Five bank fees likely to disappear thanks to technology
WHEN you look closely, you may be surprised at how many bank fees, charges and costs you incur; as a result of their cosy oligopoly, Australian banks have become the most profitable in the world, collecting $29 billion in profit in 2015 or $1600 from every adult Australian.
This financial year, bank profits are expected to top $30 billion after Westpac, CommBank, NAB and ANZ all raised interest rates outside of the RBA cycle, adding an estimated $1 billion to their bottom lines.
But have you ever wondered why certain charges exist at all - or what could be done to get rid of them?
A new breed of technology-focused financial upstarts ('fintech' for short) have emerged in Australia and around the world to eliminate wasteful bank fees, reduce unfair interest rates and leverage technology to change the way people and small businesses manage their finances.
By delivering financial services in a more cost effective, convenient and consumer-focused way, many of these online players are starting to win over disgruntled bank customers.
In Australia, the fintech revolution is still in its infancy but over the next few years many fintech businesses will become household names as they transform the financial services landscape.
Some argue that the banks won't let this happen - that they're too powerful and have too much riding on it to let smaller players eat their lunch.
But disruption has a habit of transforming industries much faster than incumbents have time to respond.
The new breed of challenger fintechs have a clean slate to design the financial norms of the future.
Already their impact is visible and their increasing presence will have a positive impact on consumers, with a broad range of bank related fees and costs set to disappear.
Here are five bank rip-offs most likely to be gone by 2020:
1. Currency transfer fees - if you've ever travelled or sent money overseas, you've no doubt been stung by currency conversion fees which can be as high as 6% once you include all costs.
The fintech solution - this may soon be a thing of the past thanks to peer-to-peer currency transfer services like TransferWise and CurrencyFair. By matching people who want to swap currency, fees can be 70-90% lower than Western Union or bank charges for transferring funds abroad.
2. Investment fees - superannuation and investment fees are arguably the Australian bank's largest swindle of all. Australians pay over $20 billion each year in superannuation fees which the Grattan Institute suggests could easily be halved.
Research consistently shows that because of high fees, retail super funds and managed funds are draining our national savings and underperforming even a portfolio of low-cost index tracking funds.
The 2014 Fat Cat Funds Report showed that 78% of active fund managers have lagged the market over the most recent five-year period.
The fintech solution - Australia's first automated investment service, Stockspot, is taking on the world of high investment fees and account minimums by offering a low cost online investment platform at a fraction of the cost of traditional advice.
Globally, 'robo advisers' like Stockspot are infiltrating the wealth management industry by making sophisticated investment management available to a much larger group of people.
Assets managed by automated investment services are expected to grow from US$15.7 billion in 2015 to $450 billion by 2020.
3. Brokerage costs - buying shares online hasn't changed a lot since first becoming available in Australia in the 1990s.
In 20 years, the major banks including CBA (CommSec) and ANZ (E*Trade) have added little in terms of functionality, but have maintained brokerage costs of between $19.95 and $29.95; while in other parts of the world online brokerage has dropped to only a few dollars.
The fintech solution - tech-focused brokers like Bell Direct have been offering much better rates ($10 trades for frequent users) and global players like Robinhood look to be entering the market soon.
Robinhood is a free-commission brokerage app.
It launched in the US in March 2015 and already has hundreds of thousands of users.
CommSec will struggle to keep charging US$65 per international trade when Robinhood offers the same for free.
4. Personal lending rates - try getting a personal loan with one of the big four banks and you'll be looking at a comparison rate of somewhere between 14-16% per annum.
This is because the banks put everyone in the same risk basket, where people who have excellent credit get the same rates as those who don't; everyone ends up paying the same average rate regardless of how risky they really are.
The fintech solution - peer-to-peer (P2P) lending businesses like RateSetter are challenging that bank model by creating a marketplace for loans.
People with extra savings can set the rate they're prepared to 'lend' at and private borrowers get a fair market price for their loans.
For many people this matchmaking service can bring down the lending rate by about 4-6% per annum which might mean thousands of dollars less in interest paid over the life of the loan.
5. Credit card surcharges - at most shops or online stores it's still hard to avoid credit charge surcharges.
These are fees imposed by payment giants Visa, MasterCard and American Express and in many cases are passed on to consumers at checkout.
The costs typically range from 0.5% to 3.0% - which can be a lot of money on big purchases like flights or hotels.
The fintech solution - so what are the alternatives?
Jost Stollman, CEO of Tyro, the only competitor to banks in card transaction processing in Australia, suggests that while hundreds of hopeful startups innovate at the edges, the four major retail banks and VISA and MasterCard have solidified their dominance in recent years.
"The barriers to entry to take on Australia's banks remain enormous, but it can be done" Mr Stollmann said.
"PayPal for example is a significant new player."
Longer-term technology, developed for digital currencies like bitcoin, will break down the stranglehold banks and the payment companies have over merchant payments.
The blockchain is like a central ledger recording every transaction, which some say could replace payment networks like Visa and MasterCard and even central bank settlement systems and bank payment infrastructure providers like SWIFT.
The future is fintech
The digitisation of financial services follows in the footsteps of industries like media, travel and retail which have all gone through immense change over the last 20 years.
In each industry, large incumbents have been dethroned by nimble technology upstarts who have been willing to reimagine how things can and should be done.
The next five years will see the same level of change sweep through financial services in Australia. Payments, lending and investing will all being transformed by technology.
As Bill Gates famously said in 1994, "Banking is essential - banks are not".