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Consumers pay the penalties for banks' creaky system

Monday, 24 March 2008

Karen Dearne, The Australian

March 25, 2008 - BANKS are gouging penalty fees from customers caught out by 30-year-old payment processing systems that cannot transact in real time, industry experts say.

Banks slugged householders more than $1.6 billion in penalties for failed direct debits, exceeding card limits and late payments on credit cards last year, consumer magazine Choice says, but they have been slow to adopt new technology to prevent errors.

Banking systems and practices will come under scrutiny in a Senate inquiry on the Fair Bank and Credit Card Fees Amendment Bill, introduced by Family First Senator Steve Fielding last year.

"Outrageous bank fees need to be reined in," he said. "Banks have been encouraging people to use electronic transactions, but instead of fees coming down they've gone up.

"The issue is doing away with fees that are totally unfair, and getting the rest back to reasonable cost recovery." Mike Aston, chief executive of real-time payments processing developer Distra, said most banks and credit card firms were still using systems that were 25 to 30 years old, and written in the obsolete Cobol language.


"Until recently, these systems did the job, and there wasn't much incentive to replace them," he said.

"But there have been a lot of regulatory and competitive changes in the past few years.

"These clunky old systems can't get any closer than 24-hour settlement.

"During the day they're simply exchanging messages about transactions, while settlement and reconciliation takes place overnight as a batch process."

Distra, a local technology startup, had developed and proven a next-generation retail payments switch that allowed real-time settlement and reporting, Mr Aston said.

National Australia Bank is the first locally to adopt Distra's platform. Four British banks are using it to meet immediate settlement rules as part of the Faster Payments program.

Senator Fielding said some banks charged up to 16 times the real cost of processing a dishonoured cheque, and 92 times the cost of processing a failed direct debit transaction.

"If, for example, your pay goes in late and the money is not there to cover three automatic payments, Westpac would charge up to $50 for each failed transaction," he said.

"National Australia Bank would charge a fee of $30 daily for overdrawing the account, and $35 for each deferred payment - adding up to $135 just in the first day.

"These penalties hit the people who can least afford it, the low-income earners, pensioners, young people - $30 is a lot of money to them, and they feel they've got no comeback against the banks."

The Senate Economics Committee will start a new inquiry after a part-heard review was stalled by the federal election in November.

The bill had been tightened up in response to initial feedback, Senator Fielding said.

Choice's senior policy officer, Elissa Freeman, said the substantial issues had not changed, despite efforts by the Australian Bankers Association to provide more information about penalties.

"We continue to hear from consumers who are frustrated by fees applied to their accounts," she said. "While some banks have tried to improve things, there are too many still charging high fees."

Ms Freeman said the proposed bill "takes us further down the path" to establishing a regulator with the "necessary powers to provide oversight" on penalties.

"At the end of the day, this issue cannot be resolved through disclosure alone," she said.

Mark Ganz, senior industry analyst at IBISWorld, said banks continued to invest "significant sums" in technology and payments infrastructure, but "most of these features are simply add-ons" to old systems.

"These seem to be doing the job, but clearly banks will reach a point where they need to totally overhaul their payment system," Mr Ganz said.

"At present, the business case in time, complexity and cost does not justify the small improvement an overhaul would make to some of the existing shortfalls."

Mr Aston said real-time payment systems allowed financial institutions an opportunity to become more agile in service delivery and developing new revenue streams.

Read more at The Australian