Reserve Bank to keep regulating bank fees

By Vanessa Tripodi

The fees you incur on your credit cards seem to be endless. While some are avoidable and others simply the cost of doing business with your credit card supplier or financial institution, there are some fees you probably didn't even know about.

This is why the Reserve Bank of Australia currently regulates the fees of banks and credit card issuers on behalf of consumers. The primary basis for this regulation is the belief that financial institutions should not profit from penalty fees. Rather, those fees should be imposed only to cover the costs of an account in default or a late payment.

Penalty fees are one of the highest earners for credit card issuers. In 2004, the Consumer Action Law Centre in Australia issued a report challenging these fees. The report said that financial institutions should continue to be able to require a sum of money is paid to them if the contract with the customer is broken -- i.e., the customer defaults. However, this should only cover the loss or damage suffered by the financial institution, and is known as a "liquidated damages" fee. This is different from a penalty, which is charged to a customer to penalise them for their mistake, and is, in fact, unenforceable by law in Australia.

The Reserve Bank also looks at the interchange fees charged to a merchant bank for accepting payment from a customer's bank. There is currently no standard interchange fee imposed by the Reserve Bank, as the competition between credit cards and financial institutions is seen as sufficient enough to keep those fees low. Instead, the Reserve Bank focuses on determining the true cost for financial institutions to provide payment services.

The 1997 Final Report of the Financial System Inquiry highlighted the charges of interchange fees and prompted the Reserve Bank and the Australian Consumer Commission to form the Payments System Board to regulate and review bank fees. The Reserve Bank also works with the Australian Bankers Association to continue to reduce the cost of using credit cards.

Most recently, the Reserve Bank announced it would continue to regulate bank fees after the Payments System Board found that banks had failed to develop a more efficient online EFTPOS network, nor had they been able to guarantee interchange fees would not rise. Banks were called on to make these changes in September 2008. While the Payments System Board acknowledged in August 2009 that the banks were moving toward a fairer fee structure, the changes were not sufficient enough to allow the Reserve Bank to remove its fee regulations. However, the Board did decide that the progress made by banks was enough to not force them to lower their interchange fees, which are already at an average of 0.5 percent.

While there are regulations on bank and credit card fees, you can save as much as $900 in fees simply by choosing the right account for the way you use your money. Researchers at Cannex suggest you first determine the type of bank customer you are, and match that to an account for your needs. For example, do you make a lot of transactions each month? Do you prefer to bank in person? Cannex also recommends you split your money between a low-transaction-fee account for everyday use, and a high-interest account where you can keep your long-term savings.

Article by Vanessa Tripodi

Published: September 9, 2009