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Banks making billions from inflated penalty charges
The Sunday TelegraphMay 31, 2009 06:41am+-PrintEmailShare
Adding up ... bank penalty fees deemed a rip-off.
Bank admin costs would amount to $4.50
But they charge customers $35 penalty fee
Overdraft penalties rake in enourmous profit
BANKS are gouging profit margins of "thousands of per cent" on penalty fees for exceeding credit limits or making late repayments.
In the wake of a Reserve Bank report which showed banks raked in almost $1.2 billion in penalty fees last year, confidential analysis by two major banks, obtained by The Sunday Telegraph, has revealed for the first time the true cost to the banks of penalty-fee transactions.
It is a fraction of the charge the customer pays, sometimes as low as just a few cents.
Sources at two banks confirmed the average cost across all bank transactions, factoring in the cost of staff, branch networks, insurance, fraud and bad debts, is a maximum of $3.90 to $4.50 depending on the bank.
Assuming an average cost to the bank of $4 on every transaction, typical penalty fees of $35 on transaction accounts give the banks a profit margin of 775 per cent. When taking the penalty fees in isolation, the profit margins can be even higher.
That equates to an annualised interest rate of more than 14,000 per cent.
Other typical penalty-fee transactions involve the costs to banks of dealing with late payments, which increase the later the payment is made.
"If a bank has to pursue a customer then it becomes a more expensive business," one bank source said. "It requires more staff time and increasingly personalised correspondence, leading ultimately to collection proceedings or even the cost of writing off the debt."
Fees for exceeding credit limits and late payments are among the most controversial because they are added to the debt automatically, and then accrue interest - sometimes at a penalty rate.
The Australian Bankers Association said many so called "exception" fees are avoidable and some banks offer exception-fee-free accounts that don't levy the penalty charges and do not allow their customers to exceed their overdraft limits.
However, most have catches. NAB, for example, offers exception-fee-free accounts - but does not allow a Visa debit card or cheque book.
Similarly, ANZ's Access Limited account does not offer a Visa debit card or cheque book.
"These are not realistic alternatives for most people," said Elissa Freeman from consumer group Choice.
"If the banks were serious about this they would give customers the option of setting a firm limit on their existing accounts instead of creating marginal products.
"We are contacted every day by furious customers who have exceeded credit card or overdraft limits by as little astwo cents."
Research by ING conducted last year revealed that 71 per cent of customers would prefer that their transaction was declined instead of being approved and incurring a fee.
The Sunday TelegraphMay 31, 2009 06:41am+-PrintEmailShare
Adding up ... bank penalty fees deemed a rip-off.
Bank admin costs would amount to $4.50
But they charge customers $35 penalty fee
Overdraft penalties rake in enourmous profit
BANKS are gouging profit margins of "thousands of per cent" on penalty fees for exceeding credit limits or making late repayments.
In the wake of a Reserve Bank report which showed banks raked in almost $1.2 billion in penalty fees last year, confidential analysis by two major banks, obtained by The Sunday Telegraph, has revealed for the first time the true cost to the banks of penalty-fee transactions.
It is a fraction of the charge the customer pays, sometimes as low as just a few cents.
Sources at two banks confirmed the average cost across all bank transactions, factoring in the cost of staff, branch networks, insurance, fraud and bad debts, is a maximum of $3.90 to $4.50 depending on the bank.
Assuming an average cost to the bank of $4 on every transaction, typical penalty fees of $35 on transaction accounts give the banks a profit margin of 775 per cent. When taking the penalty fees in isolation, the profit margins can be even higher.
That equates to an annualised interest rate of more than 14,000 per cent.
Other typical penalty-fee transactions involve the costs to banks of dealing with late payments, which increase the later the payment is made.
"If a bank has to pursue a customer then it becomes a more expensive business," one bank source said. "It requires more staff time and increasingly personalised correspondence, leading ultimately to collection proceedings or even the cost of writing off the debt."
Fees for exceeding credit limits and late payments are among the most controversial because they are added to the debt automatically, and then accrue interest - sometimes at a penalty rate.
The Australian Bankers Association said many so called "exception" fees are avoidable and some banks offer exception-fee-free accounts that don't levy the penalty charges and do not allow their customers to exceed their overdraft limits.
However, most have catches. NAB, for example, offers exception-fee-free accounts - but does not allow a Visa debit card or cheque book.
Similarly, ANZ's Access Limited account does not offer a Visa debit card or cheque book.
"These are not realistic alternatives for most people," said Elissa Freeman from consumer group Choice.
"If the banks were serious about this they would give customers the option of setting a firm limit on their existing accounts instead of creating marginal products.
"We are contacted every day by furious customers who have exceeded credit card or overdraft limits by as little astwo cents."
Research by ING conducted last year revealed that 71 per cent of customers would prefer that their transaction was declined instead of being approved and incurring a fee.
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