Reforms To Cost Banks Millions

The Age

Friday February 8, 2008

Marc Moncrief, Banking Reporter

BANKS face new costs under Federal Government plans to make it easier for customers to switch institutions.

Federal Treasurer Wayne Swan has stepped up pressure on banks to make it easier to redirect direct-debit and credit transactions to new accounts. Customers have named the hassle of redirecting bills, salary payments and other direct transactions as a big disincentive to switch banks.

But if the changes come into effect, the banks could be forced to spend millions of dollars on computer systems and retraining staff.

Banks will have to develop computer systems to transfer customers' electronic payments information to service the customers they lose, and will need to build systems to receive that information without inconveniencing new customers.

In addition, the industry will have to develop a code of practice that protects the privacy of customer information.

Banks are waiting to see the details of the plan, which may be delivered as early as today. A Government spokesman would say only that the plan was "imminent". The spokesman said the costs to banks had not been considered.

Banks have been coming under government attack over the difficulties associated with switching accounts as higher interest rates focus customers' minds on their banking relationships.

The debate has focused not only on administrative impediments to switching banks but also on fees charged on mortgage accounts when loans are repaid early.

The heat is unlikely to be reduced soon, as inflation is projected to remain high, keeping pressure on interest rates, and the influence of the US subprime crisis pushes up rates even without the Reserve Bank.

Billions of dollars in failing loans in the US have caused investors to reassess the risk of buying securities backed by mortgages. This has made it more expensive for banks to "securitise" their mortgages by bundling them and selling them.

"It is widely expected that the US subprime fallout still has some way to go and will continue to have an indirect impact on our economy," National Australia Bank chairman Michael Chaney said yesterday.

He told the annual meeting the cost of borrowing on wholesale markets had worsened in recent weeks, adding to the pressure that caused banks to raise their mortgage rates last month independently of the Reserve Bank.

Commonwealth Bank on Wednesday increased its home loan rates by 0.3 percentage points, more than the 0.25 increase the Reserve Bank announced on Tuesday.

NAB has not yet raised its rates in response to the RBA's action, but it is expected to do so within days.

© 2008 The Age

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