial products are priced.

So, the second bright spot on the horizon is computer programs that can help consumers make better financial comparisons.

Unlike other goods, financial products are often designed to make them hard to compare with others. With a credit card, for instance, the type of card (if any) that is good value may depend on fees, interest charges, whether you pay your bill on time, not to mention the ins and outs of the card's loyalty scheme.

To help consumers navigate these sorts of decisions, the inquiry recommended banks be forced into a data-sharing regime, where banks must provide "open access" to key data on their customers by July 2018.

Under this approach, banks would have to give their smaller rivals access to a customers' financial and transaction history, where that is what a customer wanted.

It also said banks should be forced to provide their product terms and conditions in a standard form that computers could read – to allow programs to crunch the numbers on what would make sense for customers.

Such a system would obviously need very strong privacy and security safeguards.

But if these were satisfied, it could help overcome what economists call "information asymmetry" – the fact banks know much more about finance than most customers. That would help smaller rivals to be more effective competitors to banks, and hopefully, better service to customers. 

Who knows, it may even prompt more consumers to take their business elsewhere when they're unhappy.

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