By Paul Rickard

At half time, the banks are thrashing the politicians in Canberra, and unless Westpac’s Brian Hartzer or NAB’s Andrew Thorburn drop the ball later today, it’s heading for a clean sweep to the politicians.

Standby for a 4-0 scoreline!

That’s probably the best way to summarise two days of testimony by CBA’s Ian Narev and ANZ’s Shayne Elliot to the House of Representatives Standing Committee on Economics ‘Review of Australia’s four Major Banks’. The politicians have barely landed a glove. 

Giving politicians the chance to publically grill Bank CEO’s is the Turnbull Government’s way to be seen to responding to Bill Shorten’s demand for a Royal Commission, and to placate some of the Members within his own side. To be held at least annually, the hearings this week are the start of the exercise.

However, the Politicians’ failure to identify any new concerns or make a substantive case about a lessening of competition in the industry highlights why the idea of a Royal Commission is such a dumb idea. Hundreds of millions of dollars in fees to lawyers, years before any recommendations (if any) would be implemented, and a huge cost and distraction for bank management. This has always been a dumb idea and remains a dumb idea.

And for the record, I should disclose my conflicts here. I am a former Commonwealth Bank Senior Executive, and currently, a lot of my person wealth is invested in the four major banks. I, like millions of Australians, have a vested interest in making sure our banks are profitable. 

Banks have vulnerabilities

That’s not to say that the major banks don’t have some serious issues which need to be addressed, but they are potentially all fixable. For example, the fact that in the case of the Commonwealth Bank - which has been responsible for some scandalous behavior with its CommInsure and financial planning divisions - no senior Executives have been fired and held accountable, is a bad look and an unsatisfactory outcome. The buck needs to stop somewhere.

On broader issues such as bank culture, executive remuneration, the appropriateness of linking remuneration for branch and other front-line staff to sales targets, and measuring “real” customer satisfaction, the banks have much work to do. But this is in their hands to fix. A Royal Commission may sharpen and hasten the thinking, but isn’t capable of delivering the solution.

Competition is no holy grail

The point that Committee Members seemed most on intent in making was that competition in the banking industry has decreased. They attributed this alleged lessening of competition, in part, because of the way the Rudd Government elected to guarantee the deposits of the banks following the GFC.  

Impacts of reduced competition were evidenced by an 83% market share for the four major banks, a failure to pass on the full amount of RBA rate cuts, almost no change to credit card interest rates and a return on equity for the major banks well above what banks offshore achieve.

But the competition is real. There are more than 140 authorised financial institutions that can take retail deposits (with a government guarantee of $250,000 per depositor), 80 financial institutions that offer credit cards, and about the same number that do home loans.

The reason that the major banks have a share of circa 83% is that with money, there are more tangible concerns than just the price. When crises hit, security and capital strength are the primary drivers. Depositors, and somewhat perversely borrowers, are far more concerned about the security and safety of the financial institution they are dealing with, rather than whether they are getting a better interest rate. This is exactly the behavior we saw post the GFC.

And rightly or wrongly, Australian consumers are notoriously reluctant to change providers. Inertia is a real factor.

But the interesting question is, why are the politicians so concerned about competition in the banking industry? Australia is a very small market, and almost without exception, each industry is dominated by two or three major players. For example, there are three major retailers with Coles, Woolworths and Aldi; three telcos with Telstra, Optus and Vodafone; consumers get to choose between either an Apple or Samsung smartphone; there are two major brewers; two airlines; and four or five major petrol retailers. 

Why should banking be any different?

The problem the banks have is that they have made themselves a very easy target. Bank bashing is just another sport.

If banks play the game right, the Royal Commission will go away 

In time, the idea for a Royal Commission will fade away, and if the banks play their cards right, they will get off the front pages. Here is what they can do to help their case.

Firstly, if there is another debacle such as CommInsure, fire someone. Cut the bonuses of those accountable, and to those to whom they reported. There needs to be blood on the streets.

Next, consider an out-of-cycle decrease to credit card interest rates. This won’t cost that much in revenue, but an admission that these rates are too high and haven’t moved in some time would be seen as a win in Canberra, and might take away some of the heat. And if the RBA does cut interest rates again, pass on the next one in full.

Finally, tell your marketing departments that consumers don’t like banks and never will, so slogans about “loving your bank” or statements such as “the ethical bank” just don’t cut it. Since the times of Shylock, money lenders have not been liked and this is not going to change. You lose credibility trying to say otherwise.

As my colleague Peter Switzer wrote yesterday when asking what our banks have in common with Kim Kardashian: “everyone seems to hate her, but an unbelievable number of ‘fans’ do business with her”.