Musings of a FinTech: Will my bank screw me?

Inspiration for this comes from the statement “Australian Banks are unquestionably strong and much of this is due to their ability to screw the Australian punter”. I won’t say who said it.

Any bank can be unquestionably strong if a few conditions are met:

  1. It holds vast amounts of capital (global top quartile)
  2. It can borrow for virtually nothing (pay no interest on deposits)
  3. Shunt any increases in costs onto customers with the type of loans it offers (e.g. variable rate home loans)
  4. Generally price loans at higher levels as there is an overall lack of competition (oligopoly, a hint of price coordination)

In short: 0% deposits, generally high interest rates and shoving capital costs and other price increases directly onto customers as they appear. The banks will remain strong for a long time and the customer will lose out. The benefit: strong banks. The cost: a weak customer.

What does a weak customer mean and is it offset by a stronger economy?

A weak customer has weak returns on their savings, so retires with less. One response to this is that a saver should also buy bank shares. Win-win. I still haven’t come up with a reply to this but market forces should help: rubbish deposit returns should lead to people moving away until the deposit offering improves.

A weak customer might not get borrowing at the right rate. This one is trickier. It might prevent a business from being created or lead someone into financial hardship. But a strong bank has a healthier economy. This means more overall lending and no recession. So again I find this hard to dispute.

Does the customer face more risks?

So my last chance is to look at risk. What if a recession comes due to an external reason, say a China crisis or a severe commodity shock (both of which have potential)? Banks may face higher costs and interest rates could go up. Then what? In the hope of keeping banks strong, they can pass on a number of costs straight to consumers: higher variable interest rates. This would happen at the time of a weaker economy, so the debt might not be serviceable.

Now this might not happen. Banks may realise a spike in defaults at a time of a contracting economy may lead to higher losses.

So give a little back to the public and maintain their margins? This I find hard to believe: competition should reduce during a recession, so there are fewer alternatives. My gut tells me the punter would get squeezed and this is a type of manufactured bailout: customers will pay for their lender’s mistakes.

In short: if you want to have certainty in the future you need to find a way to detach the ability of your lender to screw you.

Much like my previous post, a recession may trigger a huge amount of innovation: punters will know what it is like to get screwed, opportunities will appear on the efficient frontier and the public will realise that bank employees have made off like bandits for decades. Just look at the unquestionably strong Royal Bank of Scotland circa 2006. However, until that recession, punters might never know and the opportunities may never appear.

What are Huffle doing?

We don’t want anyone to get screwed. We aim to bring better home loans to Australia, which will reduce the risks that borrowers face over the long term. Watch this space in 2016!

 

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