Switching banks too costly

THE hassle of changing direct debits is preventing people ditching their old bank in favour of a better deal elsewhere.

Switching banks too costly

THE hassle of changing direct payments from accounts is preventing people ditching their old bank in favour of a better deal elsewhere, consumer groups and some financial providers say.

But the big banks warn that a proposal to create a central registry of a customer's direct debit and credit information would require far-reaching and costly changes to existing financial and payment processing operations.

The idea of a central registry service was mooted last year by the Australia Bankers Association as a way to make it easier for customers to switch banks; the organisation was prodded into action on the issue by the then-Treasurer seeking to remove barriers to competition.

A central registry was proposed to facilitate the portability of debit and credit arrangements.

In effect, the information and authorisations would be held independent of the customer's financial institution or account.

The suggestion has been canvassed more widely by the Australian Payments Clearing Association in a recent consultation paper, Aspects of Account Switching.

It concludes a registry would involve  "a fundamental change to the existing system, which currently relies on a decentralised data model for its speed, efficiency and cost effectiveness''.

The APCA runs the nation's five payment clearance systems, including the Bulk Electronic Clearing System, on behalf of its financial industry members.

It says BECS has enjoyed strong growth in recent years, with 4 million direct credits worth $20 billion and 1.8 million direct debits valued at $16 billion processed every working day.

"BECS operates on the basis of a decentralised infrastructure with payments bilaterally exchanged through computer links between financial institutions, unlike many other countries where direct credit and debit transactions are processed through a central switch,'' it says.

A central registry would need to hold an estimated 40 million separate customer records, "and these would, of course, need to be regularly updated by all existing financial institutions and billers'' on behalf of customers.

"New linkages, messaging and platforms would be required, and access rights would have to be strictly controlled to protect data integrity, confidentiality and privacy,'' APCA says. "Clearly, the cost would be substantial.''

But Choice and the Consumer Action Law Centre say customers bear considerable cost and inconvenience in switching banks.

"These costs act as more than `hassles' - they amount to a significant disincentive to switch and therefore dampen competition in the industry,'' Choice says.

"Businesses are increasingly pursuing efficiencies through electronic payments and as a consequence consumers are entering into a larger volume of e-payment arrangements.

"The unintended consequence of this development is that total switching costs have grown and will continue to grow.''

The current situation places the whole risk and cost on individuals, it says.

"Because the consumer wears the full liability of the re-establishment process, they are also liable for any direct debit dishonour fees charged by the bank or the biller as a result of delays or errors.

"Consumers routinely keep multiple accounts open for extended periods to avoid such fees, thereby paying additional account-keeping fees.''

Choice says the registry option deserves further examination. Consumer Action says it is clear Australia's payment system has fallen behind international developments.

"We're concerned that the present structure may actually be hiding significant costs due to its inability to support the complexities of future transactions,'' says the centre's co-chief executive, Catriona Lowe.

"It's possible the system needs to undergo a structural adjustment in order to maintain functionality. This may involve significant costs.

"These costs must be balanced against the costs presently being borne by individuals and the costs in terms of efficiency, together with the risk that not making such changes may result in even costlier outcomes in the long run.''

Commonwealth Bank business services general manager Paul Rickard says most customers are able to change their direct transaction arrangements without help.

"The process of switching accounts requires a small amount of manual processing to inform direct credit and debit users of the new account number, but works well,'' he says.

"While we offer free assistance to our customers, most don't need it.''

Mr Rickard says both the financial infrastructure and the behaviour of customers develops over many decades, "and changing either our infrastructure and our customer behaviour is expensive and disruptive''.

But rusted-on loyalty is misplaced and bad for the industry, according to some players. Abacus Australian Mutuals, which represents building societies and credit unions, says research shows 30 per cent of the major banks' customers are not satisfied with the service they're getting, but only 3 per cent take their business elsewhere.

"This mismatch implies that there are barriers to customer mobility and account portability,'' says Abacus spokeswoman Louise Petschler.

But she acknowledges considerable work is needed to achieve a  "completely seamless and instant account switching model''.

ING Direct says that unlike online banking - which has made electronic transactions simple, secure and paperless - direct debit and credit switching relies on  "elements like forms, signatures and verbal authorisations'' that are "soon becoming archaic''.

"In our opinion, direct debits serve the purpose of tentacles for banks to hold on to customers,'' it says.

"Importantly, we have learned that it is during the switching period that people are likely to experience dishonour fees and interruptions to essential services due to payments not being received.''

BankWest retail chief executive Ian Corfield hopes these discussions will lead to changes that make it easier for people to switch for a better deal to switch.

"We would be interested in the introduction of a central registry service similar to models adopted overseas,'' he says.

"For example, the Interbank Switch Support Service in Holland ensures customer continuity is maintained through automatically rerouting of direct debits and information to corporate clients to update their data.''