We know how the market power of a few large companies drives out the smaller players, allowing the few to dictate prices.
The lesson is simple: competition in the banking industry is good for Australia because it keeps the pricing of loans efficient.
Look at the retail industry, where Coles and Woolworths account for most of our weekly grocery sales.
The OECD looked at grocery prices in the decade to 2009 and found that Australia’s prices have risen the fastest: 41.3 per cent since 2000, ahead of Britain’s (32.9 per cent) or America’s (28.4 per cent).
But what about banking?
We’ve recently seen how much profit the Big Four banks are making.
They are doing so with almost no competition.
ANZ, CBA, Westpac and NAB now account for 90 percent of lending (up from 85 percent since the global financial crisis) and their rates and products are virtually identical.
They operate as an oligopoly because by not differentiating their pricing or products they unconsciously defend their joint domination of an entire industry rather than competing to dominate it individually.
The loser is the customer.
Twelve years ago the non-bank mortgage lenders – Wizard, Rams, Aussie etc. – became successful by charging around half the profit margin that the Big Four banks had been charging on mortgages.
By the middle of the decade the average cost of a mortgage dropped to what the non-bank lenders were charging.
Competition made the banks change their tune – nothing else did.
Now we see the banks creeping back to their old pricing (or over-pricing) model.
This is because non-bank lending virtually doesn’t exist which means no competition.
In the wake of the sub-prime problems on Wall Street and the subsequent drying up of securitised mortgage funding, the non-bank lenders could no longer offer mortgages.
Add to this the government allowing Westpac to swallow St George Bank – consolidating the Big Four – and you had a recipe for a return to the old banking system.
This has serious ramifications for home owners and Australia’s one million small business owners.
Business lending rates have increased faster than the official cash rate in the past two years and the Reserve Bank of Australia has reported that business banking fees increased 13 percent in 2009.
Australians traditionally finance their businesses from their residential mortgages, or used their family homes as security to take business loans.
So more expensive residential mortgages also equates to a greater debt burden on businesses.
The lesson is simple: competition in the banking industry is good for Australia because it keeps the pricing of loans efficient.
The only way to foster competition is to question your lender’s rates and be prepared to go to a better offer with a newer more competitive lender in the market.
Mark Bouris is the Executive Chairman of Yellow Brick Road, a financial services company offering home loans, financial planning, accounting & tax and insurance.
Email Mark on mark.neos@ybr.com.au or check www.ybr.com.au for your nearest branch.