Bank rip-offs that won’t exist in 2020

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When you take a step back, you may be surprised at how many bank fees, charges and costs we take for granted. As a result of their cosy oligopoly, Australian banks have become the most profitable in the world, collecting $29 billion in profit this year. But have you ever wondered why certain fees exist at all – or what could be done to get rid of them?

Fortunately a new breed of technology-focused financial upstarts (‘fintech’ for short) have started to emerge in Australia and around the world to eliminate wasteful bank fees 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.

Already in the US and Europe many ‘fintechs’ have become mainstream; London-based money transfer business TransferWise was recently valued at US$1 Billion and has saved consumers tens of millions in international transfer fees. LendingClub who reduces the cost of personal loans, listed on the New York Stock Exchange this year at a value of US$5 billion.

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 revolutionise financial services. 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 banks and financial institutions of the future. Already their impact is visible and many predict this will only increase over the next 5 years. This will have a positive impact for consumers with a broad range of bank related fees and costs set to disappear.

Here are 7 bank rip-offs most likely to be gone by 2020:

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

However 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. These businesses are on the rise – last year Sir Richard Branson backed TransferWise as an investor. Locally, OzForex has also grown rapidly to become one of the world’s largest foreign exchange services, helping over 200,000 people move money to 80 countries.

Investment fees

Superannuation and investment fees are arguably 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 lag the market over 5 years.

The fintech solution

As Australia’s first automated investment adviser, we are taking on the world of high investment fees and account minimums by offering a low cost online investment service 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.

High 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 a few dollars. No wonder CommSec booked $77 million in profit this year.

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.

ATM fees

It’s incredible to think that in the age where you can instantly pay a friend with the tap of an app, there is still a fee attached to accessing your own money from an ATM. Consumers can expect to pay $1.50 to $2.20 for each cash transaction made out of an ATM that doesn’t belong to their bank. Fortunately, regulations make it mandatory to display the cost of the transaction before you go ahead which allows consumers to cancel and walk away. But often we fork out the extra dollars for the convenience.

The fintech solution

ING DIRECT Orange Everyday account is one of the only banks to rebate all of your ATM fees if you deposit at least $1,000 into their account each month. This is a great start. Fortunately Australia’s reliance on ATMs is likely to fall as contactless card payments and services like Apple Pay and Google Wallet are adopted by more merchants and consumers.

Penalty fees

Bank penalty fees, which include credit card late payment fees and dishonour fees, have been detested by consumers for years. Australian banks hoovered-in a whopping $503 million in penalty fees in 2008-09 which gave rise to a class-action legal challenge in 2010. In February 2014 the Federal Court ordered ANZ to reimburse about 43,000 customers for penalty bank fees because they were ‘exorbitant and unconscionable’, however ANZ appealed the decision and in April 2015 and won the right to keep charging them.

For now at least, ANZ and the other major banks can continue charging customers up to $35 for late payment of credit cards – despite their cost being closer to 50 cents. Acting on behalf of 43,500 ANZ customers, legal firm Maurice Blackburn is currently seeking to appeal the most recent decision to the High Court.

The fintech solution

In the US and parts of Europe, digital banks like Simple have emerged to give consumers a fee-free experience and stamp-out bank overcharging on all sorts of fees.

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 so people who have excellent credit and are highly likely to pay back the loans get the same rates as those who aren’t. So 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 less interest paid over the life of the loan.

In 2014, P2P lending platforms in the US issued approximately US$5.5 billion in loans. PwC estimates that the market could reach US$150 billion by 2050. P2P lending is challenging the traditional bank lending model and will continue to reduce the banks relevance in the lending space.

The next natural step of P2P lending is in the small business arena where SpotCap has recently launched in Australia. Meanwhile, equity crowdfunding businesses like Equitise are helping grow businesses who aren’t in a position to take on debt raise equity capital.

Mortgage lending is also likely to see P2P players emerge over the next couple of years. In the UK, LendInvest which specialises in P2P lending for residential and commercial mortgages has already facilitated $320 million pounds in loans since launching in 2013.

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, and to scaling up remain enormous,” Mr Stollmann said. “Only PayPal has been a significant new player.”

Apple appears to be maneuvering itself into position to enter the payments space but has decided to work with Visa and MasterCard rather than trying to disrupt them.

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 5 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”.

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